US equities pared initial gains with an intraday rally fizzling after Federal Reserve officials signalled rates could rise above 5%.
Speaking on Monday, President of the Atlanta Fed Raphael Bostic said the central bank will need to hold their resolve as they remain committed to tacking high inflation, which warrants raising rates to between 5% to 5.25% and remain on hold for “a long time”. Elsewhere, Mary Daly of the San Francisco Fed told the Wall Street Journal she expects rates to increase somewhere above 5% although the ultimate level remains unclear and will be dependent on incoming inflation data. Bostic also noted that the case to reduce rate increases to 0.25% would be boosted should Thursday consumer price inflation data continue to show evidence prices are cooling. However, it is important to note that neither officials vote on monetary policy this year, and what the Fed says it will do and ultimately will do can be two very separate things. Despite the hawkish comments, Treasury yields were lower across the board and key spreads remain deeply inverted, with bond investors pushing back against the Federal Reserve’s guidance. The chart below shows both the 2-10 year (blue) and 3m-10-year (black) spreads remain inverted, signalling the market expects rates to be lower in the future as recession risks mount, although the signal historically tells us little about the timing of such an outcome.
Yield spreads vs US recessions
The S&P500 initially rose as much as 1.63% during the session, boosted by further signs of China’s reopening, before edging -0.08% lower. The Dow Jones weakened -0.34% while the Russell 2000 was 0.17% higher along with the Nasdaq Composite 0.63%, supported by lower bond yields, with the VIX also rising 3.83% to 21.94. European stocks rose on Monday over optimism from China’s economic reopening as well as signs of cooling inflation with the Euro Stoxx 600 up 0.88% along with the DAX 1.25%, CAC 0.68% and FTSE100 0.33%.
*Note: These prices are based on futures and/or CFD pricing and may therefore differ slightly from spot pricing.
To commodities, oil futures surged after China issued new oil import quotas, a further sign the world’s largest purchases is gearing up to meet higher demand as it transitions away from COVID zero. Oil prices initially rose as much as 4% before paring back gains with WTI up 1.40% to US$74.81 and Brent 1.48% higher at US$79.73. In industrial metals, copper gained 2.51% while iron ore futures in Singapore weakened -0.63% on Monday and are little changed this morning at US$117.05. Gold traded 0.29% higher to US$1,871 an oz while silver weakened -0.90% and both platinum and palladium were more than -1% lower.
Crude oil intraday 9th January 2022
The ASX is expected to open modestly lower this morning with ASX200 futures down -10 points or -0.14% to 7,090. The index gained 0.59% on Monday boosted by gains in materials 1.03%, energy 1.41% and real estate 1.05%. AMP declined -4.2% after announcing its sale of its Collimate funds management platform to Dexus could see $51 million reduced from its final value. Telix Pharmaceuticals fell -7.2% after the company said it generated unaudited revenue of $76.8m in October to December 2022 from sales of its Illuccix kit for prostate cancer imaging, a decline of -39% on third quarter revenue.
This article was written by Oliver Gordon, Portfolio Manager, Rivkin Securities Pty Ltd. Enquiries can be made via info@rivkin.com.au or by phoning +612 8302 3632.
