Hawkish were the minutes from the latest FOMC meeting. They confirmed that the Federal Reserve (Fed) officials are indeed not lying when they say that they will continue hiking the interest rates to tame inflation toward the 2% mark.
And the minutes show that they reckon it will take ‘some time’.
How much time? We don’t know. Even they don’t know.
But we know that the job is not done yet, and the next meeting’s 25bp increase won’t be the last one.
We also know that most officials remain favourable for small increases – for longer. But some think that a 50bp hike would be appropriate. The odds for a 50bp hike for the March FOMC meeting now climbed to 24%.
But more importantly, odds for a peak Fed rate went from 4.90% at the start of the year to around 5.36% yesterday after the release of the latest minutes. There is no more expectation of a rate cut before the year end – which was anyway a bit out of context.
Of course, the latest minutes came as no surprise, and investors had already cut their dovish positioning the day before the release. This is certainly why the market reaction to the minutes wasn’t bloody.
Both the US 2 and 10-year yields bounced lower from early-week highs. A part of it was perhaps explained by the rising tensions between the US and China after China said that their relation with Russia is ‘rock solid’.
The S&P500 eased another 0.16% and flirted with the 50-DMA support. The next important support range is the 3925/3940 band, which includes the 200-DMA and the major 38.2% Fibonacci retracement that should distinguish between the actual positive trend, and a medium-term bearish reversal.
Nasdaq 100 stocks on the other hand tipped a toe into the bearish consolidation zone, but managed to close yesterday’s session above this level.
Nvidia boosts Nasdaq futures
US equity futures are in the positive this morning, with Nasdaq futures leading gains at the time of writing.
The tech-heavy index is certainly boosted by an almost 9% jump in Nvidia shares in the afterhours trading, after the company announced soft, but better than expected results. The gaming revenue collapsed by nearly 50%, but the data center revenue increased 11%, and that segment includes the … AI chips!
The company CEO said The Thing that investors wanted to hear: ‘AI is at an inflection point, setting up for broad adoption reaching into every industry’ and they ’are seeing accelerated interest in the versatility and capabilities of generative AI from startups to major companies’.
And even if JP Morgan banned ChatGPT at its offices – as a part of standard procedure – the AI is certainly here to stay, and Nvidia here to surf on the wave.
But the outlook for the rest of the stock market doesn’t look as brilliant as Nvidia, nor as it did at the start of the year. High inflation and hawkish Fed hammer optimism on strong economic data.
What do we wish for at today’s US GDP update?
The US GDP is expected to have expanded 2.9% in the Q4, which is a fairly strong number. A read above expectations will certainly boost the Fed hawks on the idea that the US economy is resilient enough to withstand more hikes and could be bad news for stock investors. Even though a strong economy is good news per se, the Fed hawks are in charge of the market, and equity bulls may not have enough strength to get back on their feet on a strong GDP read.
A number below expectations however could ease the hawkish Fed tensions. But the days when bad news was good news are gone. At this point, we can’t really bet that a soft growth would soften the Fed’s hand. Only soft inflation could do so.
FX and energy
The US dollar consolidates gains. Although the rebound looks contained, the dollar index is now above the minor 23.6% Fibonacci retracement on the end of September to the beginning of February selloff.
The EURUSD briefly stepped below the 1.06 mark yesterday, then rebounded. The Eurozone January inflation figures are out this morning, and the expectation is that inflation in Europe eased to around 8.5% last month, thanks to softer energy prices and stronger euro.
A higher-than-expected read could revive the European Central Bank (ECB) hawks, but the ECB hawks are powerless when the Fed hawks are flying in the skies. Therefore, the EURUSD is somehow set to extend losses faced with the stronger Fed hike expectations.
One good piece of news for the euro area is that the Europeans have successfully lowered their gas demand since last summer. They consumed 19% below the 5-year average. Finland even halved its consumption. A part of it was thanks to the strong willpower to show Russia that the continent could survive without their gas. But a part of it was due to a lucky, mild winter. Weather experts expect a few cold days ahead, but at this point, Europe likely has enough reserves to avoid an energy shortage.
As a result, the European nat gas prices remain under pressure, which is certainly one of the reasons why crude oil remains under decent selling pressure as well. The barrel of American crude sank below the $75pb yesterday, as the latest API data showed an almost 10mio barrel increase in the US oil inventories last week. The more official EIA data is due today but will hardly want the oil bulls’ heart.