Released yesterday, the FOMC minutes were hawkish enough to get the S&P500 erase early gains, but not hawkish enough to get the index to close in the red. The index closed the session 0.75% higher. Nasdaq gained 0.50%.
The Federal Reserve (Fed) repeated its determination to keep fighting inflation with further rate hikes, and warned that this determination should not be underestimated by investors.
No one talked about a rate cut in the foreseeable future, even though pricing in the market still shows that investors continue to bet that the Fed will start cutting rates before the end of this year.
Yes, there are some data pointing at slowing economic activity in the US, but the jobs market – which is closely watched by the Fed – remains surprisingly tight – while the Fed keeps saying that bringing inflation back to the 2% target requires some ‘softening’ in the jobs market.
Helas, a softening that has not showed up its nose, so far. Released yesterday, the US jobs opening data was again stronger than expected. The JOLTS data showed that there were still around 10.5 million job openings in November – little changed from last month, and a bit less than half a million less than the market expectation.
Today, we will see what the ADP report tells about new hirings in December. Analysts believe that the US economy may have added around 150’000 new private jobs last month.
Note that the latter is not a good indication regarding what’s to come on Friday. Last month, the ADP printed a weak 127’000 figure, while the NFP came in at 263’000. Therefore, even the avalanche of layoff news from big companies, and a soft ADP print may not be enough convince that the US jobs market is cooling.
On the rates front, there will likely be at least another 50bp hike this quarter, and perhaps one or two more 25bp hikes. Right now, activity on Fed funds futures gives a higher chance for a 25bp hike in the next Fed meeting.
To me, that means that there is room for a hawkish readjustment in expectations through January.
Oil tanks
Weaker nat gas prices, combined to the past few days’ recession fears, and news that OPEC output increased in December thanks to the recovery in Nigerian supply from outages – despite the OPEC+ will to cut output to keep prices sustained – pulled the price of American crude 5% lower yesterday. The $75/76 support has been broken; I revise my short-term view from bullish to neutral, and expect the new support, around $70/72 range, to hold on tight supply, and the Chinese reopening story.
In the FX
The Australian dollar is surfing on the positive Chinese vibes. The Aussie-dollar shortly traded above the 200-DMA, near 0.6850, yesterday, but gains remained capped into the major 38.2% Fibonacci resistance on 2021-2022 selloff, if cleared, should hint at a bullish reversal in Aussie-dollar’s medium term trend. And I think that a bullish reversal in AUDUSD is a matter of time, as the rally in iron ore prices triggered by the Chinese reopening should continue giving support to the Aussie in the coming weeks.
Elsewhere, the US dollar index couldn’t extent the early week gains, and we are about to see a death cross formation on the daily chart, where the 50-DMA will cross below the 200-DMA very shortly.
A death cross formation is closely watched by investors and is seen as a bearish sign. Although it is a lagging indicator, it is in line with our 2023 outlook of softening US dollar against many currencies, and gold.
The EURUSD is bid around 1.0550, as Cable sees buying interest below 1.20 despite its worse economic fundamentals compared to other G7 economies.
One of the most popular trades of the moment is long the Japanese yen against EUR, USD and pound, as the BoJ’s latest decision to double its cap on JGB yields spurred hawkish Bank of Japan (BoJ) expectations. Even though the BoJ warned that this doesn’t mean that a rate hike is imminent, the BoJ won’t be able to maintain rates below zero while rates are soaring elsewhere. Sooner or later, the BoJ will hike, and that’s enough for traders to pile into the yen, which has been the worst performing major currency last year.
