This week saw indices across the world give back a little of the rally we’ve been experiencing since the calendar turned to 2023. The pause followed a speech by U.S. Federal Reserve chairman, Jerome Powell on Wednesday (8th March) where he said that interest rates might need to still go higher, for longer.
Europe’s markets had a bit of time to digest the contents of Powell’s news in real-time with the pan-European Stoxx600 index closing yesterday marginally up by 0.1%. However, the other major bourses and markets headed the other way.
Mixed news came in from China, as the world’s second largest economy saw a marginal drop in its national inflation rates. This might mean that domestic demand is falling – which is bad for China’s post-Covid economic recovery – but analysts have put a different spin on things, saying that domestic demand is still strong.
However, in the short-term – as a result of the increased household domestic spend around Chinese New Year celebrations, winter, and a downcycle in pork – demand has flattened; but this is much to be expected. That said the pare back was marginal, and will need backing-up in coming months, so many analysts, just like the Bank of China are in ‘wait and see’ mode.
TickMill Market Analyst, Patrick Munnelly takes up the story…
Asian markets followed Wall Street lower on a Fed Chair-fuelled sell-off in global equities, with the benchmark S&P500 seeing its biggest losses in two weeks shedding over 1.5% on the day. The 2/10s US treasury yield inversion marked its highest levels since the 1980s, leading investors to flee risk exposure for the safety of government debt.
Safe haven
US Treasury 2-year yields topped 5% overnight, with markets now pricing in a US Federal Reserve 50-basis point rate hike in March, as the greenback soared to a three-month high on a renewed safe haven bid.
At the same time Gold was clattered printing a USD40 drop on the day.
The data docket in today’s European session is scant, in the Eurozone 4Q22 GDP is likely to be revised lower to 0.0% quarter-on-quarter from the 0.1% estimate. This is driven by an unexpected contraction in the German release of -0.4%.
In the UK, investors will parse commentary from Bank of England MPC member Dhingra who will be speaking on the UK’s cost-of-living crisis. Dhingra is regarded as one of the more dovish MPC members, she voted against the decision of the majority at the last policy meeting to increase interest rates.
Round Two
The main event for markets today will be round two of Powell’s testimony, today the chairman will be back on Capitol Hill appearing in front of Congress, where he will likely repeat his statement made yesterday, which led to a meaningfully more hawkish repricing in markets.
The US February ADP employment report, released later today will top the data docket, providing the first clues as to Friday’s non-farm payrolls numbers, although the two data points are rarely perfectly aligned, markets will certainly have an eye on the release.
Job market tight
It is noteworthy that ADP has been weaker than official non-farm payrolls recently, any print at or above 200,000 for private payrolls would suggest the employment landscape remains tight in the US, adding further fuel to expectations of a larger Fed hike on March 22nd.
The JOLTS (US Job Openings and Labour Turnover Survey) report will provide a timely update as to job openings in the economy and is a keenly watched data input for the FOMC (Federal Open Market Committee) members.
Markets expect this number to confirm heat in the US labour market. Rounding out the US employment perspective will be Richmond Fed President Tom Barkin, who is scheduled to speak later today about the US employment market.
He recently commented that he believed that the current labour market conditions led him to see a terminal rate in the ballpark of 5.5% to 5.75% for this cycle.
