Powell pledges to control inflation

Daniel Richards - MENA Economist
Published Date: 12 January 2022

 

  • Fed chair Jerome Powell appeared before the Senate Banking Committee yesterday, where he pledged to prevent the current levels of high inflation becoming entrenched. The FOMC has been accused of being behind the curve when it comes to curbing inflation, which is predicted to come in at 7.0% y/y in today’s data release for December, and Powell acknowledged the deleterious effects high price growth can have on those ‘less able to meet the higher costs of essentials’, calling it a ‘severe threat’ to the recovery in the labour market. He committed to raise rates more aggressively if needed, in tune with the recent more hawkish turn illustrated in the FOMC minutes from December. The most recent projections by the FOMC were for three rate hikes this year, with markets pricing in the first in March.
  • The inflation threat was underlined yesterday by the news that OECD inflation rose to 5.8% y/y in November, the highest level since 1996. The 38 countries that make up the grouping (richer states from around the world) have struggled with similar inflationary pressures as the pandemic has receded. High energy prices were the key driver, with food costs also pushing higher.
  • By contrast, Chinese CPI inflation for December fell to 1.5% in data released this morning, down from 2.3% the previous month and below expectations of 1.7%. PPI inflation also fell, from 12.9% to 10.3%, suggesting easing price pressures in coming months also. The government has been acting aggressively to tame price rises, with intervention in commodity prices for instance. This slowdown in price growth will give the central bank room to focus more on growth and potentially take more stimulatory measures following the cut to the RRR at the close of last year.

Today’s Economic Data and Events

16:00 India industrial production, % y/y, November. Forecast: 2.8%.

16:00 US MBA mortgage applications, week to Jan 7.

17:30 US CPI inflation, % y/y, December. Forecast: 7.0%

Fixed Income

  • A successful auction of 3yr US Treasuries helped to lift bonds overnight with the market looking ahead to 10yr auctions later today. Yields on the 2yr UST fell a bit more than 1bps to close at 0.8825% while the 10yr gave up more than 2bps to close at 1.7357%. Fed chair Jerome Powelll gave commentary at his nomination hearing at the Senate Banking Committee that the Fed’s path toward policy normalization “really should not have negative effects on the employment rate” which may give bond markets some succor that rate hikes won’t be as aggressive as have been priced in recently.
  • Outside of the US, developed market bonds were generally higher. Gilt yields slipped slightly on the 10yr, not showing much reaction to the political noise around UK prime minister Boris Johnson. In emerging market bonds, price action was relatively muted after sharper sell-offs in the last few days. Yields on 10yr Turkish government bonds ticked up 2bps to 23.45% while the same tenor South African bonds saw yields up by 3bps to 9.988%.
  • In primary markets, EIG Pearl Holdings has mandated banks for investors calls ahead of an upcoming dual tranche issue. The company owns 49% of the Aramco Oil Pipelines Co. with Aramco holding the remainder.
  • Sweihan PV Power, operator of the Nour Abu Dhabi solar power generation plant, has also mandated banks for investor calls ahead of a potential issuance.

FX

  • Currency markets swung against the dollar overnight as yields ticked lower. EURUSD managed to recover all of its losses from earlier in the week and settled up 0.36% at 1.1367 while USDJPY rose slightly, closing at 115.30.
  • Both GBP and CHF recovered from losses earlier in the week with GBPUSD closing up 0.43% at 1.3635, its highest daily close since early November, which USDCHF added 0.4% overnight, closing at 0.9234.
  • Commodity currencies rose across the board with CAD leading the pack. USDCAD fell 0.8% to 1.2575, spurred on by a strong rise in oil prices, while AUDUSD ticked up 0.56% to 0.7210 and NZDUSD added 0.35% to 0.6786.

Equities

  • There was an uptick in optimism in equity indices yesterday, as markets took Powell’s testimony positively. In the US, the NASDAQ added 1.4% (but remains down -3.0% on the week), while the Dow Jones (0.5%) and the S&P 500 (0.9%) also added. That risk appetite is continuing in Asian trading so far this morning, where the Nikkei is currently up 1.9% and the Shanghai Composite 0.3%.
  • In Europe yesterday the DAX was the major gainer, adding 1.0%, lagged by the CAC with a 1.0% rise and the FTSE 100 which added 0.6%.
  • Within the region, the Tadwul closed up 1.5%, but the ADX (-0.3%) and the DFM (-0.7%) both closed lower.

Commodities

  • Oil futures closed up substantially with Brent futures added 3.5% to USD 83.72/b and WTI up 3.8% to USD 81.22/b. Data from the API showed a drop in crude inventories of around 1m bbl last week with official data from the EIA expected out later this evening. Commentary from Fed chair Jerome Powell also seemed to help commodity markets with the Fed chair saying that policy normalization without damaging the growth outlook.
  • The EIA released its short-term energy outlook overnight and expects US oil production at 12.41m b/d by 2023, a record high level. For 2022, the EIA projects a larger increase in global oil supply to 101.05m b/d with the US hitting more than 12m b/d by the end of 2022.

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