Fed officials signal more rate hikes

Fed officials have maintained a hawkish tone in the new year, with Raphael Bostic of the Atlanta Fed and Mary Daly of the San Francisco branch talking up the case for hiking rates further and keeping them elevated for some time, sticking to the messaging that came out of the last MPC of 2022. Both see rates above 5.0%.

The Eurozone’s Sentix Investor Confidence index rose to -17.5 in January, up from -21.0 in December and stronger than the consensus prediction of -18.0. The expectations measure, which assesses sentiment for the next six months, showed an even starker improvement as it rose to -15.8, from -22.0 previously. The outlook in the Eurozone has improved in recent weeks as inflation has softened, and a mild winter has dispelled concerns around an energy crunch. With growth looking more assured, the ECB is expected to press ahead with its rate hikes as set out at its December MPC meeting even as headline inflation slows, especially given its expectation that wage growth will be ‘very strong’ in the coming quarters, according to a paper set to be published in its Economic Bulletin.

Within the MENA region, Iraq’s CPI inflation slowed to 4.1% y/y in October, marking the slowest pace of price growth since early 2021 as commodity prices eased off the highs hit earlier in 2022. In Jordan, finance minister Mohammad al Ississ has said that the economy is expected to grow by 2.7%in 2023, which would be stronger than our forecast of 2.4% growth for the year.

Today’s Economic Data and Events

• 11:45 France industrial production, % m/m. Forecast: 0.8%
• Egypt CPI inflation, % y/y.

Fixed Income

• US Treasury markets edged higher overnight despite their being few fundamental catalysts to affect markets one way or another. Fed chair Jerome Powell will be speaking at an event later today with attention to focus on how the recent jobs data fits into the Fed’s plan to maintain a hawkish footing. Yields on the 2yr UST fell about 4bps to 4.2077% while the 10yr yield dropped around 3bps to 3.5321%.
• European bond markets settled weaker with bund yields up 2bps at 2.224% and French 10yrs closing at 2.726%, up 1bps. Gilt yields were also higher, rising by 5bps to 3.52%.
• FAB is pricing a USD 500m 5yr sukuk at t+95, tighter than initial guidance.

FX

• The dollar extended its losses into the new week with declines against all major peer currencies. The ‘goldilocks’ NFP report has helped to temper market fear of more aggressive hikes from the Fed, helping to support other currencies. EURUSD added 0.8% to 1.073 while GBPUSD added about the same amount to settle at 1.2184. USDJPY was more muted but still moved in favour of the yen at 131.88, down 0.2%.
• Commodity currencies all rallied with USDCAD down 0.4% at 1.3389, AUDUSD gaining 0.5% at 0.6912 and NZDUSD up 0.4% at 0.6372.

Equities

• The Hang Seng and the Shanghai Composite maintained their strong pace of growth yesterday as the indices shrugged off the mounting Covid-19 case numbers in China to focus on the reopening opportunities. They closed up 1.9% and 1.1% respectively. Elsewhere in Asia the Nikkei added 0.6%.
• The prospect of higher for longer rates weighed on US equities yesterday as the S&P 500 lost 0.3% and the Dow Jones 0.1%. The NASDAQ managed to add 0.6%, boosted by gains in big tech firms.

Commodities

• Oil prices gained overnight with Brent futures closing at USD 79.65/b, up 1.4% and WTI adding 1.2% to USD 74.63/b. Gains had been wider earlier in the day on news that a cargo vessel had gone aground in the Suez Canal, potentially threatening trade and oil tanker flows.
• China has issued large import quotas for its independent refiners, implying the country is expecting a sizeable bounce back in oil demand since the Covid-19 restrictions have been lifted.

Click here for charts and tables