Fed warns of further rate hikes

Federal Reserve officials were out in force at the start of the week to caution that the Fed wasn’t done with hiking rates and that markets had gotten ahead of themselves in pricing any easing in policy stance. John Williams from the New York Fed said that rates would be on a “modestly higher path” than earlier Fed predictions while James Bullard from the St Louis Fed markets were “underpricing” risks that the Fed had to do more on rates. Fed chair Jerome Powell speaks later in the week with expectations again that he will push back against any anticipation of an early pivot.

Klaas Knot, head of the Dutch central bank and a member of the ECB governing council, said talk of over-tightening of monetary policy was “a bit of a joke” and that the ECB needs to maintain “focus on restoring price stability.” Knot also said that a recession was not a certainty for the eurozone but did say that the economy will “get weaker growth, that’s for sure.” The ECB hiked rates by 75bps its last meeting in late October and markets are split on whether it will follow up with another similar sized hike or 50bps at their meeting on December 15th. Knot is among the more hawkish members of the ECB though his views do seem to be carrying momentum until the end of the year.

Net foreign assets at the Saudi Central Bank fell by USD 4.2bn in October to USD 444bn. After dropping sharply in the early stages of the Covid-19 pandemic, and a brief dip earlier this year, reserves have been holding close to about USD 440bn for much of the past two years even as oil prices have surged and Saudi Arabia’s current account balance has moved substantially into surplus this year. The country has placed deposits at regional central banks to help support governments facing financing and balance of payments issues in 2022.

Today’s Economic Data and Events

• 11:00 TU Trade balance Oct: forecast USD -8bn
• 17:00 GE CPI y/y Nov: forecast 10.4%
• 18:00 CA GDP Sep y/y: forecast 3.8%
• 19:00 US Conference Board consumer confidence Nov: forecast 100

Fixed Income

• Rates markets benefitted early in the session overnight from a risk-off tone as investors watch the political unrest in China. But hawkish commentary from Fed officials helped to unwind the gains later in the day with both the 2yr UST and 10yr UST yields closing relatively unchanged.
• European markets opened the week lower, likely affected by hawkish commentary from ECB officials as well as the Fed speakers. The 10yr bund yield added 1bps to 1.979% while 10yr gilts closed flat at about 3.1%.

FX

• A strong risk-off tone related to the unrest in China and hawkish messages from central bankers helped to lift the dollar against peers. The broad DXY index added 0.68% last week, unwinding a good chunk of the prior week’s losses. EURUSD dropped 0.53% to 1.034, reversing some substantial mid-day gains to nearly 1.05 on the back of hawkish commentary from Klaas Knot from the ECB. GBPUSD fell 1.1% to 1.1959 after having breached above 1.21. Japanese yen benefitted from the haven bidding with USDJPY down 0.17% to 138.95.
• Commodity currencies took more of a beating given their high betas to risk assets. USDCAD added 0.87% to close at 1.3496 while AUDUSD dropped 1.5% to 0.665. Australia’s high exposure to China’s economy will keep the pair under scrutiny while the unrest occurs. NZDUSD fell 1.34% to 0.6163.

Equities

• Unrest in China weighed heavily on equity markets to start the week with losses across the bulk of major global indices. While Indian markets remained positive on Monday as the Sense closed up 0.3%, elsewhere in Asian stocks were trending downwards. In China, the Shanghai Composite lost -0.8% on the day, while the Hang Seng dropped -1.6%. Nor were other jurisdictions immune as Japan’s Nikkei ended the day -0.4% lower and South Korea’s KOSPI dropped -1.2%.
• The negative selling continued in Europe as the CAC dropped -0.7% and the DAX -1.1%. The UK’s FTSE 100 lost -0.2% with energy companies in particular struggling through the session.
• Locally, the DFM dropped -0.5% and the ADX -1.2%. The Tadawul lost -0.5% with losses later in the day.
• In the US, the S&P 500 and the Dow Jones both fell -1.5% and the NASDAQ -1.6%, weighed down by both events in Asia and by pushback around the chances of a rate pivot from various FOMC officials.

Commodities

• Oil prices managed to find a floor yesterday after opening with some heavy selling related to demand concerns coming out of China. Brent futures eventually recovered and managed to settle at USD 83.19/b, down 0.5%, while WTI added 1.3% to USD 77.24/b after some gains later in the session.
• The EU has still failed to formalize a level for its oil price cap with a level of USD 62/b reportedly under consideration. The plan is meant to come into force next week and the uncertainty on the price level will add to risks for oil markets into the end of the year.
• ADNOC will spend USD 150bn over the next five years to increase domestic oil production capacity as well as make investments into gas, chemicals and renewables abroad. ADNOC also plans to integrate its LNG and gas processing firms into a single company and offer shares via an IPO.

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