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Market Update
The main news in the last 24 hours was that US President Biden opted to renominate Jerome Powell to a second term as chairman of the Fed. Brainard, who was viewed as the main contender to Powell for the Fed’s top spot, was promoted from the Fed’s Board of Governors to the position of Vice Chair. The market reaction was hawkish; the dollar index surged to fresh 16-month highs above 96.50 at one point and US real yields surged, with the 5-year TIPS up over 12bps at one point and the 10-year TIPS up over 10bps. The surge in real yields, which also pushed nominal yields higher (2s, 5s and 7s all hit their highest since the early days of the pandemic and 10s moved back above 1.60%) despite a decline in inflation expectations, went hand in hand with a hawkish repricing of Fed policy expectations. Money markets are now pricing in as many as three or four hikes from the Fed next year. The hawkish repricing represents an unwind of “dovish Brainard-led Fed” risk, as a Fed under Brainard would have been expected by many to be slower lifting interest rates to tackle inflation given a higher emphasis placed on getting the labour market back to full health.
US equities were initially boosted by Biden’s decision to renominate Powell, with the S&P 500 and Nasdaq 100 both opening at record levels (the S&P 500 in the 4740s). However, amid the sharp rise in US yields, that was later in the session exacerbated by bad 2 and 5-year bond auctions, tech stocks begun to underperform heavily and, in the end, both indices ended the session lower, the S&P 500 at 4680 (-0.3%), the Nasdaq 100 slightly under 16.4K (-1.2%). Asia markets were also subdued (Hang Seng -1.2%) despite a Reuters report suggesting that some Chinese banks had been ordered by regulators to issue more loans to property firms, in efforts to ease liquidity strains across the struggling industry. Meanwhile, European equities are down this morning with the Stoxx 600 lower by 0.9% to just above 480 and the Euro Stoxx 50 Volatility Index hitting its highest level in seven-weeks. Equities in the region are weighed amid concerns about not only Fed hikes, but also a worsening of the domestic pandemic situation (Germany is expected to tighten lockdown restrictions soon) and amid hawkish signs from the ECB.
According to influential ECB members Schnabel, Eurozone inflation is set be higher next year than previously thought and is likely to stay above the ECB’s 2.0% symmetric target in the medium term, thus ending the PEPP purchases remains a valid plan right now, despite the new worsening of the latest wave of Covid-19 infections. This has triggered markets to price back in a 100% probability of a 10bps rate hike from the ECB by the end of 2022 and is pushing European yields higher this morning (with an outsized move higher being seen in periphery yields). According to ING, “the message is that the ECB is increasingly focused on inflation upside, that it is not going to change its plan to end PEPP in March and is in no rush to boost the (asset purchase programme) after that”. Summing up how equity markets are viewing dynamics, analysts at Reuters said that “growing nerves around a fourth wave of COVID-19 infections stalling European recovery at a time when central banks are planning the withdrawal of monetary support has also pulled investors out of equities”.
In terms of US pre-markets, S&P 500 futures are extending on yesterday’s losses amid downside in European equities, with index futures down another 0.2% and now under 4680, while Nasdaq 100 index futures are down a further 0.5% to just above 16.3K. US yields are much more subdued, though the 10-year is this morning up about 1bps to over 1.63%. WTI prices continue to chop, meanwhile, and currently trade about 1.0% lower just under $76.00 per barrel with the US Department of Energy expected to announce a release of strategic crude oil reserves later in the session in tandem with other countries. Gold prices, meanwhile, remain under pressure having had the rug pulled out following Powell’s renomination yesterday. Prices have dropped under $1800 this morning, down another 0.5% on the day, having dropped all the way from around $1840 prior to the renomination announcement yesterday.
In terms of FX markets, the DXY is taking a breather after recently printing fresh 16-month highs above 96.50. Ahead of the US open, the index is down about 0.1% in the 96.40s. According to TDS, “the USD looks poised to hold onto its gains post-Powell renomination as it leaves room for markets to flirt with the idea of a faster taper”. Moreover, according to MUFG, “the decision removes one source of uncertainty for financial markets and favours policy continuity at the Fed… We expect US yields and the US dollar to remain under upward pressure in the near term while US activity and inflation data is surprising to the upside”.
Meanwhile, the euro is up about 0.2% against the buck and EURUSD is back above 1.1250. Eurozone purchasing managers index numbers showed business growth unexpectedly improving in November, with the manufacturing PMI rising to a robust 58.6 and the services PMI rising to a solid 55.8. But with lockdowns having been tightened midway through the month, this may result in the final numbers seeing big downwards revisions. The euro has only responded marginally much to the positive data and aforementioned hawkish remarks from Schnabel. Sterling is meanwhile a tad lower, despite also posting strong PMI numbers for November this morning. GBPUSD is down about 0.3% this morning and trading just above 1.3350. According to ING, “GBP is clearly looking less vulnerable than the EUR at this moment… The vicinity of the UK to the EU, where cases are rising dangerously and new restrictions are being discussed, may be keeping a floor on EUR/GBP”. In terms of the rest of the G10, JPY and AUD are flat around 114.80 and 0.7220, the former surging to fresh four-year highs yesterday close to 115.00 amid the rise in US yields. CAD and NZD, meanwhile, are both down about 0.3%, with USDCAD having now pushed convincingly above 1.2700 amid further oil price downside and NZDUSD dropping towards 0.6900 ahead of tonight’s RBNZ rate decision.
Day Ahead
The main event on the economic calendar is US Markit PMIs out at 1445GMT. There will then be a US 7-year note action and a speech from BoC’s Beaudry at 1800GMT, followed by remarks from ECB’s de Guindos at 1840GMT ahead of private weekly US oil inventories at 2130GMT. The most important event of the day for oil traders will be the SPR release announcement, the timing of which isn’t yet clear.
