Daily Insights - London Open Edition

What’s driving markets today into the London open?

·??????FOMC Minutes are getting digested by the market

·??????Apple is increasing the wages of its employees amid inflationary pressures

·??????RBNZ Governor Orr stated that rates need to be above neutral for a long time

Why it matters?

The Federal Reserve’s Open Market Committee released the minutes from its latest meeting at which it raised rates by 50 bps. Overall no new information outside of recent comments from Fed officials and Chair Powell has been made public. The Fed believes the U.S. economy is strong and will be able to handle higher interest rates.

The notion that the U.S. central bank is going to be able to raise rates as fast as it wants without impacting the real economy is getting questioned by the market as it started to reduce the odds of two more consecutive 50 basis points rate hikes. The Fed’s ability to control inflation however is its top priority as repeatedly stressed by officials. The market questioning that narrative might not be enough to dissuade the Fed from acting.

Apple has increased the hourly wages for its employees, in what is another recognition that the Fed’s job to prevent a wage-price spiral is getting difficult. The cycle of rising inflation leading to higher wages which in turn into yet more inflation is the main worry of the Federal Reserve.

As stressed overnight by the Reserve Bank of New Zealand Governor, Orr, interest rates will need to be above neutral for some time for inflation to get in line. The initial market reaction for the Fed’s minutes might be premature, and we could see a repricing today.

What we’re hearing??

Chinese firms are making contingency plans to move production outside of China in record numbers, according to a report by the European Union Chamber of Commerce in China. The Chinese yuan resumed its downward trend and is weighing on commodity currencies in early European trading.

Chinese premier Li Keqiang communicated late yesterday that the ongoing challenges facing the local economy might be greater than those experienced during the Covid-19 pandemic outbreak in 2020. The response of the Chinese government will be in focus over the coming weeks, however until the CCP decides to support demand, there is little that can affect markets materially in a positive way. Also, the Chinese government could be reluctant to boost demand while commodity prices remain as high as they are.

What we’re watching?

The European data calendar is quiet, with some comments from Bank of England’s Gerken around 09:30 AM GMT. German Chancellor Olaf Scholz will speak at 12:00 GMT, energy markets could be looking at some comments on the planned oil embargo on Russia.

US GDP and the latest jobless claims alongside Canadian retail sales are due at 13:30 GMT. Finally, Fed’s Brainard is to deliver comments during her confirmation testimony in Congress at 17:00 GMT.

Meanwhile, bipartisan senators have been urging Biden to backpedal on his plans to roll-back some tariffs on China. Worth noting here that the U.S. President doesn’t need Congress approval to take action on this front.

What they’re saying?

RBNZ Governor Orr: International recession risks have risen.

Between the lines

Caught between a rock and a hard place, stock markets are struggling to digest the latest news flows from central bankers. While the bond market is slashing its expectations for higher rates, inflationary pressures continue to build up, signalling a protracted conflict between the price stability goals of central bankers, and the prospects for a recession.

Flashback

A digital currency from the U.S. central bank is one strategy to ensure that the dollar continues to be used globally.

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