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Market Update
There isn’t much by way of new news driving the macro price action, but we are seeing a notably cautious/risk-off start to the week. European equities are trading lower, with the Stoxx 600 down more than 0.5% and US index futures are also seeing downside in pre-market trade, with S&P 500 futures also down about 0.5% and in the 4650 area. Losses in the US equity space in pre-markets are being led by tech in a continuation of the trend seen last week, with the tech-heavy Nasdaq 100 index (future) down about 1.0% and under the 15.5K level again. This dynamic suggests that the driving force in the US (and global) equity space remains concerns about Fed tightening. US bond yields are flat this morning, but scotched higher last week, with the 10-year surging to fresh highs since January 2020 near-1.80%, and this hurt stocks (like big tech) whose value is disproportionately based on expectations for future earnings growth as opposed to current day earnings. For reference, the 10-year is at 1.77% this morning, while the 2-year is still around 0.87%, having tested 0.90% last week (also at post-pandemic highs).
Analysts at Capital Economics say that they “think that the increase in long-dated Treasury yields has further to run… Markets may still be underestimating how far the federal funds rate will rise in the next few years, so our forecast is for the 10-year yield to rise by around another 50bp, to 2.25%, by the end of 2023”. Some analysts are betting that a hot US CPI print on Wednesday will contribute to a further pricing in of hawkish Fed expectations, given that Core CPI is seen rising to 5.4%, its highest in decades. Fed member Barkin said he supported the bank’s recent hawkish shift over the weekend, joining a throng of FOMC members to recently do so. Indeed, last week’s minutes showed that all FOMC members supported the more hawkish shift, with the main discussion at the Fed now on the pace of tightening in 2022 rather than on whether to tighten in 2022 or not. Speaking of Fed members, Powell and Brainard (the Fed Chair and Vice Chair) will speak at their nomination hearings, which could provide some fodder for market participants to trade off of. Other Fed members will also be hitting the wires. Ahead of the Fed meeting later this month, the Fed will remain a key market focus.
Back to looking at what markets are doing at the start of the week; crude oil prices are a tad lower in tandem with equities and perhaps as well as Kazakhstan supply concerns ease. This news, coupled with news of a substantial near-term drop in Libyan output, had helped to support prices in recent sessions. The fact that Libya production looks set to remain well below recent highs for the time being may continue to offer some support to crude oil, however. WTI is currently trading in the low-$78.00s amid a mostly quiet start to the week and is down about half a buck on the day, with traders also fretting about a potential widening of restrictions in China as cases of Omicron continue to crop up and the country maintains its strict zero-Covid stance ahead of the winter Olympics next month. Concerns about these lockdowns weighed a tad on industrial metal prices on Monday, with copper and iron ore both modestly lower, while gold continues to trade in the $1790 area as traders keep an eye on movements in US bond markets (which as noted are broadly flat) and FX markets, where the dollar is seeing a modest reversal of last Friday’s post-payroll drop.
Indeed, the drop last Friday in the US dollar after the latest US jobs report did confuse some market participants. Sure, headline payroll growth missed expectations, but the fact that the unemployment rate fell under 4.0% and other measures of slack of also improved, while wage inflation heated up, suggests that the Fed’s view of a very tight labour market that is suffering from a worker shortage remains very much intact, leaving them on course to start hiking perhaps as soon as March. This, some thought, would support the dollar. Maybe that support can come in this week with more Fed speak and US inflation data due. The DXY is this morning up about 0.3%and has recovered back to the 96.00 level, though is still a fair way below recent peak near 97.00. Amid the slight risk off being obese in commodities and equities, the yen is the best performing G10 currency, up about 0.3% on the day versus the buck and enough to push USDJPY back towards 115.00 from previously above 115.50. The euro and Swiss franc are the underperformers, down 0.4-0.5% on the day versus the buck each, with EURUSD falling back towards 1.1300 despite hawkish sounding remarks from ECB’s Schnabel over the weekend. The rest of the G10 is fairly subdued, with GBPUSD a tad lower but still above 1.3550, AUDUSD flat in the 0.7175 area and USDCAD a tad higher and just above 1.2650.
Day Ahead
There isn’t a great deal to get excited about on Monday. The December US CB Employment Trends Index isn’t likely to provoke a market reaction, nor is Wholesale Inventory data for November. Both are out at 1500GMT. Focus will thus be on news related to the pandemic and market chatter regarding central bank policy normalisation in wake of recent data (like hot Eurozone inflation and last Friday’s US jobs report) and recent central bank developments (like last week’s hawkish Fed minutes).
