European markets took a step back yesterday in the aftermath of Friday’s bumper US payrolls continued to reverberate through the market, with the FTSE100 also retreating from its record highs last week.
Hawkish talk from the likes of ECB governing council member Robert Holzmann, followed by the Bank of England’s Catherine Mann saw the move higher in bond yields that we saw on Friday, accelerate further yesterday, further undermining market expectations of potential rate cuts by year end.
In reality these expectations were always wishful thinking given how resilient core CPI prices already appear to be, it’s just a pity that it took a blowout US payrolls report and a sharp rebound in US services activity in January to ram home that message.
Nonetheless there still appear to be those who are holding on to the hope that we can still see a sharp decline in headline inflation that will result in central banks being forced to cut rates by year end.
US markets also underwent another negative session yesterday, although the losses of the last couple of days are still quite modest, when compared to the upward move being seen in US 2-year treasury yields, which are now at one-month highs and close to their January peaks.
We’ve also heard from a number of central bank officials in the aftermath of last week’s US economic numbers. On Friday, Mary Daly of the San Francisco Fed, who doesn’t have a vote on the FOMC this year, said that the December projection of a Fed terminal rate of 5.1% was still a decent benchmark, and that policy needed to stay restrictive for some time to come.
Yesterday it was the turn of Atlanta Fed President Raphael Bostic, another non-voting member to weigh in saying that his base case was still for two more hikes at least.
We also heard from the ECB’s Holzmann and Catherine Mann yesterday reinforcing the global view of higher rates for longer, with all eyes set to be on Fed chair Jay Powell later today, particularly in light of last week’s press conference to see if he adopts a much more forceful tone when it comes to the Fed’s rate path.
Powell’s performance last week was a little too nuanced and appeared to prompt the markets to draw their own conclusions on the Fed’s peak rate at a time when a less nuanced view is needed.
Minneapolis Fed President Neel Kashkari is also expected to weigh in over the next couple of days, and given he is a voting member this year his views are pertinent given he’s been fairly quiet as to whether he has changed his views from when he was calling for a terminal rate of 5.4% before a pause at the start of this year.
Last week’s market reaction pre pre-payrolls had all the hallmarks of a child that has become so used to getting its own way over the last 15 years when it comes to interest rates, that it thinks that it can fight the Fed when it comes to rate policy. Sadly, for Powell markets don’t seem to do nuance anymore, and in today’s remarks he needs to clearly set out that the Fed has no intention of cutting rates this year, and that markets had better get used to that idea.
In this morning’s Asia session, the Reserve Bank of Australia raised its benchmark interest rate by another 25bps, perhaps hoping that the December surge in headline CPI from 7.3% to 8.4% was a one-off that is likely to be reversed quite quickly. With its headline rate now at 3.35% it remains quite a bit below its peers which means the central bank may well have to keep hiking a lot more in the months ahead.
This is something that it acknowledged it would have to do, saying that “further increases in interest rates will be needed over the months ahead”, suggesting that at least a couple of more rate rises would probably be needed in the months ahead. The Australian dollar has rebounded strongly after three days of losses.
EUR/USD – we’ve seen further euro weakness as we look to close in on the 50-day SMA at 1.0680, with a break of this key support opening up the risk of a move back to the January lows at 1.0480. Resistance now comes in at the 1.0820 area.
GBP/USD – on course for a move towards 1.1835 now that we’ve slipped below the 1.2080 area, as well as the 50-day SMA at 1.2180. Need to move back above the 1.2180 to stabilise.
EUR/GBP – pulled back a touch from the 0.8980 area with wider resistance at the 0.9000 area. Support back at the 0.8870 area. Above 0.9000 targets 0.9070.
USD/JPY – continues to push on after Friday’s sharp reversal off the 128.00 area. The surge through the 131.50 area has seen the US dollar push above 132.50 but needs to close beyond the 50 day SMA. We have cloud resistance at 133.35 which could also act as resistance.