September 20, 2022

Markets Today: Fears the Fed will ‘keep at it’ for a while yet

US yields continued to push higher ahead of the FOMC

Todays podcast

Overview: Tomorrow

  • A quiet start to the week
  • US yields continued to push higher ahead of the FOMC
  • US 2yr up 7bp to 3.94%
  • US equities turn around intraday, S&P500 +0.7%
  • Coming up: Japan CPI, China LPR, RBA Minutes, Riksbank

Won’t you come back tomorrow, Won’t you come back tomorrow – U2

US equities close in the green but struggled to find direction in a start to the week that was light on for news flow. Holidays in Japan and the UK and coverage of the Queens funeral added to picture of a slow start to what will be a busy week. Yield curves have generally bear flattened. The FOMC, BoJ and BoE each meet from Thursday morning Sydney time.

After being down as much as 0.9%, US equities returned to positive territory through the afternoon and pushed higher in the final hour of trade led by megacaps. The S&P500 closed 0.7% higher, while the more tech focussed NASDAQ was 0.8% higher. Healthcare and Real Estate were the only sectors to record declines on the day, with vaccine makers knocked after President Biden said the pandemic is over in a TV interview. Moderna was 8.7% lower and Novavax fell 8.2%. European indexes were generally little changed. The Euro Stoxx 50 was flat.

In rates markets, US short end yields continued to push higher ahead of the FOMC meeting. The 2yr yield pushed another 7bp higher to 3.94%. That’s 55bp higher than it’s September low on 2 September and a fresh post-GFC high. The 10yr yield was 44 bp higher to 3.49%, the 2s10s inverting further to -45bp. The German 10yr yield was 5bp higher at 1.81%, while the 2yr was 8bp higher to 1.6%.

The futures market continues to price 80bp of tightening by the Fed this week , and added another 7bp to the peak rate priced for March 2023, now at 4.47%. Focus on Thursday morning, beyond the decision in September, will be on whether updated projections and Fed Chair Powell’s commentary can match that hawkish outlook. Of some interest was a WSJ article by Fed whisperer Nick Timiraos during the US morning that reported a late change at Jackson Hole from a more nuanced address to something much more blunt amid concerns investors were misreading the Fed’s intentions given the need to slow the economy to combat high inflation. Notably absent was any mention of a possible 100bp move this week.

In Europe, ECB Vice President Guindos said “the slowdown will not reduce inflation by itself. Monetary policy needs to contribute to ease inflation,” as he emphasised the need to avoid second round effects. Governing council member dove de Cos, in his first remarks since the 75bp hike earlier this month, emphasised that though “we will continue to normalize monetary policy ” but struck a less proactive tone, saying the pace and magnitude depends on the “materialization of risks to our medium-term inflation target” because actions have a maximum effect after 2 years. “It may not be desirable to force an excessively rapid convergence of inflation to 2%, due to the excessive impact on activity and employment that this would entail.”

Moves in currency markets have generally been small. The DXY lost 0.1%, with movements against most of the G10 currencies under 0.3%. The dollar rose 0.25% against the yen alongside the push higher in yields, while the kiwi was the clear underperformer, down 0.5% to 0.5956  after trading at a fresh 2½-year low of 0.5930. The AUD was 0.1% higher at 0.6723 after trading as low as 0.6672 intraday, just shy of yesterdays low of 0.6670, before recovering through the US afternoon alongside the rebound in US equities.

The only economic data of note in the past 24 hours was a ninth consecutive drop in US Homebuilder sentiment in September. The NAHB index dropped 3 points to 46, its lowest since April 2020. Also on US housing, building permits and housing starts are published tonight.

Coming Up

  • Ahead of the Bank of Japan meeting on Thursday, August CPI data attract somewhat more attention than usual this morning , especially given source reports (Reuters) highlighting the dropping in July of the word ‘temporary’ in relation to BoJ officials’ comments in meeting and speeches about underlying rises in inflation. Headline August CPI is expected to lift to 2.9% from 2.6% and the core (ex. fresh food) measure to 2.7% from 2.4% – above the BoJ’s target for a fifth month, but still positively benign relative to the inflation challenge elsewhere, and with core-core (ex. fresh food and energy) seen at just 1.5% y/y from 1.2%.
  • China’s one- and five-year Loan Prime Rate sets are due at 11:15 AEST. While surveys from last week show a strong consensus for no change to both, yesterday China lowered its 14-day reverse repo rate by 10bps to 2.15% (7-day rate unchanged at 2.0%). This elicits a bit of speculation that we could see a small change in one or both LPRs, so signifying a further easing in monetary policy (and negative for the Yuan were it to transpire).
  • The RBA’s September Meeting Minutes may have been largely pre-empted by Lowe’s Parliamentary Testimony on Friday with Lowe having set up the October decision as between 25 and 50bp, but markets will still be looking for any clues to when the RBA might slow the pace of hikes.
  • The week of central banks kicks off in Sweden with the Riksbank widely seen raising 75bp to 1.5%. On the data calendar are US Housing Starts and Canada CPI.

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