Markets:
- Gold down $3 to $2033
- US 10-year yields down 7.3 bps to 3.98%
- WTI crude oil down $1.92 to $75.90
- S&P 500 down 1.6%
- JPY leads, AUD lags
Today truly underscored that this is a market that’s hanging on every headline.
There were 4-5 chapters to the story today. It started with softer US ADP data, along with lower wage growth in the employment cost index.The initial Fed statement read hawkish with a line added that said they won’t ease until they have more confidence on inflation. That move initially reversed when Powell said that data doesn’t need to turn down for cuts but just needs to keep on doing what it’s doing. However the ultimate move was higher in the dollar when he said it’s unlikely they will have enough confidence on inflation to cut in March.
Zooming out, there’s a portion of the market that’s focused on March or on which central bank will cut first. But there is also a potion of the market that’s looking at the bigger picture around growth differentials, which I think creates an interesting dynamic. Clearly in bonds, there is a bigger-picture outlook as yields at the short end fell on the day even as Powell pushed back hard on March. There’s also a line of thinking that says if central banks wait longer to cut rates, then the economic pain will mount and the terminal rate will ultimately be lower.
However that didn’t apply to FX where the dollar is rounding out the day near the highs. The euro has slipped through 1.08 again but not yet below Monday’s seven-week low of 1.0794. That will be eyed with more data to come but today’s French industrial data wasn’t exactly promising.
Buried under 10 headlines was that Canadian GDP numbers were materially stronger than expected. The BOC was looking for flat growth in Q4 and the preliminary number today was 1.5%. In a vacuum, that would have given the Canadian dollar a bigger boost but with oil and equities lower along with USD strength, that was never going to happen today. Still, the loonie had some modest outperformance again the commodity bloc.
Looking ahead, this data-hungry mood in the market will have plenty of feast on with eurozone inflation, the BOE decision, initial jobless claims and ISM manufacturing tomorrow; followed by non-farm payrolls on Friday.