By Stuart Talman, XE currency strategist
Recent stronger than expected activity data for the US economy and aggressive Fed-speak has the market contemplating how many more hikes the Federal reserve will deliver in 2023.
That theme continued to influence price action through Thursday’s US session as a stronger than expected Producer Price Index report for January adds weight to expectations for another two or three 25bps hikes through 2H.
US equities are lower on the day but have been rebounding off opening bell lows whilst US rates and the dollar continue to trek higher.
The yield on the benchmark US ten-year bond fell to the 3.30%’s in mid-January on the narrative that the encouraging pullback in inflation meant the Fed was nearing the end of its most aggressive tightening cycle in over 40 years.
The 10yr yield now trades in the 3.80%’s adding over 40bps in a little over two weeks.
Given rates markets’ hawkish repricing, it’s a little surprising the USD has not logged larger gains – the dollar index climbing over 3% from early February lows to trade through 104.00.
In late September, the dollar index traded close to 115.00 as core inflation in the US continued to lurch higher and the Fed opted for the third of four consecutive 75bps hikes.
One factor supressing the dollar’s rebound is the market’s hope for a softish landing. The jobs market is astonishingly robust whilst (as evidenced by yesterday’s large upside retail sales beat) household balance sheets remain healthy enough to maintain non-recessionary levels of spending.
Although, credit usage has been spiking in recent months….a recessionary signal.
Whilst US equities have pulled back from near term highs, price action through February has been consolidative, choppy trade ensuring the three major indices stay within reaching distance of early February highs.
Heading into the New York afternoon, the S&P 500 is down around half-a-percent having opened over 1% lower following the PPI release.
The PPI measures the average change over time in the prices domestic producers receive for their output. It is a measure of inflation at the wholesale level that is compiled from thousands of indexes measuring producer prices by industry and product category
Producer prices increased 0.7% month-over-month in January, the most in seven months and higher than market forecasts of 0.4%. Goods prices jumped 1.2%, also the largest increase since rising 2.1% in June 2022.
The hot PPI number adds to concerns that inflation is sticky.
Cleveland Fed President Loretta Mester added to the market’s worry, commenting that she saw a compelling case for the Fed to roll out another 50bps hike earlier in the month and that the Fed has to be prepared to move rates higher than expected if inflation remains stubbornly high.
A noted hawk, Mester is currently a non-voting member FOMC member.
Although, should FOMC colleague Austan Goolsbee be appointed as Vice Chair (replacing Lael Brainard who is leaving to for a gig at The White House), Mester will become a 'temporary' voter until Goolsbee's replacement is chosen.
Another noted hawk, St Louis Fed President, James Bullard will be speaking this morning. A voting member last year, Bullard is a non-voter for 2023.
With Mester’s comments and the PPI data creating a tough backdrop for risk assets to perform, the New Zealand dollar extended further below 63 US cents, logging overnight lows a few pips above 0.6230.
It’s the lowest the Kiwi has traded since early January, and importantly the first daily close below the 200-day moving average since price action ripped through the widely monitored trend following indicator.
Kiwi dollar traders will be watching with intent over the coming days. Further consolidation below the 200d MA casts doubt over the NZD’s ability to initiate a new leg higher….the new year rally may be done should the market’s attention shift back to concerns over renewed Fed aggression.
Looking to the day ahead – it’s a quiet one for economic data releases, UK retail sales the sole data point that could influence GBP price action.
Regionally, RBA Governor Lowe speaks for the second time this week…..is Lowe going to provide any new insights following his appearance before the Senate estimates committee (earlier in the week) and last week’s SoMP?
Not likely.
Given the lack of market moving data, it will be interesting to observe how equity markets trade during the final session for the week. Will the equity market bulls re-enter the market or will we see non-committal price action as market participants await next week’s major events – GDP, PMIs and FOMC minutes?
Likely we see relatively tight ranges with the Kiwi closing the week in the mid to high 0.62’s.
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Stuart Talman is Director of Sales at XE. You can contact him here.
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