Fed officials maintain hawkish tone

Fed officials stuck with their hawkish tone overnight, with John Williams, Susan Collins and Lael Brainard all indicating that rates had further to rise even as inflation slows. Brainard said that rates may need to stay elevated “for some time” in order to get inflation sustainably back to the 2% target. She also indicated that she thought inflation and wage gains could slow without a significant rise in unemployment. Williams noted that demand was still “very strong” relative to supply and that disinflation this year would be largely due to supply chains improving and commodity prices coming off last year’s highs.

The US treasury started “special measures” yesterday to avoid breaching the debt ceiling as congress has yet to raise the limit. Special measures include moving money from government pension funds, which would be made good once the debt ceiling is raised. However, such measures would only ensure funding until June, at which point more severe steps may be required in order to avoid a default, if the debt ceiling issue has not been resolved by then.

Japan’s CPI accelerated to 4.0% y/y in December from 3.8% y/y in November, in line with forecasts. “Core-core” inflation, which excludes both food and energy, also rose to 3.0% from 2.8% in November. However, analysts indicate that higher inflation is due to rising costs rather than stronger demand, which is why the BoJ is expected to continue with its stimulus measures for now. Base effects could see Japan’s inflation slow in the coming months.  

Bank of England Governor Andrew Bailey believes the UK has turned a corner on inflation, and that inflation will fall “quite rapidly” from late spring, largely due to lower energy prices. He also indicated that wage inflation, which has remained high in the latest data, may also start to cool in the coming months. Bailey indicated that market rate expectations (for another 100bp rate in rate hikes to 4.5%) are more closely aligned with the BoE’s own views.

Minutes from December’s ECB policy meeting showed that “a large number” of policy makers had pushed for a 75bp hike, but compromised on 50bp with a more hawkish tone in the commentary. We expect the ECB to raise by 50bp again in February.

The central bank of Turkey kept its benchmark rate on hold at 9.0% as expected yesterday. However, the bank’s guidance didn’t mention that the current rate was “adequate”, potentially opening the door for further cuts ahead of elections in May.

Today’s key economic data and events

• 11:00 UK retail sales (Dec) forecast 0.5% m/m (-4.0% y/y)
• 19:00 US existing home sales (Dec) forecast 3.95m (-3.4% m/m)

Fixed Income

• US Treasuries fell overnight as a hawkish tone emerged from several central bank speakers. Lael Brainard, vice chair, said rates will need to be “sufficiently restrictive for some time” while John Williams from the New York Fed said “monetary policy still has more work to do.” Yields on the 2yr UST added 4bps to 4.1264% while 10yr UST yields added 2bps to 3.3915%.
• European bond markets also showed some selling pressure as markets discount the ECB moving quickly to a slower pace of monetary tightening. Bund yields added 4bps overnight to 2.05% with French 10yr yields up by about the same amount. In the UK, gilts were the only major bond market to rally overnight with a 4bps drop in yields to 3.269%.
• Emerging market bonds closed with a weaker bias overnight, both in USD and local currency markets. Yields on 10yr Turkish bonds added 5bps to 9.84% following the CBRT’s decision to leave rates unchanged but open up the possibility of a further move in rates.

FX

• Selling against the dollar gathered pace overnight even as there was a general unease around risk assets. EURUSD added 0.4% to close at 1.0833 while GBPUSD gained 0.4% to 1.2391 and USDJPY fell 0.4% to 128.43. Commodity currencies closed more mixed with USDCAD down 0.2% in favour of the loonie, settling at 1.3466 while AUDUSD fell 0.5% to 0.691 and NZDUSD fell 0.7% to 0.6396.

Equities

• The S&P 500 fell for a third day running yesterday, with hawkish commentary from Fed officials weighing on sentiment. It fell 0.8%, as did the Dow Jones, while the NASDAQ ended the day 1.0% lower.
• Losses in Europe were even more acute, as the composite STOXX 600 fell 1.6%. The DAX and the CAC lost 1.7% and 1.8% respectively while the UK’s FTSE 100 dropped 1.1%.
• Locally, the DFM added 0.1% but the ADX fell 0.5%. Saudi Arabia’s Tadawul closed 0.2% higher and Egypt’s EGX 30 added a further 0.5%.

Commodities

• Oil prices managed to recover some losses overnight with gains of 1.4% in Brent markets to USD 86.16/b and 1.1% in WTI to USD 80.33/b. Commercial crude inventories rose by 8.4m bbl last according to the latest estimates from the EIA along with a .3.5m bbl build in gasoline stocks and a draw in distillate inventories. US oil production was flat at 12.2m b/d.

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