DB Early Morning Reid Macro Strategy

DB Early Morning Reid - Macro Strategy

Key Market Data (Index @ Close // Change) (S&P 500 @ 7552 // -0.45%) (STOXX Europe 600 @ 637 // +0.46%) (iTraxx Crossover @ 258 // -7) (Brent Oil^ @ 105.64 // -2.00%) (10yr Treasury^ @ 5.00 // 1 bp) (10yr Bund @ 3.51 // -3 bp) (Dollar Index^ @ 100.34 // +0.67%) (Further Fed hikes/cuts priced for 2026 @ 32 // -20 bp) (Further ECB hikes/cuts priced for 2026 @ 35 // -1 bp) ^ - Change from previous day's 4:30 GMT to 04:30 GMT

*** Marion Laboure on our team has published her latest outlook on everything you need to know about asset tokenization in 2026. You can read her chartbook on the Deutsche Bank Research Institute here: Asset Tokenization 101: The Next Phase of Financial Infrastructure ***

The Fed delivered its first hike since 2023 last night, while also signalling that it has likely kicked off a modest tightening cycle. Investors moved to fully price another three Fed hikes by next summer in response, which weighed on both bonds and equities. The 2yr Treasury yield (+7.4bps) rose to its highest level since 2024, while the 10yr yield (+2.1bps) reached a new post-2007 high of 5.02% and the S&P 500 (-0.45%) retreated to its lowest level since July. Those moves came even as the extent of the sell-off was mitigated by a pullback in energy prices, as WTI crude (-3.21%) saw its biggest decline in six weeks amid increased optimism on Saudi oil flows. Markets have pared back some of the losses overnight, with 10yr yields trading at 5.00% and S&P 500 futures erasing yesterday’s losses.

The FOMC raised the fed funds rate by 25bps to 3.75-4.00% as expected, with the unanimous decision accompanied by a more-hawkish-than-expected shift in the Fed’s dot plot. This showed a strong consensus around another hike this year, with 16 out of 18 officials anticipating additional tightening, while 2027 projections showed most officials split between 50bps and 75bps of total tightening. While still below market pricing, this was visibly above the economists’ consensus that had expected the 2027 dot at the 3.75%-4.00% level, so only reflecting yesterday’s hike. The FOMC framed the hike as supporting “a timelier return” to the 2% inflation target. Tolerance for above-target inflation has declined amid a more optimistic view on growth and the labour market that was also reiterated by Warsh in the press conference. The Fed Chair also framed the hike as removing “a dose of accommodation" as financial conditions showed little sign of being restrictive. Warsh noted that this view on financial conditions is “widely shared across the Committee”, a potential shift given some Fed officials had previously described the policy stance as mildly restrictive. In all, this left a clear sense of the Fed being at the likely start of a moderate tightening cycle rather than delivering a one-off hike.

As Jim noted in yesterday’s Chart of the Day (see link here), this marks only the fourth Fed hiking cycle this century and the 15th since the mid-1950s. Yesterday’s signal has reinforced our US economists’ view of the Fed delivering another 50bps of tightening, with 25bp hikes in December and March. See their full reaction here. Meanwhile, President Trump called for lower interest rates following the decision, posting that US rates “should be 1%, or less, because we are the Best Credit in the World”, though he did not call out Warsh or the Fed directly.

Money markets moved to price in more tightening, with another 75bps of Fed hikes now being fully priced by next June (+10.8bps on the day), and with a hike around 50% priced for the upcoming October meeting. In turn, 2yr Treasury yields surged to a 2-year high of 4.74%, closing +7.4bps on the day and around +13bps above their pre-FOMC lows. The 10yr yield (+2.1bps) saw a more modest rise, having traded lower pre-FOMC amid the decline in oil, but still reached a new post-2007 high of 5.02%. Yields have pared back some of that rise this morning, trading 2-3bps lower across the curve. The rise in US rates also left the US dollar as the best-performing G10 currency yesterday, with the dollar index (+0.64%) rising to a 7-week high.

The hawkish Fed repricing weighed on risk assets. The S&P 500…