The Week Ahead

We started the week with a plethora of Fed speakers giving their views on the previous week’s FOMC meeting.  We had Daly saying the Fed is not on a pre-set course, however there is no need to provide ‘extraordinary accommodation’ anymore. She sees rates increasing in March and doesn’t think the Fed is behind the curve at all.  George believes a steep rate path and a modest balance sheet move may flatten the curve. She said it might be appropriate to move earlier on balance sheet changes and said it is in no one’s interest to make unexpected adjustments to interest rates. Then we had Bostic saying 50bp hike is not his preferred policy action for March and sees three hikes this year, however, there is still lots of data to come. He would like to see market response to rate hikes before balance sheet run-down and is not worried about impact of rate hikes on employment levels. Lastly Barkin said the rate of hikes depends on how economy develops, but what he’s really watching is the labour/wage pressure. 

On Tuesday more than 1 billion people around the world celebrated the start of the Year of the Tiger. US equity markets finished January on the front foot, however, it did not stop the S&P and Nasdaq having their worst month since March 2020. 
  
Next, we heard from the Bank of England and the ECB on Thursday. The BoE increase the UK base rate by 25bp, the first time since 2004 that has raised rates at back-to-back meetings, along with beginning the process of quantitative tightening by ceasing to reinvest maturing assets. The markets had long expected the rate rise, however, eyebrows were raised as four members of the committee voted to increase rates by 50 basis points to 0.75%. The bank also raised it inflation forecast to an April peak of 7.2%, up from the 6% predicted in December. In the statement following the rise it was noted ‘The MPC judges that, if the economy develops broadly in line with the February Report central projections, some further modest tightening in monetary policy is likely to be appropriate in the coming months’. Andrew Bailey’s (the BoE governor) call for British workers to hold off on demands for higher pay went down like a lead balloon.  
 
The ECB, however, chose not to move despite record rises in inflation in the Eurozone. Defending the decision Christine Lagarde, the ECB President said that ‘Inflation is likely to remain elevated for longer than previously expected, but to decline in the course of this year’. She believes the recent inflation increases have been largely driven by higher food and energy costs. However, she did hedge her bets by saying, ‘Compared with our expectations in December, risks to the inflation outlook are tilted to the upside, particularly in the near term. If price pressures feed through into higher than anticipated wage rises or the economy returns more quickly to full capacity, inflation could turn out to be higher’.  
 
Equites also started February in the same vein as they left January, however, it was short lived. Facebook’s parent company Meta earnings fell short of what market was expecting, along with a disappointing forecast for the near-term outlook. The stock fell over 25%. This dragged the Nasdaq down nearly 3.75% on Thursday, down over 11% for the year. There was a welcome bounce for the tech sector led by Amazon overnight which was up 15% in post market trading after its most successful Black Friday period ever and a hike in annual Prime fees in the US. 
  
Lastly, it was the first Friday of February, which means Non-Farm Payrolls. The estimates were for 125k jobs added an unemployment rate of 3.9% and participation rate of 61.9%. Average hourly earnings were eyed at 0.5% mom and 5.2% y/y. As it turned out the numbers came in much stronger than had been expected. Total payrolls increased by 467,000 and the net upward revisions to the prior two months were a massive +709,000. Average hourly earnings jumped by 0.7% m/m, pushing up the y/y pace to 5.7%. Only the unemployment rate was on the softer side, at 4%.  
 
On the back of the number Treasuries sold off across the board, with the front end moving 13bps. The market is now pricing a 40% chance of a 50bp hike at the upcoming FOMC meeting. The 10-year closed at 1.9% up 14bp on the week.  

The week ahead 
 
In the US, the highlight will be the CPI report on Thursday. The market is eyeing a 7.3% jump y/y, up from 7% in December, while core is expected at 5.9% y/y vs. 5.5% in December. PPI will be reported next Tuesday. The U.S. Treasury will auction USD50bn of 3-year notes Tuesday, USD37bn of 10-year notes Wednesday, and USD23bn of 30-year bonds Thursday.  

Eurozone data is limited this week. German Industrial Production today along with CPI on Friday.  

We have UK GDP on Friday, along with construction output, Industrial Production, and trade deficit.  
 
Fixed Income Team