Weaker equities and a stronger US Dollar – suggest Chair Powell did not offer the passage to the downshift that investors were pining for and now puts the onus for any market rebound squarely on next week's US CPI print. Until inflation improves substantially, the US interest rate glide path is higher for longer.
While it should not come as a surprise to anyone that the Fed is having discussions about slowing the hiking pace from 75 basis points (bp) per meeting, however, it is all about digesting Powell's concept that the pace of hikes is not the focal importance. Instead, it is the terminal rate level and how long the Fed needs to hold them there. The Fed new direction looks like a long string of smaller hikes with higher terminal rates.
Investors' ability to absorb another backup in rates and the power of corporates to adjust to a higher for longer cost of the capital environment remains a crucial question for risk markets.
Oil
Oil prices are trading off inter-week highs after the Federal Reserve quashed any hope for an early 2023 policy pivot which boosted the US dollar negatively for oil futures. Also weighing on investors, the top side ambition is that the possible easing of Covid rules in China feels a bit long in the tooth after China's National Health Commission reiterated its adherence to covid zero policy.
However, oil is still finding support on the bullish to consensus weekly US oil inventory draws. There were also reports that Saudi Arabian intelligence has shared a warning of a possible imminent Iranian attack on the country, which adds a layer of support from a geopolitical perspective. Any supply disruption due to a terrorist attack will increase prompt prices immediately.
It makes sense that a committee will be formed to examine reopening, which will be a significant driver of economic growth and commodity and stock-price performance, hence why Tuesday's headlines got so much attention. Investors should look for vaccine booster shots, efforts to ramp up healthcare facilities, more significant signs of Beijing providing local authorities with flexibility on Covid restrictions, and a propaganda/media blitz. So, what is the progress on that from boots on the ground? Not much movement, if any. That said, I suspect China's grand reopening will be well-signposted, allowing investors many opportunities to get ahead of the move.
Foreign Exchange
The US jobs numbers and the October CPI data on Nov. 10 will be critical for foreign exchange markets. It will determine to a significant extent whether the 100 bp priced over the two next meetings is justified. If the data holds to its current hawkish form, the dollar could remain supported into year-end. However, if the data shifts the rate hike outlook evenly balanced between 25bp-50bp for February, it will help settle real yields, benefiting growth equities and USD shorts.
Japan's J-Alert system – used to alert the public and media on emergencies – was activated after North Korea fired a missile overhead into the Pacific. Japan last used the warning system on Oct. 4, the first use of the Alert since September 2017. USD/JPY has had a muted reaction so far.