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Market Quick Take - February 11, 2022

Macro 6 minutes to read
Saxo Strategy Team

Summary:  Another set of hot US CPI numbers and hawkish rhetoric from an FOMC voter on the need to hike more aggressively, and even consider an inter-meeting emergency hike, spooked asset market. The US dollar spiked higher as US yields lifted all along the curve, particularly at the short end as traders rush to price in quicker and larger rate hikes from the Fed as it finds itself badly behind the curve.

What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equities were hit by the worse-than-expected US inflation in January with Nasdaq 100 futures leading the declines taking out the lows from the session before. This morning sentiment is still weak as the US 10-year yield is now above 2% with the 14,500 level being the important support level to watch in Nasdaq 100 futures. Our view is still unchanged, which is that equities will remain volatile with downside risks persisting due to uncertainty over inflation trajectories and central bank reactions to the current inflation shock. The inflationary pressures are also impacting profit margins which will cause headwinds on earnings going forward.

Hang Seng (HK50.I) trades down 0.5% following the sell-off in the U.S. Chinese property developers rose, finding relief from the larger than expected 10.5% YoY increase in outstanding aggregate financing in China and the release of implementation details of access to presale cash held in escrow bank accounts. Coal miners and catering stocks were also gainers. MIIT in China released a blueprint on enhancing industrial waste management capability, in iron and steel, non-ferrous metals, chemicals and EV batteries. Relevant companies’ shares rose in the A-share market. CSI 300 rose modestly before turning lower ahead of the European opening.

EURUSD – the pair somehow managed to poke at the highs for the cycle just below 1.1500 in the wake of another hot CPI release (see more below) before falling sharply yesterday as comments from FOMC voter and St. Louis Fed president Bullard on the need to hike rates more aggressively helped to spook risk sentiment and supported the US dollar across the board. The reversal will likely set up a test of the 38.2% retracement of the rally off the lows, which comes in near 1.1350, but the price action could reach toward deeper Fibo retracements if the Fed surprises with an inter-meeting move or risk woes deepen badly. The next level of import is the 61.8% retracement at 1.1264.

USDJPY and JPY crosses – USDJPY rushed higher yesterday ahead of the US CPI release on news from the Bank of Japan that it would buy “unlimited” 10-year Japanese Government Bonds after the yield of these nearly reached the declared cap of 25 basis points under the BoJ’s yield-curve-control (YCC) policy. This sign of commitment to their YCC policy suggests that any further rise in yields globally could be transmitted straight to JPY weakness if the JGB market can’t absorb the losses. Interestingly, USDJPY was unable to break above the 116.35 highs for the cycle after the USD spike yesterday on the hot US CPI data and hawkish Fed rhetoric, perhaps as weak risk sentiment saw JPY bid strongly in the crosses as risk sentiment deteriorated badly (with a correction in energy prices also helping JPY).

Crude oil (OILUSMAR22 & OILUKAPR22) trades lower with Brent heading for its first weekly drop since December 17. The prospect of a deal with Iran seems to be rising and it could pave the way for additional production and exports. In addition, a bigger than expected jump in US inflation has flattened the US yield curve, potentially signaling an incoming economic slowdown as central banks pull the brakes. A development that may end up switching the focus from tight supply towards a potential slowdown in demand. Focus today being the general level of risk appetite signaled through bonds and stocks as well as the monthly oil market report from the IEA.

Gold (XAUUSD) is holding onto a weekly gain despite an extended sell-off in US treasury bonds after a surprise jump in US inflation rattled global markets. Ten-year yields punched past 2% with real yields rising to a fresh cycle high at –0.42%, up nearly 0.7% since the start of the year. However, the flattening yield curve suggests investors expect slowing growth into the oncoming rate hike cycle, now priced to deliver seven hikes over the coming year, with calls for an emergency Fed move adding to the uncertainty (see below). Support at $1818 while resistance can be found at $1842 and $1854.

US Treasuries (IEF, TLT). The yield curve bear-flattened sensibly following higher than expected CPI readings. The market advanced interest rate hike expectations causing two-year yields to rise by 25bps, breaking above 1.60% for the first time since January 2020. Ten-year yields broke above the pivotal 2% level, increasing by 10bps. The yield curve inverted between 10-year and 7-year yields for the first time since the Covid pandemic. The problem is that the bear-flattening will continue, causing an inversion among other maturities. The 30-year US Treasury auction was average, tailing only by 1.1bps before the selloff intensified. Next week’s FOMC minutes will be in the spotlight as investors look for clues concerning balance sheet runoff conversations.

European sovereigns (VGEA). Despite Lane defended the central bank’s “hold steady” stance pointing to the fact that inflation linked to bottlenecks should soon fade, European yields rose sharply following the US CPI readings. Bunds remain closely correlated to US Treasuries, so it’s fair to expect the selloff to deepen in the EU sovereign space today. It’s key to monitor the BTPS-Bund spread. As it widens, the more uncomfortable the ECB will become.

What is going on?

US January CPI shows core inflation highest in 40 years, roils markets. The year-on-year headline and Ex-Food-and-Energy US CPI readings both came in hotter than expected for January at 7.5% / 6.0% vs. 7.3%/5.9% expected and 7.0%/5.5% in December. The month-on-month figures were also higher than expected at 0.6% / 0.6% vs. 0.4%/0.5% expected, respectively. The numbers jolted Fed expectations sharply higher for coming meetings and saw risk sentiment rolling over as the Fed is seen as needing to chase this development and show some credibility (more below on risk of emergency Fed move).

St. Louis Fed President Bullard calls for 100 basis points of hikes by mid-year, including a 50 basis point move. This would take the Fed Funds rate would be 1.00-1.25% by mid-year over the next three meetings. He also argued that the Fed should begin outright quantitative tightening (shrinking its bond holdings) already in the second quarter. Interestingly, in light of the discussion below on whether we risk an inter-meeting emergency move from the Fed, Bullard sounded open to that idea, “There was a time when the committee would have reacted to something like this to having a meeting right now and doing 25 basis points right now...I think we should be nimble and considering that kind of thing.”

Bank of Japan announces “unlimited” operations on Monday to cap 10-year JGB yields – suggesting that it is doubling down for now, at least, on its yield-curve-control policy, under which it has declared a cap on the 10-year Japanese Government Bond Yield at 25 basis points and after the yield on these bonds approached that level this week, trading as high as 23 basis points.

Sweden’s Riksbank remains dovish – at yesterday’s meeting, the Riksbank announced the intent to continue with its QE programme (with one hawkish dissenter) and only moved its forecast for the lift-off time frame for the policy rate to the second half of 2024, versus Q4 2024 at the prior meeting. This threw the Swedish krona under the bus yesterday.

Risk sentiment across the commodity sector received an end of week setback on worries that an aggressive US rate hike cycle may alter the growth and demand outlook. The Bloomberg Commodity Spot index is heading for its first weekly drop since mid-December with weakness being led by the energy sector. While the BCOM industrial metal index remains on track for its highest weekly close since 2011, some profit taking has started to emerge. Copper trades down 3% after rallying earlier in the week while aluminum slipped from a 13-year high, partly driven by a much-needed rise in LME monitored stockpiles. The grains sector also suffered a sharp reversal led by wheat and soybeans, the recent highflyer.

What are we watching next?

Emergency Fed rate hike dead ahead? The latest US CPI numbers suggest that the Fed remains so badly behind the curve that it must move aggressively to catch up with the inflation debacle that is unfolding and regain some credibility. Given that we are more than a month away from the next FOMC meeting on March 16th, some argue that the Fed may have to make a move ahead of the meeting – the first inter-meeting move for the purpose of tightening policy in modern memory. The The St. Louis Fed’s Bullard is open to the idea as noted above. A Bloomberg article suggests otherwise, based on recent statements by some Fed members. But the idea of an emergency Fed move is afoot in US rate markets, with the “right” timeframe for the Fed to make such a move as early as today and through early next week.

Earnings Watch. The week is done in terms of important earnings with just a few energy companies reporting today.

  • Today: Enbridge, Dominion Energy, Apollo Global

Economic calendar highlights for today (times GMT)

  • 1030 – Russia Central Bank Key Rate Announcement
  • 1500 – US Feb. Preliminary University of Michigan Sentiment
  • 2030 – CFTC Weekly Commitment of Traders Data
  • During the day: IEA’s Monthly Oil Market Report

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