Mixed Day for Europe after Fed Minutes as US Observes Thanksgiving Holiday

Fed Looks to Slow  

Minutes from the last Federal Open Market Committee meeting show most members reckon they should start slowing the pace of rate hikes soon. This is not a significant surprise, if indeed it’s surprising at all. Mostly we knew that the Fed was wanting to take its foot off the gas a bit as we round the corner of the year into 2023 to allow time to take a look in the rear view mirror to see if the economy was catching up with the breakneck pace of hikes.   

"A number of participants observed that, as monetary policy approached a stance that was sufficiently restrictive to achieve the Committee's goals, it would become appropriate to slow the pace of increase in the target range for the federal funds rate," the minutes showed. "In addition, a substantial majority of participants judged that a slowing in the pace of increase would likely soon be appropriate."  

Markets are hooked on the idea of a pause or a pivot and when that might be. This is the wrong way to look at it. As Fed governor Christopher Waller said: “Quit paying attention to the pace and start paying attention to where the endpoint is going to be. Until we get inflation down, that endpoint is still a ways out there.”  We know the Fed is slowing, the issue at stake is how far it gets before it stops.   

Hong Kong Peg Under Pressure  

US rate hikes are the source of a lot of pain this year and Hong Kong’s dollar is increasingly finding itself in the firing line. Hedge fund billionaire Bill Ackman says he has taken a short position against the HKD, arguing that it’s only a matter of time before it breaks. The Hong Kong Monetary Authority has a mandate to keep the currency trading in a range of HK$7.75 to HK$7.85 to the USD, which it has successfully done thus far. 

Ackman is not the first to bet against the peg – George Soros and arch China hawk Kyle Bass have done so in the past and lost. But the pace of Fed rate hikes may make it increasingly difficult for the HKMA to maintain the peg.  

“We have a large notional short position against the Hong Kong dollar through the ownership of put options,” Ackman said on Twitter. “The peg no longer makes sense for Hong Kong and it is only a matter of time before it breaks.”  

The HKD has traded at the weaker end of the range for most of the year but indications that the Fed might be slowing the pace of rate hikes has helped ease pressure on the band, pushing the USD to HK$7.81 from the HK$7.85 level it has traded since January. Kinda seem that Beijing and HK will throw everything at defending the peg and the pace of Fed rate hikes is about to slow down. 

Muted Markets  

Thanksgiving holiday in the US but Frankfurt and Paris are looking to rally with the DAX +0.8%, Paris +0.5%. London is flat. Yesterday’s minutes from the Fed pushed the dollar to its lowest in over a week but the USD is catching a bit of bid in early trade this morning after dropping further overnight. GBPUSD is holding at 1.2080 and looks to pause before a test of the 200-day line near 1.220…light trading in US could let this happen. EURUSD is just holding on the 200-day line at 1.0420. Yen showing strength as it looks to break the recent range at 138.50. 

China cases of covid continue to rise but offsetting this is more easing by the PBOC and a new rescue deal for the property sector. The Bank of Korea slowed the pace of tightening, opting for a 25bps hike. German Ifo business climate survey showed a slight improvement but still well below anything resembling confidence. Looks like German industry is more confidence that gas rationing won’t be needed.  

Oil Inventories Draw  

EIA figures showed crude inventories fell by 3.7 million barrels last week, though there was a large increase in both gasoline and distillate inventories. Oil prices fell as the G7 was said to be looking at a price ‘cap’ on Russian oil of $70-$75 a barrel. Though with Russian oil on the market already heavily discounted, it’s unclear whether this amounts to much of a cap at all.  

Today  

Did I mention it’s a holiday in the US? The European Central Bank meets to review recent policy decisions, meanwhile there are several Bank of England speakers on the card. Light day for data given the US holiday.