U.S. data and headlines dominated this week, particularly the highly anticipated inflation updates that were hawkish for the U.S. Dollar.
But it was the euro that took the top spot this week, likely benefiting from continued expectations that the ECB will stay aggressive on tightening interest rates as recession may be avoided in Europe.
Notable News & Economic Updates:
Expectations of Kazuo Ueda replacing BOJ Gov. Kuroda sank the yen on Monday
Crypto firm Paxos to face SEC charges, ordered to stop minting Binance stablecoin
- U.S. government announced plans to release 26M oil barrels from Strategic Petroleum Reserve
- OPEC raised its 2023 global oil demand growth on China relaxing COVID restrictions
- API: U.S. crude stockpiles up by 10.507M barrels in the week ended Feb 10 vs. 2.184M barrel draw in the previous week
- Saudi Energy Minister Prince Abdulaziz expects that the fixed production targets for 2023 will remained unchanged
U.S. inflation, retail sales, PPI, and initial jobless claims reports supported the “sticky inflation, tight labor market” narrative
Bitcoin broke above 24K and briefly hit 25K on short squeeze then traded lower on hawkish bets and regulation concerns
Australia’s jobs report disappointed with a 11.5K drop in hiring vs. the projected 19.8K increase, December figure downgraded to show 20K jobs lost
Lots of Fed commentary this week with two officials (Bowman & Mester) suggesting aggressive hikes (50 bps; higher terminal rate) are still needed, while Barkin thinks a gradual pace is more appropriate to maintain flexibility
Notable speeches from major central bank policymakers:
- ECB President Lagarde: “In view of the underlying inflation pressures we intend to raise interest rates by another 50 basis points at our next meeting in March.”
- RBA Gov. Lowe: “I don’t think we’re at the peak yet but how far we have to go up I don’t know”
- BOC Gov. Macklem: “Still a long way from our inflation target, but recent developments have reinforced our confidence that inflation is coming down”
- NZ FinMin Grant Robertson: There’s evidence that “we’ve peaked” in terms of inflation
- ECBs Gabriel Makhlouf: The ECB could raise rates to above 3.5% and hold them there
Intermarket Weekly Recap
It was a U.S.-focused trading week with Uncle Sam printing top-tier economic data and several FOMC members sharing their two cents.
Equities started the week by extending Friday’s cautiously optimistic tone, helped in part by the European Commission reporting that inflation in the Eurozone may have peaked and that the economy is set to avoid a recession.
The safe-haven yen was weighed further by talks that “dark horse” former BOJ board member Kazuo Ueda – who warned against unwinding BOJ’s loose monetary policy too soon – would succeed Kuroda as BOJ Governor when the latter’s term ends on April 8. Ueda did get the Japanese government’s formal endorsement and is now scheduled for a confirmation hearing on February 24.
Risk-taking went on until traders were hit with a higher-than-expected U.S. CPI data release on Tuesday. Not only did monthly price increases beat market expectations, but the annualized rates also pointed to a “stickier” high inflation environment rather than a move back towards the 2% target range that the Fed is expecting.
Speaking of the Fed, several FOMC members noted spoke this week with some hinting at their willingness to aggressively raise interest rates if needed, further extinguishing hopes of a Fed pivot scenario ahead.
U.S. 10-year yields and the U.S. dollar were among the biggest gainers after these developments, though Bitcoin also spiked higher as BTC/USD broke above the 22K resistance. Bitcoin’s upswing carried over through Thursday when a short squeeze triggered a move to the 24K mark. BTC/USD even hit 25K before it bowed down to a spike in USD demand.
Thursday provided another opportunity to buy the dollar after the U.S. saw a higher-than-expected producer price inflation read and an unexpected dip in weekly jobless claimants. This sparked increased hawkish Fed bets, which weighed on risk assets like U.S. equities and crude oil prices while the U.S. 10-year yields, gold, and the U.S. dollar index capped the day near their intraday highs.
This environment continued through the Friday session as there were no additional catalysts to shift the focus away from this week’s updates pointing towards aggressively monetary policy tightening ahead.
Most Notable FX Moves
Risk-taking pulled the dollar to its intraweek lows but higher-than-expected CPI report and hawkish Fed speeches pushed it to a slow and (almost) steady uptrend until the end of the week.
U.S. consumer price index rose at a faster than expected rate, up 6.4% y/y in January vs. 6.2% forecast
U.S. retail sales unexpected surged by 3.0% m/m in January, the biggest uptick since March 2021
New York manufacturing index improved to -5.8 in February vs. -32.9 in January, much better than the -18.0 forecast
U.S. industrial production for January: 0.0% m/m vs. -1.0% m/m in December
U.S. producer prices index was up by 0.7% m/m vs. 0.4% expected in January
Initial jobless claims fell from 195K to 194K vs. 200K expected, supported tight labor market claims
Philly Fed manufacturing index slowed in February to -24.3 vs. -8.9 in January (vs. -7.4 forecast)
Notable Fed commentary this week:
- New York Fed President John Williams: “there are risks that inflation stays higher for longer than expected, or that we might need to raise rates higher” than forecasted
- Dallas Fed President Lorie Logan: “The most important risk I see is that if we tighten too little, the economy will remain overheated and we will fail to keep inflation in check.”
- Also Logan: “We must remain prepared to continue rate increases for a longer period than previously anticipated”
- Richmond Fed President Thomas Barkin: “Inflation is normalizing but it’s coming down slowly,” and that there’s “a lot more persistence to inflation than maybe we’d all want”
- Also Barkin: the “risk is on the inflation side at this point rather than the economy side,” adding that “if inflation persists at levels far above our target then maybe we’ll have to do more.”
- Philadelphia Fed President Patrick Harker: Fed “likely close” to high enough interest rate to pause, but that the CPI report didn’t change his view that rates should rise above 5%
- Federal Reserve Bank of Cleveland President Loretta Mester: “incoming data have not changed my view that we will need to bring the fed funds rate above 5% and hold it there for some time.“
- St. Louis Federal Reserve President James Bullard pushed for 50bps rate hike in last meeting, doesn’t rule out another 50bps hike in March
European Commission revised GDP forecasts higher to +0.8% in the EU and +0.9% in the Euro area; inflation seen to fall to 6.4% y/y in 2023 (9.2% y/y forecast back in Autumn Forecast)
Euro area Flash GDP for Q4 2022 was +0.1% q/q and flat for the European Union at 0.0% q/q. Employment was up +0.4% q/q in both the Euro area and the European Union
ECB’s Gabriel Makhlouf: The European Central Bank could raise rates to above 3.5% and hold them there
ECB President Lagarde confirmed that the European Central Bank will raise rate by another 50 bps again in March
Talks of a less hawkish than expected BOJ Governor nominee dragged JPY lower in the first half of the week. The yen eventually regained some of its intraweek losses when hawkish Fed bets and risk aversion dominated the markets.
BOJ governor speculation rattles Japanese yen, Nikkei index
Japan preliminary GDP read for Q4 2022 was +0.2% q/q vs. -0.3% q/q previous
Japan’s trade deficit balloons to record of 1.82T JPY as Chinese exports slump
Japanese Dec core machinery orders rose by 1.6% m/m vs. estimated 2.7% gain
RBA Gov. Lowe on Wednesday: “I don’t think we’re at the peak yet but how far we have to go up I don’t know”
Australia’s jobs report disappoints with a 11.5K drop in hiring vs. the projected 19.8K increase, December figure downgraded to show 20K jobs lost
Lowe on Friday: RBA needs to respond to inflation’s demand element with “further monetary policy,” need to make clear that “we were not done yet.”
BOE MPC member Haskel: BOE should be “really, really careful” about high inflation becoming embedded
U.K. claimant count surprises with 12.9K drop in unemployment vs. expected 17.9K gain, average earnings index slows from 6.4% to 5.9%; unemployment rate holds at 3.7%
U.K. inflation rates fell more than expected, headline CPI was down from 10.5% y/y in December to 10.1% y/y in January
UK manufacturers’ factory gate prices up by 13.5% y/y in January vs. 14.6% uptick in December
January discounting pushes U.K. retail sales 0.5% m/m higher vs. 0.3% expected, -1.2% in December