Fed Chair Jerome Powell’s hawkish testimony propelled the DXY to 105.6, the intra-day high on 6 January. The last time the DXY surged more than 1% was on January’s solid 517k nonfarm payrolls on 3 February that halted and reversed the greenback’s three-month sell-off. Powell told the Senate Banking Committee that interest rates were likely to peak at a higher level than previously anticipated, i.e., above the 5.1% pencilled in December’s Summary of Economic Projections. The implied yield for December Fed Funds Futures has risen to 5.55% from 4.46% over the past month. While this message had been well telegraphed, markets were unprepared for the Fed’s readiness to deliver larger hikes again on more upside surprises in data. The US Treasury 2Y yield extended its rise to 5.1% this week, further deepening the inversion of the yield curve to more than -100 bps.
Hence, the ADP Employment report will take precedence over Powell’s second testimony to the House Financial Service Committee today. If ADP adds more jobs than the 200k expected for February and the 106k in January, it will increase bets for February’s NFP to beat the 224k consensus this Friday. Today’s Fed Beige Book report should affirm the tight labour market as a hurdle to the Fed’s mission to bring inflation, especially the PCE core deflator, back to its 2% target. Next week’s CPI report will also determine if consensus, currently looking for a 25 bps hike at the FOMC meeting on 22 March, closes the gap with the market’s bet for a 50 bps move.
Currencies are vulnerable against a more assertive Fed if their central banks start dialling down their hawkish stance. Yesterday, AUD’s 2% plunge below 0.66 on the Reserve Bank of Australia’s dovish 25 bps hike to 3.60% was a good example. USD/CAD is eyeing 1.40 after breaking out of its four-month range between 1.3220 and 1.3710 in anticipation of the Bank of Canada becoming the first major central bank to pause its hiking cycle today. The BOC told US lawmakers that the 425 bps hikes over the past year were working to lower CPI inflation to 3% by mid-2023. Inflation fell to 5.9% YoY in January from its 8.1% peak in June. Real GDP was flat in 4Q22, affirming the government’s expectation for growth to stagnate this year. Today, European Central Bank President Christine Lagarde may signal smaller rate increases after the 50 bps hike expected next week. The ECB reported yesterday that 3Y inflation expectations fell significantly to 2.5% in January from 3% in December. Earlier in the week, Sentix Investor confidence stopped improving for the first time in five months and fell to -11.1 in March, a reminder that the bloc’s economy was still fragile. After depreciating 1.2% to 1.0550, EUR could fall further if it breaks the support at 1.0520 or its 100-day moving average.
Quote of the day
“If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.”
Fed Chair Jerome Powell
8 March in history
Malaysian Airlines Flight 370 disappeared en route from Kuala Lumpur to Beijing in 2014.
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