Powell: “Pressure, pushing down on me”

- Fed Powell’s job made even tougher

- US treasury yields recover

- Producer prices inflation in focus today

Yesterday

• Fed Powell’s job was made that much harder after monthly core inflation climbed higher for the 4th consecutive month. In recent days, markets have been fast to discount further rate hikes and actually price back in rate cuts by year-end, but with inflation continuing to climb higher, does Fed Powell have the luxury of easing the pace of rate hikes? The USD caught some support from the data, but not to the same magnitude perhaps if the data had come out one week earlier. Markets now put a 64% chance of a 0.25% hike by the Fed next week.
• Markets in general were a lot calmer with volatility lower, judging by the performance of the VIX index (down 15% from Monday), and equity indices in Europe and the US all rebounded higher as markets wager that the negative sentiment following the recent turmoil may well be over for now.
• Increased risk appetite continued overnight with the Chinese economy continuing to rebound from its Covid slump. Retail sales rose 3.5%, industrial output grew 2.4% and investments climbed by 5.5%.

Today

Market rates

* Daily move - against G10 rates at 5:00pm, 14.03.23

** Indicative rates - interbank rates at 5:00pm, 14.03.23

Data points

Speeches

• None today.

Our thoughts

The Fed’s challenge now is whether it should prioritise price stability or financial stability - its job may become much harder should today's core PPI figures come in higher. We know from the Fed’s December dot plot its rate target is towards 5.25% and should there be calm in markets, and inflation data continue to come in higher, there could be an argument that a 0.25% next week followed by similar hikes could be on the cards. Movements on USD seem likely to be dictated by rate expectations.

Today also sees the release of the Spring Budget alongside the OBR growth revisions. We expect Chancellor Hunt to raise near-term growth forecasts, given recent data, the £2,500 energy price guarantee to be extended, and continued cuts to fuel duty. Overall, we are not expecting much of an impact on GBP pairs from this budget, with more explicit fiscal stimulus expected in the Autumn Statement or next year’s Spring Budget ahead of elections.

Chart of the day

Fed Powell now needs to consider whether the Fed’s priority is either price stability or financial stability. We saw a rebound in equities and yields on 2-year treasuries, suggesting there is some calm in the markets following actions taken by policymakers. Risk appetite is creeping back into markets, so perhaps the Fed will refocus on the battle with inflation, given the fact that the problem of elevated prices still has not gone.

Next up is producer price inflation. A higher print here and markets could increase bets on a rate hike next week.

Source: Bloomberg Finance L.P.

Have a great day.