Jerome Powell warns more hikes could be needed

Fed Chair Jerome Powell was speaking in Washington last night, where he warned that interest rates would have to be raised to a level higher than currently anticipated by markets, and that it would probably take ‘a significant period of time’ to bring down inflation given the ‘extraordinarily strong’ labour market data seen in the NFP report released last week. Nevertheless, Powell did predict that inflation would slow this year, and some read his commentary as not having been as hawkish as it could have been given he did not push back against stock market gians, leading to a rebound in the equity indices. Fed official Neel Kashkari was also commenting yesterday, telling CNN that he also believed that there was still more to be done on rates.

President Biden was also speaking overnight as he made his annual State of the Union address. The President talked up the strong labour market with the near-record low unemployment rate and the 12mn jobs created over the past two years, and touted cross-party cooperation in government, an issue that becomes more important as the debt ceiling issues rises once more. There was also a focus on deficit reduction through making sure ‘the wealthy and largest corporations pay their share’ and on the need to develop domestic chip manufacturing.

Data out of Germany remains mixed. Following on from the upside surprise in factory orders for December released yesterday, industrial production came in worse than expected, with a 3.1% contraction m/m. The consensus prediction had been for a shallower 0.8% fall, following in from the (upwardly revised) 0.4% gain seen in November.

Today’s Economic Events and Data

• 8:30 Reserve Bank of India interest rate decision. Forecast: 6.50%

Fixed Income

• US Treasuries weakened in the wake of Fed chair Jerome Powell’s comments that more rate hikes may be needed given how apparently hot the labour market is running. Yields on the 2yr UST closed unchanged on the day but faded a brief rally on Powell’s initial comments. Yields on the 10yr yield added about 3bps 3.6735%.
• European bonds also closed softer overnight with yields rising across all major Eurozone economies. Bund yields added 5bps to 2.339% while Italian 10yr yields closed up 7bps at 4.223%. Gilt yields also jumped higher up 7bps at 3.313%.
• Moody’s downgraded Egypt’s sovereign rating to ‘B3’ and also revised the outlook on the rating to stable from negative. According to Moody’s, the downgrade reflected “reduced external buffers and shock absorption capacity.”

FX

• Currency markets showed relatively muted action by the standards of the last few days. EURUSD closed unchanged at 1.0726 while GBPUSD added 0.2% to 1.2048 and USDJPY ticked lower by 1.2% to 131.07. Commodity currencies all pulled strong against the US dollar with USDCAD down 0.4% at 1.3399 while AUDUSD added 1.1% to 0.6959, buttressed by the RBA’s commitment to further tightness in policy. NZDUSD added 0.3% to 0.6326.

Equities

• Asian markets recouped some of Monday’s losses yesterday as the Hang Seng closed up 0.4%. On the mainland, the Shanghai Composite added 0.3% while in Japan the Nikkei closed flat.
• In the US, stock markets rebounded following losses earlier in the week as investors chose to interpret Jerome Powell’s comments as relatively dovish. The Dow Jones, the S&P 500, and the NASDAQ added 0.8%, 1.3%, and 1.9% respectively.
• Locally, the DFM added 0.1% and the ADX closed flat. The Tadawul lost 0.8% while the EGX 30 added a furhter 1.9%.

Commodities

• Oil prices bounced strongly overnight despite little in the way of material catalyst to support a move. Brent futures added 3.3% to USD 83.69/b while WTI rose a bit more than 4% to USD 77.14/b. The API reported a draw in US commercial crude stocks of 2.2m bbl last week though there were sizeable builds in gasoline and distillate stockpiles.