China Eases and US Yields Surge
This week saw the PBOC cut interest rates by 10bps and US bond yields rise higher again on expectations that the Fed may need to hike by as much as 50bps at March’s meeting. Fed fund futures are now pricing in more than 4 hikes this year and this has further weighed on US stocks. Yields and equities can rise together, but if the Fed is hiking as growth and inflation are peaking the risk is that this sets off further selling in equity markets. The Nasdaq and the S&P500 broke lower through key support on Tuesday. Earnings season will be hotly watched now. If companies start to revise future growth and earnings lower expect more downside in the US indices.
Other key events from the past week
- * Risk: China’s GDP, Jan 17: The GDP print from China was better than forecast at 4.0% vs 3.3% expected. Also, the People’s Bank Of China cut rates by 0.10 bps making conditions easier for Chinese companies. Is this now the perfect time to buy China’s 50 index as growth is once again stimulated in China?
- * AUD: Labour data, Jan 20: The RBA is acutely focused on labour data. The print showed that unemployment was now at a 13 year low. This now sets the stage for the RBA to end its QE program and move more quickly to rising rates.
- * GBP: PM Johnson battles to save himself, Jan 19: PM Johnson is facing pressure to resign over misleading Parliament about lockdown parties that were taking place at Number 10 Downing Street. If PM Johnson does quit the GBP will likely dip lower initially before bouncing depending on his replacement.
Key events for the coming week
- * USD: US interest rate statement, Jan 26: The hawkish tilt by the Fed has been extreme. Last year the Fed projected no rate hikes until 2024. Now QE is due to end soon, interest rate hikes are due in March, and QT by the summer. Will the USD sell-off next week as a lot of hawkishness is priced in.
- * Seasonal trades: Platinum buying, Jan 24: Platinum tends to see a strong performance in February. Will that pattern repeat again this year? See the strong seasonal pattern here.
- * CAD: US interest rate statement, Jan 26: The BoC have an implied rate of 6 hikes this year. Even after the CAD CPI data surprised to the upside this still seems too steep given that the BoC warned against slowing growth in their December interest rate meeting. Watch for CAD volatility on Wednesday.