U.S. equities weakened along with bond yields after the Federal Reserve hiked interest rates by 0.5% as widely anticipated.
United States
Equities initially pushed lower after the updated economic projections known as “dot plots” showed policymakers expect interest rates to peak at 5.1%, with several members suggesting a higher terminal rate was necessary. It is likely that the projections had been prepared prior to the release of Tuesday’s CPI report which showed inflation softening more than forecast. Additionally, from the Federal Reserve’s perspective, they are eager to avoid the mistakes of the 1970’s by declaring victory too soon, only to see financial conditions ease and undo their efforts to tame inflation.
Equities recovered from their session lows following Powell’s press conference where he noted that the central bank is getting closer to reaching the end of the current tightening cycle although intends to keep battling inflation. Powell noted the size of the next policy decision at the February 1st 2023 meeting would be dependant on incoming data, although pushed back against expectations of rate cuts in the latter half of 2023 noting “I wouldn’t see us considering rate cuts until the committee is confident that inflation is moving down to 2% in a sustained way…Restoring price stability will likely require maintaining a restrictive policy stance for some time”. It is important to be aware that what the Federal Reserve says it will do and what it actually does can be two very different things. Economists’ and Central Bankers’ forecasts are often missed, and data can evolve in unexpected ways. With forward-looking indicators weakening and the full effects of the current tightening cycle yet to be felt, softer incoming data could very well lead to softer policy as priced by financial markets.
The S&P500 traded -0.61% lower although with the Dow Jones -0.42%, Nasdaq Composite -0.76% and Russell 2000 -0.65% however the VIX retreated -5.59% to 21.29. The 2-year Treasury yield edged 0.6 basis points higher to 4.224% while yields across the rest of the curve were lower, highlighting investors continue to expect rates to be lower in the future with key spreads remaining deeply inverted.
*Note: These prices are based on futures and/or CFD pricing and may therefore differ slightly from spot pricing.
Australia
The ASX is set to open lower this morning with ASX200 futures down -52 points or -0.73% to 7,147. The index rose 0.67% on Wednesday in broad-based buying with 82% of stocks higher and all sectors positive. Shares in Challenger rose 0.26% extending five sessions of consecutive gains over speculation of a takeover as private equity firm Apollo builds a stake which sits at roughly 19%. TPG Telecom fell -2.8% after its cybersecurity adviser Mandiant discovered evidence of unauthorised access to business customer emails and the breach is still being investigated by TPG. In focus today is the release of employment data for November, expected to show 19k jobs were added over the month and the unemployment rate remaining stable at 3.4% as well as consumer inflation expectations at 11:30 and 11:00 AEDT respectively.
Commodities
Oil prices gained overnight with both WTI and Brent crude up 2.61% and 2.64% to US$77.37 and US$82.81 a barrel respectively. Overnight the International Energy Agency said world oil demand it set to contract by 110k barrel per day in Q4 2022 when compared with a year earlier and oil supply fell by 190k barrels in November following curbed supply in line with OPEC+ output targets. Iron ore futures in Singapore declined -0.24% on Wednesday although are 0.44% higher this morning at US$109.10 while copper rose 0.47%. Gold is modestly lower by -0.17% to US$1,807 an oz while silver rose 0.75% and Bitcoin gained 0.37% to US$17,828.
Economic data:
- New Zealand GDP (QoQ Q3) 08:45
- Australian Employment (MoM Nov) 11:30
- Chinese Industrial Production, Retail Sales, Fixed Assert Investment (YoY Nov) 13:00
- BoE Rate Decision 23:00
- ECB Rate Decision 00:15
- US Retail Sales (MoM Nov) 00:30
- ECB Press Conference 00:45
This article was written by James Woods, Portfolio Manager, Rivkin Securities Pty Ltd. Enquiries can be made via info@rivkin.com.au or by phoning +612 8302 3632.
