Money markets are continuing to price in a higher terminal rate for the Fed on Monday following the robust payrolls and ISM data, as anxiety builds of a possible upside surprise in this week’s US CPI numbers. Fed fund futures swung sharply higher over the last week as investors ramped up their expectations of how high the Fed will raise interest rates, while slowly pricing out rate cuts towards the year end.
Markets on edge ahead of US inflation data
Hawkish remarks by a slew of Fed officials on the back of the hot jobs report and services PMI have sidetracked traders who until recently were ready to bet against the central bank. Investors seemingly misinterpreted Powell’s perceived dovish tone in his post-FOMC press conference when the expected terminal rate dipped to 4.82%, only to surge back above 5% in the subsequent days and has hit 5.19% today.
- Stocks, yields and US rate futures fall in line with Fed’s ‘higher for longer’ message
- Worries about upside surprise in US CPI report weighs on mood, dollar firms
- Yen reverses gains as contender for BoJ chief dents hawkish expectations
But there is more to this week’s jitters than just the hawkish Fed talk as the January CPI figures will be the first to be calculated using new methodology. Moreover, upward revisions to both December’s headline and core month-on-month prints have increased the possibility of the January report breaking the recent trend of softer-than-expected readings.
Higher yields pressure stocks as CPI in focus
Two- and five-year Treasury yields maintained their upward path on Monday, with the former hitting two-and-a-half-month highs and the latter a one-month peak. But the 10-year yield eased off its highs from above 3.75% as European trading got underway, providing some relief to battered stocks.
The Nasdaq Composite lost about 2.4% last week as the relentless rise in long-term borrowing costs hammered tech stocks that had been rallying recently, raising question marks once again about excessive valuations.
With the majority of big earnings releases out of the way, equity markets will be on standby this week for the CPI data as well as upcoming Fed speakers’ response to it. But in the meantime, European stocks are enjoying a bit of a reprieve, edging up today to post modest gains, while US futures are mostly flat.
Yen on the backfoot as hawkish BoJ hopes dashed
The US dollar was trading mixed on Monday as it extended its gains against a basket of currencies. But this came mainly on the back of a sharp dip in the Japanese yen, which tumbled across the board. The yen initially rallied on Friday on reports that dovish BoJ deputy chief Masayoshi Amamiya won’t be the Japanese government’s pick for new governor after all. But it didn’t take long for the excitement to fade after the new favourite Kazuo Ueda voiced his support for the BoJ’s ultra-loose monetary policy on Nippon TV.
There’s likely to be further volatility for the yen over the next 24 hours as Q4 GDP data for Japan will be followed by the government’s decision on who to nominate as governor and deputy governors at the Bank of Japan.
The dollar was last trading 0.9% higher at 132.60 yen.
Kiwi shines as pound braces for UK data barrage
In other currencies, the New Zealand dollar stood out, rising the most versus its US counterpart, as New Zealand government bond yields caught the fever in US Treasuries and shot higher. European currencies were subdued, however, unable to put up much of a fight against the rejuvenated dollar bulls.
The euro was trading near one-month lows, while sterling inched lower too ahead of some key UK data releases this week, including employment numbers on Tuesday and inflation stats on Wednesday.
