The Week Ahead
The week ahead for markets sees a lively docket once again, with the Fed's latest monetary policy decision on Wednesday expected to attract top billing. Mindfulness will also be on earnings season, with 122 S&P 500 companies reporting over the coming week, and there will be a high level of scrutiny on economic data releases. Several countries publish their Q4 GDP readings for the first time.
The January FOMC meeting should be reasonably quiet. While the pace of economic recovery has wavered in recent months due to virus resurgence, nearly all Fed officials have said that the medium-term outlook remains bright.
Still, the worsening public health situation has dampened economic recovery since the FOMC’s last meeting suggesting any material changes to the policy settings and tapering messaging looks to be far off on the horizon after they adopted outcome-based forward guidance for asset purchases in December. Still, the big question on investors' minds will be any timetable for tapering purchases, but it's unlikely Chair Powell will provide any target date for the market to throw darts. He's more likely to adopt a dovish tone on this and reiterate that it's premature to contemplate a potential timeline given the challenging near-term outlook and remaining uncertainties.
Intuitively, Fed forward guidance promises to keep rates low and ignore reflationary impulses or more robust data. If markets believe this guidance, they will refrain from pushing interest rates in response to positive data surprises.
During the current FOMC blackout period, robust US data was met by shoulder shrugs from both bond and currency markets, suggesting the beta of Treasury yields and US dollar to positive data is reassuringly for risk sentiment very near zero.
It was a mixed week in terms of risk, with equities trading higher and the USD weaker. Towards the end of the week, sentiment deteriorated, equities softened and commodities eased, supporting the US dollar. Oil markets suffered a Lunar New Year mobility restriction panic attack and was further weighted down amid weaker economic data and European vaccine shortages reports.
Risk appetite can stay at elevated levels for prolonged periods as long as the macro backdrop remains supportive. With that in mind, there are a lot of positive signals in IHS Markit's January flash PMI release – "strong start", "pace quickened" and "regain growth" dotted the language. However, inflation ruminates as a concern with inflationary pressures intensifying as supplier delays and shortages pushed input prices higher.
The rate of input cost inflation was the fastest on record (since October 2009), with soaring transportation and PPE costs noted. Several firms were able to partially pass on more significant cost burdens, however. The impact was less marked in the service sector as firms sought to boost sales, but manufacturers registered the sharpest rise in selling prices since July 2008.
Mega-cap tech and housing stocks were the winners last week on Wall Street, while the cyclical space consolidated. Retail and systematic buying has offset continued HF and active investor risk reduction. Perhaps there was some element of investors taking their feet off the gas into earnings.
The emerging theme across central banks (ECB, BOC, Norges) has been a recentering of focus towards potential upside policy scenarios around upcoming vaccinations and economic reopening. With the RBNZ still priced for cuts, the Kiwi will undoubtedly attract some attention under this scenario as pushback on negative rates could be the central theme leading up to the next RBNZ meeting in about a month.
The Bank of Canada usually moves to the Federal Reserve's impulse, but this year it's likely to become more hawkish by degrees. Indeed, the BoC is already sounding more hawkish than many of its peers. After all, it has much less work to do to monetize government borrowing, hence it can focus on economic recovery.
So, in the race to policy normalization, Bank of Canada is wearing the yellow jersey and at the head of the peloton, while the Reserve Bank of New Zealand's is the quickest of the chase group riders. But both currencies look remarkably attractive. The Loonie continues to resonate from an oil price prospective as vaccinations mean we all get to fly again, so both oil and the Loonie could fly on the oil impulse.
So, on Friday’s close: +NZDUSD @ .7179 and -USDCAD 1.2731.
Oil traded weaker most of Friday on headline heebie-jeebies, then started rallying on the US open following equities. Friday's figures saw a large draw at the Cushing hub that the API survey predicted earlier in the week, but the size of the build in oil stockpiles was a surprise. Looking at the build, the area that saw the largest inflow was the Gulf of Mexico with 5.6mbls.
Chatter from the physical market brokers in Singapore suggests Asia remains active with purchases of both North Sea and Middle Eastern cargos for March and April delivery to countries like Thailand, China and India helping keep a steep backwardation at the front of the curve.
Amid all the China LNY headlines scares, Brent crude oil prices closed above the $55/bbl level despite the clear demand impacts of lockdowns in Europe and additional China measures.
However, a focus on a more efficient rollout of vaccines helped buttress the Lunar New Year anvil effect on oil prices. In the US, the number of Covid patients in ICUs has started to drop nicely over the last week. Simultaneously, the vaccination campaign has picked up momentum and is already close to the new administration's target of one million shots a day.
In terms of oil and US politics, essential news of note last week was bullish: the Biden administration announced a freeze on lease awards and well approvals on Federal land (and water) ahead of a policy review in this area.
It's not entirely clear what triggered the sell-off in metals on Friday as it was a pretty big outsized move relative to the reaction in rates markets. Perhaps thoughts were on the expected physical Lunar New Year buying bonanza wilting and with much of the US stimulus event, be it 1.5 or 1.9 trn, priced into the golden cake, markets were left headline and backchannel prone to the discussion around central banks shifting focus to the upsides.
It will undoubtedly be a long process to monetary policy normalization. Still, central banks have already started to change direction to upside scenarios that broader vaccinations this year might bring to the horror of virtually every gold investor. In this regard, the vaccine will be a central bank policy game-changer and likely one for gold prices, which I firmly believe have seen their policy-inspired heyday and it will be up to inflation from here on out to do the bulk of the heavy lifting.
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US equities continue to welcome any high-risk event being put in the rear-view mirror – especially when rates markets look prime to consolidate lower