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The Fed Also Rises

“How did you go bankrupt?" Two ways. Gradually, then suddenly.

Many traders will natively understand Hemingway. And so too it is with rates and recession, at least in the US. Gradually we have seen rates and bond yields rise and then barely a month after Fed chair Jay Powell was talking about disinflation, he suddenly comes out with a renewed hawkishness that pushed bonds and stocks lower and put a fire under the US dollar. It could also see the Fed slam the economy hard just as rate hikes start to take effect.

Powell opened the door to a 50bps move this month and raised the prospect of further outsize hikes just as markets had assumed we were on a 25bps course. The pilot cut the engines coming into the harbour but has had to fire them up again – the risk is slamming into the mole at full tilt. Fed hikes are about to catch up just as it reaccelerates. 

The Fed chair said there was “little sign of disinflation” and that the “ultimate level of interest rates likely to be higher than previously anticipated”. He also said the Fed would be “prepared to increase the pace of rates” should incoming data warrant it. It looks as though the Fed was premature to slow the pace of hikes – I said precisely that the Feb 1st victory lap was too early. Now they look erratic, and this introduces further volatility into rates markets, which is sub-optimal when you are already at quite elevated levels of interest.

 

A Date with Data

Front-end yields jumped, with the 2yr rising above 5% and the 10yr was struggling to breach 4%...leaving a huge 100+bps inversion that is of course screaming recession. Powell continues his testimony today. The market has moved to give Fed the room to go with 50bps this month – pricing in the likelihood at about 60% vs 30% at the start of the day. The key is the data now and we should remember the Fed is still data-dependent. This phrase needs to be considered as revealing 50bps is not a slam dunk: “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.” Don’t get out – the market is still chopping up bears and bulls alike – the Fed can easily step back to 25bps and unwind all of this in a blink of an eye.

 

Damage control: Wall Street Stumbles

The Dow Jones dropped 575 points, or 1.72%, to end at 32,856.46, negative for the year. The S&P 500 fell by more than 1.5% to 3,986.37 - below the key 4,000 level but still north of the 200-day simple moving average around 3,940. The Nasdaq was down 1.25% to 11,530. Bank shares led the decline as investors fretted over recession.

All this makes the jobs report on Friday particularly huge. Today is the ADP nonfarm payroll data, hardly a great indicator but it will be watched closely. Also check the JOLTS job openings, which a month ago surged to 11m from 10.46m, cementing the Jan NFP report strength. Inflation data is not improving either. Manheim: "Wholesale used-vehicle prices (on a mix, mileage, and seasonally adjusted basis) increased 4.3% in February from January. This was the largest increase for the full month of February since 2009’s 4.4% rise.”

 

Europe Trips Over Wallstreet

European equities took the cue from Wall Stret and were broadly lower in early trade on Wednesday, albeit we saw the DAX move marginally higher, taking the Euro Stoxx 50 with it. The FTSE 100 was below 7,900, down around a quarter of one percent. Crude prices fell sharply on the hawkishness of the Fed chair...implied US growth slowdown hitting demand in the market that accounts for about a fifth of crude consumption. However, the demand remains robust enough for now - US crude inventories fell by 3.8m barrels against forecasts for a rise of 400,000.  Sterling broke through its 200-day line and went further south – looking to see if the 38.2% retracement level around 1.1650 comes into focus if the dollar rally has legs.

Sterling broke through its 200-day line.png

Yesterday saw a sharp move up for the dollar index, through the 100-day line.

dollar index through the 100-day line.png

Elsewhere... 

WeightWatchers International shares surged 80% after it announced plans to buy Sequence, a telehealth company that helps tackle obesity. Darktrace –1% or so after guiding for lower free cash flow as it makes adjustments to the tax treatment of share awards relating to its 2021 listing. The company lowered FY23 guidance for free cash to 50-55% from 60-65%. Adidas – quarterly loss, dividend slashed after cutting ties with Kanye West. Yeezy footwear still unsold...cost of ~$630m in the fourth quarter and estimated $1.2 billion this year.

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