Olivia

Happy Thanksgiving to any of our US followers! I have some holiday-related stats to quiz you on to get the episode started this week. Then from a market perspective, I cover what information we learned from the latest FOMC minutes, why the UK is set to be one of the worst performers in the G20 over the next two years, and what caused volatility in the oil market this week.

Flash PMI’s for November turned out to be a mixed bag. US data disappointed as the manufacturing PMI dropped to 47.6 from 50.4 and service PMI pushed lower as well to 46.1 from 47.8. It is broadly in line with our view that the US economy is heading into a mild recession in early 2023. Investments still look resilient as durable goods orders were decent in October. However, leading indicators suggest investments will slow down soon. For once the picture was a little more positive in the euro area as both PMI manufacturing and service were better than expected. The German ifo business confidence also surprised to the upside rising to 86.3 from 84.5. Despite the improvement the indicators are still at low levels and point to a euro area recession. But on the margin it is positive and fits with our view that the recession will not be deep, although it could be protracted as we have yet to feel the full effects of the sharp rise in bond yields and ECB policy rates. The PMI’s also showed easing price pressures and a further normalisation of delivery times, which is a further sign that goods price inflation is in… Read More »Euro inflation key to size of next ECB hike

It’s official: The most eagerly awaited economic report of this month, if not this year was released on Wednesday and showed the U.S central bank favors slowing down the pace of interest rate hikes to mitigate risks of overtightening. Minutes from the FOMC Monetary Policy Meeting earlier this month revealed several officials backed the need to slow the pace of rate hikes – signalling a pivot to smaller interest rate increases from as early as December. This adds weight to expectations the central bank will raise rates by 50 basis points next month, finally ending a run of super-sized 75 basis point hikes. In another revelation, some committee members expressed concern about risks to the global economy should the Fed continue to press forward at the same aggressive pace. Several Fed officials signalled that their assessment of the risks of a recession had grown to almost 50-50. That was the first such warning since the central bank began raising rates aggressively in March, bringing their target benchmark rate to a range of 3.75% to 4%. Whichever way you look at it, one thing is clear. This is the start of a more different and dovish narrative from the Fed, which ultimately presents… Read More »What’s next for commodities as Fed prepares to pivot on rate hikes? [Video]

After the Thanksgiving downtime that generated some further weakness for the greenback, investors will be looking for fresh direction from the barrage of US economic data that will be dominating the agenda in the coming week. The latest payrolls report will be the main attraction along with PCE inflation readings. CPI data out of Australia, the Eurozone and Switzerland as well as Canadian GDP numbers will be important too, while OPEC’s monthly decision will be another one to watch amid speculation of an output increase.

US non-farm payrolls – 02/12 – despite concerns about the strength of the US economy the labour market, has thus far continued to hold up well, with weekly jobless claims currently averaging around 225k per week. In October non-farm payrolls came in at 261k, while the September jobs number was up to 315k. Slightly more disappointingly was the fact that the unemployment rate edged up to 3.7%, while wage growth slowed to 4.7% from 5%. The report also served to indicate that there was little sign of a wage price spiral despite still high levels of vacancies. If anything, we are now starting to see in the current earnings season reports that the big tech companies are letting people go in their thousands. Amazon for example has announced the loss of over 10k jobs worldwide with more to come, while Meta recently announced 11k. Twitter has also seen people leave the business, some of them voluntarily because they don’t want to work for new owner Elon Musk. While not all these job losses are likely to be in the US there does appear to be a trend starting to build, although it is likely to take some time to filter… Read More »The Week Ahead: US non-farm payrolls, US PCE, easyJet results

The Fed minutes recognises that the risk of a US recession next year is almost ‘as likely as the base case’. This revelation sent the USD sharply lower on Wednesday and will put acute focus on the US PCE print next week. The week started rather subdued with the lack of any major catalyst expected and going forward the main market focus remains on whether the Fed will pivot or not and, if so, when? In other news, the RBNZ stepped up its fight against inflation significantly raising its terminal rate projections. Other key events from the past week USD: US PMIs, Nov 23: US PMIs for services and manufacturing both printed below the market’s minimum expectations showing weakening US sentiment. Will it change the Fed’s mind? Unlikely, but it moved the USD quickly lower. NZD: RBNZ hikes by 75bps, Nov 24: The RBNZ rate hike was as expected, but the committee also discussed a 100bps hike and raising the terminal rate to 5.5% for Q3 2023. This was a decidedly more hawkish tilt from the RBNZ. USD: FOMC Minutes, Nov 24: US Markets paused for US Thanksgiving celebrations on Thursday, but the Wednesday minutes showed the Fed anticipate a US recession next year which led… Read More »Weekly market brief: US recession

Since the Fed's last raise November 3, Fed Funds rate opens and closes at 3.83. The Fed Funds rate once traded freely on its own with highs and lows as any financial instrument. In 2000, Central banks implemented meetings every 6 weeks. Prior to 2000, central banks met anytime they desired and changed interest rates at their own discretion. Traders were forced to factor Fed Funds for oversold and overbought status for possible changes to an unknown date to meetings. Fed Funds then was known as the discount rate and this rate is discounted to headline. The question was the spread and insight to possible interest changes. Bernanke and Big Sis Yellen changed Fed Funds into an immovable fixed rate. Fed Funds moves every 12 points with every 25 point change to headline and remains fixed. From 3.83, Fed Funds trades daily at its maximum 25 points and minimum 12 from 3.80 to 4.05. Yields are priced from Fed Funds and normally trade much higher rates. The question to past yield curve inversions occurrs particularly when higher yields trade below lower yields especially the 10 to 2 rates. How serious is an inversion must be measured by the 10 year… Read More »Currency Market: FX next week and yield curve inversions

The U.S. Dollar was lower across the board on Thursday, as markets reacted to the latest Fed minutes. The Federal Open Market Committee confirmed that it could be prepared to pivot from aggressive rate hikes in coming months. Yesterday’s minutes showed that, “A substantial majority of participants judged that a slowing in the pace of increase would likely soon be appropriate.”  The minutes went on to say that, “The uncertain lags and magnitudes associated with the effects of monetary policy actions on economic activity and inflation were among the reasons cited regarding why such an assessment was important.” GBPUSD is currently trading at a three month high, with EURUSD nearing a five month high.

Dollar Index has declined sharply post the FED meeting minutes released yesterday and could be headed towards 105/104 while Euro has scope to rise to 1.05/1.06. Aussie and Pound are headed towards 0.68 and 1.22 while EURJPY holds below 146 and can fall. USDJPY can test 136 before bouncing back from there. USDCNY can test 7.10 while USDRUB remains within 59-61.50 region. EUINR has risen sharply and can test 86. USDINR can be ranged within 82-81.50 region before breaking higher eventually. The US Treasury yields are continuing to fall in line with our expectation. The minutes of the US Federal Reserve’s November meeting showing that the pace of rate hikes would be slowed down soon has dragged the yields lower. The Treasury yields have room to fall more from here. The German Yields are coming down as expected and can fall further to test their key supports. Thereafter a bounce is possible. The 10Yr and 5Yr are looking mixed and are stuck in a sideways range. Dow continues to rise above 34000 keeping our bullish view intact. DAX remained stable but overall view remains bullish to see a rally on the upside. Nikkei has risen as expected and has room… Read More »Morning Briefing: Dow continues to rise above 34000 keeping our bullish view intact

United States: Leftovers are for quitters The closest thing to leftovers in economic data are unfilled orders, which may help sustain factory activity, but they're unlikely to be a saving grace should demand dry up more meaningfully. In addition to a jump in durable goods orders this week, new home sales shot higher in October. The number of people still on unemployment benefits rose to the highest level since March. Next week: Personal Income & Spending (Wednesday), ISM Manufacturing (Thursday), Employment (Friday). International: European sentiment improves, but recessions unavoidable Eurozone and U.K. purchasing manager indices were better than expected in November, but remain in contraction territory. While the upside surprise signals the magnitude of economic contraction may not be as severe as initially expected in Q4-2022, we still believe recessions in the Eurozone and U.K. are imminent. Next week: China PMIs (Tuesday), Eurozone CPI (Wednesday), Brazil GDP (Thursday). Credit market insights: China steps in to help struggling property sector China's property sector has certainly faced challenges this year, as struggles to generate sufficient cash flow and liquidity issues have seen real estate projects across the country stall. Furthermore, over-leveraged developers continue to face elevated probabilities of defaulting on debt as… Read More »European sentiment improves, but recessions unavoidable