Markets buoyant in the face of a faster Fed

It’s Thanksgiving in the US which means stock markets and bond markets are closed across the pond. Trading volumes will be thin elsewhere. That doesn’t mean there’s not a lot going on to analyse, trade and cogitate over.

Asian stocks had a mixed day and European equities are trading modestly higher. The broadest index of Asia—Pacific shares outside Japan fell to a six-week low, having posted a small decline in each of the past six trading sessions. Wall Street ended higher overnight and is back testing record highs as tech stocks bounced back from a selloff earlier in the week.

Decent US data to push US growth higher

Yesterday, we got the release of the Fed’s preferred measures of inflation for October which saw headline and core PCE running at 5% and 4.1%, new cycle highs.  The weekly initial jobless claims figures dropped to their lowest in over 50 years. Even if statistical issues were at work, this suggests ongoing improvement in the labour market. The figure is also in many ways remarkable after prints of six million less than two years ago.

Spending and income data also suggest a solid start to the fourth quarter, even as prices accelerate further. US growth of between six and seven per cent are being forecast for the last three months of the year, while interest rates remain near zero.

Fed tilting to quicker taper, earlier rate rise

It’s no surprise that the dollar is trading near its highest in almost five years versus the Japanese yen and nearly 18 months to the euro, just above 1.12. The stronger greenback is a headwind for emerging market equities and was also supported yesterday by the hawkish bias evident in the FOMC minutes.

Several policymakers said they would be open to speeding up the tapering of the Fed’s bond-buying if the high rate of inflation continued to run higher. In turn, they would move more quickly to raise interest rates. Bond yields moved north with the short end of the bond curve (2-year yield) touching post-Covid highs at 0.65%. The market is currently pricing in over two 25bp rate hikes next year, with the first fully priced in for the June FOMC meeting.

USD pausing at the top

The dollar index, heavily weighted by the euro, is pulling back from the highs this morning. The combination of a bullish Fed and fourth waves in Europe has propelled the DXY to overbought levels. German business confidence (IFO) published yesterday also painted a less upbeat picture on the outlook for Europe’s largest economy.

The weekly dollar index chart shows the clear upside break in early November. The greenback is now heading for five straight weeks of gains. Bulls will target highs made back in June 2020 around 97.80. Stretched levels of buying may see a pullback with support around 96.27.

Happy Thanksgiving to one and all!