Market Summary Report Wednesday 08 March 2023

Powell tries to cool 50bps rate hike speculation; risk assets continue to be under pressure while US dollar and US yields stay firm.

1- In his second day testimony in Congress, today before the House Financial Services committee, Fed Chairman, Jerome Powell, said that no decision has been made yet on the March Fed meeting, in an apparent attempt to cool market speculation of a 50bps rate hike during the Fed meeting on March 21-22. "If - and I stress that no decision has been made on this - but if the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes," Powell said before the committee. Here are some key points of what Powell said during the testimony:

"We have important data before March meeting." Referring primarily to NFP this Friday and CPI next week.

"We have not made any decision yet about March meeting, it's data-dependent."

"Terminal rate is likely to be higher than we expected."

"Extraordinarily strong jobs report and inflation reports pointed in the same direction."

"Inflation is coming down but it's very high."

"Some part of the high inflation we have is likely related to extremely tight labor market."

"Costs of failure to control inflation would be much higher than costs of controlling it."

"Committed to bringing prices down."

"China's faster reopening could put upward pressure on commodities prices but also quicker healing of supply chains."

"We expect China's impact to be moderate overall."

"We are aware of lags of monetary policy effects."

"Slowing down pace of rate hikes this year is a way to better watch for those effects."

"Data we've seen so far suggests that ultimate level of rates will need to be higher."

"Will do everything I can to bring people into consensus on any change to bank capital requirements."

2- Job Openings and Labor Trends Survey (JOLTS) in the US and the ADP private sector jobs report, on balance, still point to a tight US labor market. The number of job openings as on the last business day of January was 10.8 million, vs. 11.2 million in December, and against expectations of 10.6 million. This means there is 1.90 job openings per every unemployed worker in January, calculated on the basis of unemployment rate of 3.4%. The ADP report showed that private employment increased by 242,000 jobs in February after rising 119,000 in January. Economists had forecast private employment increasing 200,000.

3- If you want to have an idea of what the likely end of the Fed's hiking cycle would look like, have a look at Australia. Reserve Bank of Australia’s governor Philip Lowe said in a speech earlier today that the central bank is nearing a point where it’s ready to hit the brakes on rate hikes. He also said “One is the risk of not doing enough, which would result in high inflation persisting and then later proving very costly to get down. The other is the risk that we move too fast, or too far, and that the economy slows by more than is necessary to bring inflation down in a timely way.” Lowe’s comments come after the central bank hiked its benchmark overnight cash rate by another 25 basis points to 3.6%, marking the highest that it’s been since June 2012.

4- A day makes a lot of difference in financial markets, especially when the Fed chair talks! The 30-day Fed funds futures are now discounting 70% chance of the Fed raising rates by 50bps and 30% chance of 25bps rate hike at its next meeting on March 21-22. A complete reversal of the two probabilities from just the previous day!

US Treasuries:

The US Treasuries yield curve has intensified its inversions, a clear indication of market expectations of hard landing, and a probable recession after the Fed finishes its rate hikes. Also, the closely watched 2-year note yield stretched wide above 5%, to reach 5.06% today. As I mentioned yesterday, the bond market discounted a full percentage point of rate hikes by the Fed before it is done.

The yields on the 3-month note reached 5.036% today, and the yield on the "information laden" two -year note reached 5.060%. Crucially, though, the yield on the benchmark 10-year bond stayed below 4%, thus taking the spread between the three month note yield and the 10-year bond yield to minus 106bps, and the 10-2 yield spread to minus 108bps. This sharp dip deep into negative territory, after the two spread improved to around minus 80bps last month, show that the market is expecting at least a hard landing for the US economy. To be clear, this market is very difficult to read as there are many variables that keep changing, and market expectations may not come to light.

Foreign Exchange:

The US Dollar maintained its strength against the Japanese Yen, but weakened slightly against both the Euro and Sterling. The dollar was last trading at Y137.25, $1.0546 and $1.1838 respectively. Powell's second day testimony in the House did not change market perception about the US yields and future path of interest rates, and hence the forex market was range bound today.

US equity markets:

US stocks traded mostly lower today, as comments by the Federal Reserve Chairman Jerome Powell before the House failed to dispel concerns about a possible 50bps hike in the next Fed meeting on March21-22. Today's JOLTS and ADP private survey added to concerns that the jobs market is not cooling fast enough. The markets are now discounting more than two thirds chance of a 50bps rate hike, against one third chance of a rate hike of only 25bps.

On individual stock news, Tesla suffered more than 3% loss as it was downgraded by brokerage house Bernstein.

Sector-wise, the energy was the biggest loser as oil prices continued to fall today. Financials, consumer discretionary and healthcare were losers as these sectors are vulnerable to interest rate rises and the economic cycle. On the other hand, real estate, utilities and technology rose as the real estate sector is benefiting from lower than expected mortgage rates (mortgage rates are tied to the 30-year bond yield and hence it has fallen lately). Utilities are a defensive sector, while technology, especially big caps, have been doing well lately even in the face of a rise in short-term US yields, as the discounting of future cash flows of these companies (most sitting on tons of cash) is done on the basis of the 10-year yields, which have not risen lately.

Oil:

Today a bipartisan group of US senators reintroduced a long-standing legislation that would allow the US to take the dramatic step of suing OPEC nations. The act, known as NOPEC, was introduced in various versions several times over the past two decades, but has never been adopted, considering the grave consequences it could have on countries that the US considers allies, such as Saudi Arabia, the UAE and Kuwait, to name but a few. To be clear, OPEC does not set prices its members periodically agree to boost or cut production. The timing, in my view, is interesting, as it comes after a credible report, carried by no less than the highly respected Wall Street Journal, said that the UAE is thinking of leaving OPEC from next year. This will set the UAE free to produce as much as it wants and shield it from NOPEC, should it be passed this time around, or next year, for example. It is not a straight forward issue for the US, the largest producer of crude oil in the world, and a net exporter, since shale oil producers turn their wells on and off depending on the price of oil, where many oil rigs have a breakeven price of $50-70.

In today's action, oil continued its slide, having fallen sharply yesterday. The WTI March futures were last trading at $76.45 and Brent March futures wee at $82.41.

Gold:

Gold stayed on the back foot today, having falling almost 2% yesterday. US Dollar strength and the rise in US yields are still pushing the precious metal down. It dipped to just below $1,810 before making a dash above $1,820, which stalled at $1,824 before beating a retreat all the way down to $1,815 level.

Cryptos:

Cryptocurrencies were mixed today. Bitcoin fell slightly to just above the $22k level, while Ethereum rose slightly to $1,550. Ripple continued its bullish run of lat to reach $0.39, up more than 3% on the day, while Litecoin continued its bearish decline from just over $100 last month to $53.26, a fall of over 2.6% on the day.

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