MARKET WRAPS
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Germany CPI, WPI; UK Index of services/production, first quarterly estimate of 4Q GDP, trade, monthly GDP estimates, business investment, NIESR monthly GDP tracker; ECB Survey of Monetary Analysts results; IEA Oil Market Report; updates from British American Tobacco, Saab, Babcock, MTN, Tate & Lyle
Opening Call:
Fears over the pace of Fed rate hikes will dominate the mood early Friday, with European shares likely to track Wall Street's heavy losses. In Asia, there was a more muted response to the U.S. selloff, with most major stocks mixed. Elsewhere, the dollar and Treasury yields continued to climb, while commodities were lower across the board.
Equities:
European stocks face a possible selloff Friday after the latest U.S. inflation print sparked a 500-point fall on the Dow.
Wall Street lost ground at the opening bell as investors reacted to the inflation reading, then trimmed or erased losses. But equities suffered another leg lower after St. Louis Federal Reserve Bank President James Bullard said he would like to see the fed-funds rate rise 100 basis points, or 1 percentage point, over the central bank's three next policy meetings.
Bullard has consistently been among the most hawkish central bankers in the current inflation surge, and he doubled down on that worldview in a Bloomberg interview Thursday.
He now wants the Fed's first rate rise in March to be a 50 basis point increase, and he wants a full percentage point's worth of increases in place by July. That puts the FOMC voter at the bleeding edge of hawkishness.
Also Thursday, Cleveland Fed chief Loretta Mester, another FOMC voter, said she's unlikely to support more than a 25 basis-point hike next month. If the Fed hews toward the smaller move, it's possible Bullard may cast a dissenting vote at the March FOMC.
"Now that the central bank has found itself behind the curve, we think policy needs to adjust quickly, but not necessarily too much in total amount as the Fed weighs data over time, since this would create significant risk for markets and the economy," wrote Rick Rieder, BlackRock's chief investment officer of global fixed income.
"So, while the time has come [or did months ago] to move policy persistently and aggressively away from overly accommodative conditions, and toward a more neutral and appropriate stance, executing on this pivot is going to be a real challenge for policy makers."
Forex:
The dollar continued to strengthen in Asia against other major currencies, while the yen also made gains on possible safe-haven demand.
The U.S. January inflation report has spurred talk of an emergency rate increase by the Fed, said City Index and any such early increase could spark widespread panic and benefit safe havens and weigh particularly heavily on commodity currencies.
The Fed is "deeply behind the curve," said SGH Macro Advisors economist Tim Duy, in a note to clients. Having fallen so far short of getting inflation under control, Duy said the Fed is on track for the equivalent of seven quarter percentage point rate hikes this year.
Duy said very hawkish comments from Bullard have opened the door to an intermeeting rate hike, but he added: "If it waits until March, the Fed will kick off this cycle with a 50 basis point hike and justify it to open a subsequent meeting for quantitative tightening."
Other Currencies:
The Polish zloty is likely to weaken this year even though the central bank is raising interest rates regularly after a delayed start, said Commerzbank.
"The market does not price in the base rate rising to anywhere near the current 9% inflation rate, and even if inflation were to soon peak, the real carry [real rate adjusted for inflation] on the zloty would remain deeply negative through 2022," said Commerzbank currency analyst Tatha Ghose.
The zloty could also be hit by the Fed and European Central Bank starting to raise rates, with Ghose adding that EUR/PLN could rise to 4.70 by December from 4.4960 currently.
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Ghose also said the Russian ruble is likely to weaken as tensions over Ukraine persist.
"Matters may appear to calm down from time to time, but we think that Russia's stand-off with the U.S. and EU will be difficult to de-escalate without a full written treaty," said Ghose.
The ruble would weaken much more in the worst case scenario, whereby Russia invades Ukraine, western nations impose sanctions on Russia and Russia implements counter sanctions, Ghose said.
Commerzbank raised its USD/RUB forecasts to 80.0 from 74.0 for mid-2022 and to 80.0 from 76.0 for end-2022.
Bonds:
Treasury yields remained above 2% after the latest U.S. inflation print intensified a selloff in U.S. government bonds.
Yields on shorter-term Treasurys, which are especially sensitive to the outlook for near-term monetary policy, led gains Thursday. The two-year yield logged its biggest one-day increase since 2009 to finish at 1.560%. Yields on longer-term bonds also climbed sharply, with the 10-year yield topping 2% for the first time since mid-2019 to settle at 2.028%.
Those yields were at 1.587% and 2.033% respectively early Friday.
Thanos Bardas, global co-head of investment grade and senior portfolio manager at Neuberger Berman said that the 10-year yield is now likely to settle into a range between 2% and 2.5%, reflecting a major shift in the economy and the need for central banks around the developed world to "change course very, very soon, very aggressively to realign themselves with the new reality."
He added that expects to see "lots of volatility across all asset classes and more difficult times for many investors" as central banks follow that course.
Still, some investors cautioned that the longer-term outlook for interest rates remains uncertain and that world-wide demand for Treasurys, as an ultrasafe, easy-to-trade asset, could limit some of the damage.
For now, there is a strong case for betting on a shrinking gap between short- and long-term Treasurys, given that the Fed seems certain to raise rates in the coming months but could still adjust to future economic data over the longer run, said Michael Lorizio, a senior trader at Manulife Investment Management.
"There is such a need to own U.S. Treasury debt around the globe," he added.
Other Bond News:
Euro-corporate bond spreads have widened significantly in reaction to the ECB's comments last week suggesting it could accelerate the end of some bond-purchase schemes, said ING.
"This spread widening on the back of the ECB messaging has sent the European credit market into flux," said ING's Timothy Rahill. He thinks spreads are now heading into oversold territory and could potentially approach the wide spreads seen in mid-2016 and mid-2019.
"We determine a new high end of the range to be 80 basis points for the iTraxx main [index] and 83bp for the ICE BofA Euro non-financial index," he said, adding that in a more stressed environment, spreads could reach levels last seen in early 2019.
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The cost of insuring against European junk bond defaults edged lower Thursday, with the iTraxx Europe Crossover index, which tracks euro high-yield credit default swaps, falling one basis point to 302 bps relative to the previous session and was down 18 basis points since it hit 320 bps this Monday.
Read: Corporate Bonds in Europe Suffer Biggest Fall Since Pandemic Began
Energy:
Oil prices edged lower in Asian trade as the dollar strengthened further.
In addition, Fitch said Brent will likely face downward pressure on expectations of increased supply and easing oil-demand growth.
While Brent prices are being squeezed by a "fundamentally tight" market, Fitch said higher production quotas by OPEC+ and large additions by non-OPEC countries including the U.S. should ease market tightness over 2022. Successful Iranian negotiations should also bring the country's oil exports back to the market.
Fitch has held its forecast for Brent to average $76/bbl over the course of the year, significantly below current spot price levels."
Metals:
Gold prices fell in line with other commodities, after they ended higher for a fifth session in a row Thursday, shaking off earlier weakness to mark their longest streak of gains since November.
Copper was more than 1% lower but Huatai Futures said the prospect of continued high inflation will keep prices of key industrial raw materials elevated.
Aluminum prices eased down on prospects that the pandemic-related lockdown in China's Guangxi region, a production hub for the metal, may ease soon. TD Securities said there appears to be signs that Covid-19 cases in the region are dropping.
Other News:
There are two major risks to mining in 2022, according to Jefferies: the risk of a hard landing in China and the risk of a Fed policy misstep that leads to disappointing global growth.
As it stands, China has been switching from a headwind to a tailwind because of improving Chinese credit growth in recent months. "Which leaves the Fed. Barring a policy mistake that significantly impacts the global economy, commodity prices should continue to outperform," Jefferies said.
TODAY'S TOP HEADLINES
Fed's Bullard backs aggressive rate hike path
The Federal Reserve should launch an aggressive interest rate hike campaign with a cumulative 100 basis points in increases by July 1, said St. Louis Fed President James Bullard on Thursday.
Speaking to Bloomberg News after U.S. consumer price inflation data earlier Thursday, Bullard said he was already more hawkish than his colleagues but has now increased dramatically the amount of rate hikes the central bank should do.
Surging Inflation Heightens Fed Debate Over How Fast to Raise Rates
The question facing Federal Reserve officials ahead of their policy meeting next month is no longer whether they will raise interest rates but rather by how much.
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02-11-22 0040ET
