European markets finished the day lower yesterday, despite a softening in yields which was brought about by comments from St. Louis Fed President James Bullard that he envisaged a Fed funds rate of 5.37%.
This is broadly in line with the Minneapolis Fed’s Neel Kashkari who has consistently indicated a more hawkish stance of 5.4%, although this a slightly more benign stance than markets had started to price in over the past few days.
Notwithstanding that, last night’s Fed minutes didn’t tell the markets much that hadn’t been deduced already given the recent comments from Mester and Bullard last week. What they did show however was that there was significant sympathy for a 50bps rate hike from a few FOMC members before they settled on the more gradual option of a 25bps rate rise.
Fed officials were also at pains to cite continued inflation risk, which suggests contrary to the narrative that followed the Powell press conference that the Fed is far from done when it comes to raising rates further.
A lot of the takeaway from the minutes last night was that they didn’t provide a lot of new information. That isn’t entirely true, given that we now know that a number of other Fed officials share the view of Bullard and Mester that more needs to be done, and in light of the data since then that position will only have hardened further.
Without last week’s interventions these minutes would have been considered extremely hawkish, and with the interventions they now show that the Federal Reserve has further to go, with another 25bps in March, followed by further hikes into Q2.
US markets finished the day lower albeit off the lows of the day with the S&P500 posting its 4th successive day of losses, although the Nasdaq managed to close higher. This divergence looks set to help markets in Europe open marginally higher, although the FTSE100 looks set to underperform due to a host of big companies going ex-div, including GSK, AstraZeneca, Unilever and Barclays.
Today’s weekly jobless claims are likely to reinforce the tightness of the US labour market and are expected to rise to 200k from 194k.
Despite the rise in interest rates, we’ve seen over the past few months, the US economy has held up reasonably well, with strong growth in Q3 as well as Q4, after a weak H1.
The first iteration of US Q4 GDP saw the economy expand by 2.9%, which was above expectations of 2.5%.
Personal consumption was a little disappointing, slipping back to 2.1%, which wasn’t that surprising given that November and December retail sales contracted. This trend will probably rebound in the January personal spending and income numbers which are due tomorrow.
Before this afternoon’s claims data and US Q4 GDP we get the final iteration of EU CPI for January which is expected to be confirmed at a slightly higher 8.6% due to hotter than expected Germany CPI numbers, while core prices are expected to remain steady at a record high of 5.2%.
This guarantees another 50bps rate hike from the ECB when it meets next in March, a move which was reiterated earlier this week by ECB President Christine Lagarde..
EUR/USD - slipped below the 1.0610 level keeping the prospect of a move towards the 1.0480 level. We have resistance at the 50-day SMA currently at 1.0730.
GBP/USD – still ranging between support at the 200-day SMA at 1.1935, and resistance at the 50-day SMA at 1.2180. We need to see a move through 1.2200 to target a move back towards 1.2300.
EUR/GBP – rallied from the 0.8780 area and currently finding resistance at the 50-day SMA at 0.8820 area. Further resistance comes in at the 0.8870 area.
USD/JPY – slipped back from 2-month highs at 135.25 area, as it looks to edge towards the 200-day SMA at 136.70. Interim support at 133.60, and below that at 132.60, and 50-day SMA.