Is the Fed fighting an already dead monster?

Daily Thoughts

Yesterday’s US inflation data (Consumer Price Index) showed that prices in November rose 7.1% when compared to the same time last year. This was lower than the market expectations of 7.3% and much lower than the previous print of 7.7%. This is the 2nd month that the CPI data has undershot expectations and it could mean that the previous aggressive interest rate hikes by the US Federal Reserve is already starting to slow down inflation at a faster pace than many expect. 

If this trend continues, it’d be headed decisively towards the Fed’s 2% target in a matter of months. Though the Fed is trying very hard to avoid prematurely declaring victory, their repeated comments that there will be more hikes next year is highly dependent on how data continues to evolve.

With oil and commodity prices way off the highs, the doves (which are more open to slowing and even, stopping rate hikes entirely) may start to become more vocal in the weeks ahead.

Day Ahead

UK inflation rate is expected to inch lower to 10.9% YoY from 11.1% last month. The print remains high and does not bode well for the GBP or the UK economy. 

The US Federal Reserve (3 am SGT) is expected to raise rates by +0.50% to 4.5%. Expect Fed Chair Powell to continue to talk hawkishly as well. Fed officials will also release their projections for the future path of interest rates as well.

Trading Plan

1. Currencies: 

EUR – Neutral. EUR continues to trend higher as US bond yields continue to drop. For now, stay on the sidelines.

CNH – Bullish. Short USDCNH. Stay patient for now. 

2. Commodities: 

Uranium & Energy – Stay patient and stay invested. 

3. Stocks: 

US Stock Index: Stocks were up 3-4% after the weaker than expected US inflation data. However, the market gave up most of the gains as the trading session wore on. Still closing in positive territory, but yesterday’s highs would be resistance levels for now. 

Single StocksTrackRecord Model Portfolio is tracking the broader market for now. 

Key risks: US Federal Reserve policy meeting tonight. A 0.5% hike in policy interest rates pretty much baked in, but Fed Chair Powell’s comments on the path of future rate hikes will be important especially after the undershoot in yesterday’s US inflation data.

What Happened Yesterday

Market Movements as of New York Close 13 Dec 2022
  • US Consumer Price Index (CPI) showed that prices rose 7.1% on a Year-on-Year basis (vs 7.3% expected), down from 7.7% last month. The core component, which excludes food and energy prices, rose 6% YoY (vs 6.1% expected), lower than last month’s 6.3%. While inflation is still relatively high, the lower than expected prints is the 2nd month in a row that actual CPI has undershot market expectations. This could embolden the doves on the committee that the past aggressive interest rate hikes may be enough to win the war against inflation and now they should be more patient and allow for the lagged effects of previous hikes to continue to slow inflation down. 
  • The US Treasury yield curve remains inverted with the difference between the 2-year and 10-year bond yields now at 0.71%. The 2yr yield slid -0.17% to 4.22% while the 10yr yield fell -0.10% to 3.51% after the lower than expected CPI print. 
  • The US stock futures did not make much headway during Asian trading hours and stayed within a range. However, it then started to drift higher in the first half of the London trading session as we headed toward the CPI release, resulting in a 0.65% gain in the S&P 500 futures just before the CPI release.
  • The US stock market futures then ushered in the lower than expected release with a huge rally with the S&P 500 rising +3.14%. However, the move faded and the market traded lower back to where prices were during the Asian hours by mid New York session. The market then drifted higher again and closed higher on the day. The S&P 500 was up +0.73% on the day (intraday high: +2.77%, intraday low: +0.06%). The Dow Jones rose +0.30% (intraday high: +2.08%, intraday low: -0.34%) while the Nasdaq increased +1.09% (intraday high: +3.93%, intraday low: +0.16%).
  • The crypto market traded higher along with the US stock market despite withdrawals on Binance after reports of US prosecutors considering pressing money laundering charges against the exchange. Bitcoin and Ether both increased +3.4% (BTC intraday high: +5.2%, intraday low:-0.7%; ETH intraday high: +5.5%, intraday low: -1.5%). The Binance Coin fell 1.5% on the day but had an intraday low of -8.1%. 

Headlines & Market Impact

OPEC sees robust global oil demand growth in 2023 after 2022 Chinese contraction

Notable Snippet: OPEC on Tuesday said it expected to see robust global oil demand growth in 2023 with potential economic upside coming from a relaxation of China’s zero-COVID policies, which this year have pushed the country’s oil use into contraction for the first time in years.

World oil demand in 2023 will rise by 2.25 million barrels per day (bpd), or about 2.3%, the Organization of the Petroleum Exporting Countries (OPEC) said in a monthly report. The forecast was steady from November, after a series of downgrades.

“Although global economic uncertainties are high and growth risks in key economies remain tilted to the downside, upside factors that may counterbalance current and upcoming challenges have emerged as well,” OPEC said in the report.

“A resolution of the geopolitical conflict in Eastern Europe and a relaxation of China’s zero-COVID policy could provide some upside potential,” the report said in a separate section.

What we think: Even if the OPEC+ decides to ramp up production in the near future due to the foreseen increased demand, it is unlikely that upward pressure on energy prices will ease given the inability to meet quotas by some OPEC+ members.

Binance temporarily halts withdrawals of stablecoin USDC as investor concerns mount after FTX collapse

Notable Snippet: Binance, the world’s largest cryptocurrency exchange, said Tuesday it is pausing withdrawals of the stablecoin USDC while it carries out a “token swap.”

The move comes as investor concerns grow about Binance’s stability following the collapse of rival exchange FTX as well as a report of a potential criminal investigation from the U.S. government.

Changpeng Zhao, CEO of Binance, tweeted on Tuesday that the exchange is seeing an increase in withdrawals of USDC, a cryptocurrency known as a stablecoin because it is pegged one-to-one with the U.S. dollar.

USDC is used by investors to trade in and out of different cryptocurrencies without the need to move money back into U.S. dollars. If traders are withdrawing USDC from Binance, it could be to move it onto another platform.

What we think: Jitters remain high in the crypto market even as prices of the major coins remain stable. Get your crypto to a safe place if you have not done so.

Hit by COVID wave, companies in China strain to keep operations running normally

Notable Snippet: From e-commerce giant JD.com to cosmetics brand Sephora, companies in China are rushing to minimise the impact of surging COVID infections – doling out test kits, encouraging more work from home and, in some cases, procuring truckloads of medicine.

After unprecedented protests against oft-draconian COVID curbs, the world’s second-largest economy abruptly dropped its zero-tolerance COVID stance last week. The ensuing fierce spread of the virus has even forced certain businesses to shut their doors for the time being.

Anecdotally, in cities like Beijing and Wuhan, many workers and their families have succumbed to COVID, although official case numbers have fallen to under a fifth of a Nov. 27 peak as China now conducts much less testing.

“More than half of our staff in the mall and the hotel are positive,” said a senior executive at a firm that manages one of Beijing’s largest retail complexes.

What we think: With the abrupt change in policies, we may expect some jitters in the Chinese economy as infection spikes result in companies taking their own measures to deal with Covid. Nevertheless, China is now clearly trying to move on from its Zero-Covid policies and more growth boosting measures are likely in the weeks ahead. 

Sentiment

FX

Stock Indices

Best,
Phan Vee Leung
CIO & Founder, TrackRecord