official Daily Market Notes by Tickmill.co.uk

[tickmill-analytics]

Two questions ahead of today’s Powell Testimony

Tuesday at the market was quite calm, despite the potential storm that Powell's testimony in Congress today is supposed to bring. The head of the Fed will have a tough time: back in January, he confidently spoke about disinflation in 2023 and made pretty transparent hints that the Fed will soon end the tightening cycle. If in January the markets predicted one 25 basis point increase and a terminal rate of 4.75-5.00%, then currently the consensus has shifted to three rate hikes this year and a terminal range of 5.50-5.75%. Today, Powell will have to explain what he meant back then and connect his soft rhetoric with the February surprises in data into a single story, otherwise there will be a communication failure that could harm the regulator's reputation. This, in turn, increases the costs of conducting monetary policy - if market participants start forming their own expectations rather than listening to the Fed, it will be more difficult for the regulator to expect the policy to work as intended. Therefore, it is necessary to strike a balance between not bending too much to deny what is happening and not going along with every swing of market sentiment.

From a practical point of view, investors may be concerned about two questions today:

1.    What is the likelihood that the Fed will raise rates by 50 basis points at this month's meeting?
2.    How has the expected terminal rate range changed?

However, most likely these two questions will remain unanswered. We are still waiting for another NFP and CPI report for February, which will allow us to clarify whether the February strengthening in data is the beginning of a new trend or still a temporary aberration. Most likely, the Fed and Powell will prefer to get more information to give more accurate forecasts to the markets about forthcoming policy decisions. In addition, the market's recent reaction to expectations of a tighter monetary policy suggests tightening credit conditions in the market (as seen from higher bond yields and wider credit spreads), which should itself have a depressing effect on inflation and economic activity. Powell cannot fail to understand this, and in theory, this should be an argument in favor of a more cautious tone today.

Considering that market prices have already factored in a fairly aggressive Fed policy for the next few meetings, Powell's cautious tone may balance the odds towards a more moderate policy trajectory, and as a result, risky assets will respond with a small rise and the dollar with a decline. Based on the dollar index, within the current mini bearish trend, we can consider a drop in the index towards the lower border of the channel, which will correspond to the level of 104.20:

This would correspond to the EURUSD rise to the area of 1.0725/30.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

Markets look completely unprepared for dovish NFP report

US equity indices continue to cling to key levels that currently separate the bearish and bullish markets. For the SP500 index, this level is 4000 points, around which it has been hovering since the end of February. On Thursday, futures for US stocks are trading moderately lower, as are European stock indices. The dollar index, after a brief rise to the level of 106 points, corrected on Wednesday and continues to moderately decline on Thursday. Employment data from the ADP agency exceeded expectations, but only slightly, with an increase of 242K jobs compared to the forecast of 200K. Due to the positive surprise in employment data, demand for risk assets remains subdued, so risks for tomorrow's report are also shifting towards a positive surprise.

However, considering that the chances of a 50 b.p. rate hike at the upcoming Fed meeting are already 74.9%, there is little room for further selling in case of a strong report:

A much greater effect will be caused by job growth below the forecast of 200K - a shift in expectations could be significant and the hypothesis that the February improvement in data was another temporary aberration may start to gain ground. In that case, the dollar will face strong headwinds, and risk assets, including the cryptocurrency market, may rebound due to retreat of bond yields.

Fed Chair Powell, speaking to the House of Representatives on Wednesday, generally said the same things as he did in the Senate on Tuesday. In addition, he hinted that the JOLTS job openings report, the NFP report for February, and the CPI next week will be key data that will affect the FOMC's March decision.

JOLTS data showed that the number of job openings decreased to 10.824 million, with the previous reading revised up to 11.234 million:

The consensus was for 10.5 million. The layoff rate decreased from 2.6% to 2.5%, the lowest level since January 2021, but still above the historical average of 1.9%. The job openings/unemployed ratio decreased to 1.9, but it is still above the level that would characterize a balanced labour market. However, Oxford Economics noted that the share of those surveyed decreased to 32% from 64.3% in July 2022, meaning that there is an increased risk that the JOLTS report distorts the real situation in the labour market, particularly it may overstate labour shortage.

According to the ADP report, employment in the US increased to 242K from 119K in February, which exceeded the expected 200K. The report noted that there is active hiring, which is good for the economy and workers, but wage growth is still quite high and that moderate slowing of wage growth itself is unlikely to lead to a rapid reduction in inflation in the near term. At the same time, job holders showed a 7.2% (prev. 7.3% m/m) which is the slowest pace of growth in the past 12 months, and the proportion of workers who changed jobs was 14.3% (prev. 15.4% m/m). The ADP report comes out before the employment report is released on Friday, but recently it has been showing low predictive power in providing an accurate estimate of new jobs. Regarding the employment report, Pantheon Macroeconomics noted: "Our model is based on solid employment data from Homebase and does not take into account ADP figures; this model correctly predicted January and indicates employment growth of 200K in February".

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

The Fed set to ease monetary policy in response to banking sector tensions, propping up risk assets as US economy is still in good shape

Over the weekend, American politicians took steps to restore trust in the US banking system and prevent bank runs, but unfortunately two pretty big banks couldn't be saved. In the next few days, the markets will be primarily focused on the performance of US banks, and over the next week, they'll be looking to the government for additional measures. Expectations for the Fed rate have sharply changed, and the spread between long-term and short-term bond yields has started to narrow. Essentially, this indicates that expected inflation has decreased and the risk of recession in the US has increased. Demand for safe havens should remain high this week, with traders keeping an eye on low-yielding JPY and CHF.

Following the second-largest bankruptcy in US history on Friday, American politicians took steps to restore trust in the US banking system. The Federal Reserve, US Treasury, and Deposit Insurance Corporation announced two key measures. The first measure is that all uninsured depositors in Silicon Valley Bank will be fully reimbursed. This solves the problem of uninsured depositors (in this case, in venture capital/technology) potentially losing their deposits and withdrawing money from other banks with high levels of uninsured deposits (reports suggest that 96% of deposits in SVB were uninsured). The second key measure is that the Federal Reserve announced a new liquidity program - the Bank Term Funding Program (BTFP). This will allow qualified financial institutions to access dollar liquidity in exchange for placing US bonds, agencies, or mortgage-backed securities as collateral. Importantly, the collateral value will be accepted at face value, meaning that the Fed will temporarily bear the bank losses from Treasury depreciation. This solves the problem of SVB, which needed to sell securities to cover deposit outflows - this led to losses and capital reduction.

Investors today will be keeping a close eye on the stocks of US banks to see if the measures taken were enough to restore trust. Unfortunately, the picture doesn't look too good:

Over the weekend, another bank, Signature Bank in New York, was also declared bankrupt by US authorities. The clear takeaway for the market is that the Federal Reserve won't be able to raise rates by 50 basis points on March 22 if it's introducing new liquidity measures for the US banking system at the same time.
Right now, the market has lowered its expectations for the FOMC rate for this month to +25bp, and some experts predict unchanged rates. In fact, the price for the December 2023 FOMC meeting is now 75bp lower than it was in the middle of last week.

For the currency market, this means that the first major financial crisis in the US since 2008 has led to a significant reduction in the US yield curve, which has negatively affected the dollar. The same thing is happening now. The US economy is in good shape and, for now, the beginnings of a financial crisis are seen by the market as something that can be quickly isolated with Fed liquidity injections. That's why risk assets, despite the decline, are holding up pretty well, and the most speculative segment - cryptocurrencies - has even risen in anticipation that the Fed will radically change course in the near future, either by no longer raising rates or by cutting them.

DXY will likely trade together with the US banking sector index, particularly the regional banking sector index, today. Risks indicate a drop towards 103.50 and potentially down to 102.50 this week.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.