Powell still sees rate hikes ahead

• Federal Reserve Chair Jerome Powell addressed the House Financial Services Committee yesterday, and in prepared testimony he underscored the Fed’s ongoing support to carry on with rate hikes as previously signalled, despite the turmoil that has taken hold in Eastern Europe – although he did acknowledge the conflict in Ukraine and said that they would proceed carefully as they learnt what the implications of this were. Powell cited the tight labour market after recent gains and the inflation rate which he believes is ‘too high’ in both goods and services – although he still believes that it will moderate this year, he does not know when. Powell ‘is inclined to propose and support a 25bps rate hike’ this month, but he also said that moves of more than 25bps could be warranted if inflation is persistently high.
• The ADP employment report released yesterday was further indicative of a robust labour market in the US. There was a net gain of 475,000 in February, while January’s figure was revised from a contraction of 301,000 to a gain of 509,000.
• Preliminary February CPI inflation in the Eurozone surprised to the upside in data released yesterday, coming in at a 5.8% y/y, compared to projections of 5.6%. The upside surprise was more likely after German inflation had already come in higher than anticipated the previous day. The bulk of the price growth was driven by energy costs which were up by a record 31.7% y/y and this is likely to be exacerbated by the conflict in Ukraine and subsequent price surge. Price pressures are becoming more widespread and core inflation also ticked up, from 2.3% in January to 2.7%. All the same, that remains low compared to core inflation levels seen in the US and UK, and the ECB is unlikely to move towards more rapid tightening given the other challenges the region now faces.
• OPEC+ agreed at its meeting on March 2nd to increase production by 400k b/d for April, in line with its plan to return barrels back to the market and as we had expected. The decision had seemingly no dissent and the ministerial meeting was completed in a brief period. Critically, the statement following the meeting made no mention of the war in Eastern Europe nor of any threat to Russian exports of oil that could come as a result of its invasion of Ukraine. The April production levels are the last ones before new higher baseline levels come into effect that will allow relatively larger monthly increases from some producers, including the UAE. 
• India’s manufacturing PMI rose to 54.9 in February, from 54.0 the previous month. With the disruption caused by the wave of Omicron infections in previous months fading, activity has rebounded, and business optimism was at the highest level since October.

Today’s Economic Data and Events

11:00 Turkey CPI inflation, February, % y/y. Forecast: 52.5%.

17:30 US initial jobless claims, week to February 26. Forecast: 225,000

Fixed Income

• Treasury markets tumbled in another day of volatile trading as Jerome Powell, chair of the Federal Reserve, indicated his testimony to the House Financial Services Committee that he supports a 25bps hike at the upcoming FOMC and didn’t rule out bigger moves either. Powell said that it was too early to observe the impact of the war in Ukraine on the US economy.
• The front-end of the curve led the sell-off in Treasuries with 2yr UST yields up 17bp to 1.512% while the 10yr added around 15bps to 1.8767%. The levels are more in line with the expected pace of rate hikes though price action is still likely to be volatile as the conflict in Eastern Europe persists. Futures markets are still only pricing in slightly less than 100% of a chance the Fed will hike at the March FOMC.
• European bond markets sold as well, though their drops were in place before the Powell commentary. The 2yr Schatz yield added almost 12bps to -0.63% while the 10yr bund rose 10bps to move back to neutral. Gilt yields jumped higher with 2yr gilts up 26bps to 1.065% and the 10yr adding 13bps to 1.257%.
• Emerging market bonds fell overnight even as risk sentiment ameliorated somewhat. Yields on South African 10yr bonds added 12bps to 9.976% while moves across much of Europe was for higher yields.

FX

• EURUSD closed relatively unchanged at around 1.1119 overnight despite Fed chair Jerome Powell’s endorsement of a 25bps hike at the FOMC later this month even as the war in Ukraine continues. That limited moves in the broad dollar index and held it around 97.40. USDJPY moved higher, rising by 0.5% to 115.52 while GBPUSD rose strongly, abetted by the sharp rise in gilt yields. Sterling settled at 1.3406, up 0.6%.
• Commodity currencies were stronger against the dollar, benefitting from the Bank of Canada carrying out a 25bps hike at its meeting overnight. USDCAD moved lower by 0.9% to 1.2631. AUDUSD rallied by 0.6% to 0.7297 while NZDUS added 0.5% to 0.6787.

Equities

• Equity markets staged a modest resurgence yesterday, with European and North American indices turning green after consecutive losses. In Europe, the DAX added 0.7%, the CAC 1.4% and the CAC 1.6%.
• In the US, all three major indices closed higher as the NASDAQ added 1.6%, the Dow Jones 1.8% and the S&P 500 1.9%.
• MSCI and FTSE Russell will cut Russian stocks from their widely followed equity indices. The Russian stock exchange will remain closed today, as it has all week, but Russian firms with dual listings abroad have plummeted.

Commodities

• As expected, OPEC+ agreed to a modest production increase for April at their March 2nd meeting. Even as oil prices have been screaming out for additional barrels, the producers alliance chose the to keep the integrity of their group, which includes Russia, over easing the current tightness in oil markets. Brent futures surged up 7.6%, closing at USD 112.93/b while WTI added almost 7% to settle at US 110.60/b. With no apparent moderation of fundamentals at place in the market, a move even higher in oil looks a certainty.
• The backwardation in Brent markets is enormous at more than USD 5/b on 1-2 month spreads. For WTI, the same spread is at record levels at almost USD 4/b.
• Hardly helping oil markets, the EIA reported a draw in US crude stocks of 2.6m bbl last week with declines also coming across much of the rest of the barrel. Production in the US was unchanged at 11.6m b/d.

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