Investors are wisely pausing for thought ahead of what is expected to be another jumbo Fed rate hike while attempting to plot a Fed rate hike path well into 2023. With the 10-year yield back above 4% and little fuel for the 'Fed pivot' narrative, the market seems to be positioning for an FOMC hawk if not erring a touch risk off
Foreign Exchange
50bp or 75bp in December is ultimately less important than the path Chair Powell lays out for next year. If push comes to shove, the Fed probably does not want to see the market pricing cuts as soon as the hike cycle finishes, so I expect the rhetoric to be targeted here, which means that US Dollar could remain supported. Notwithstanding the fact, the euro has struggled for traction after a somewhat dovish hike from the ECB last Thursday,
Similarly, USD/Asia is well-bid across the board, and despite all the recent Fed' pivot' talk, the base case for the market is that Chair Powell seeks to assert a hawkish stance.
Full-month data for South Korea's exports confirm the slowdown indicated by the partial data. Meanwhile, imports rose, and that combination drove a wider-than-expected trade deficit. As with South Korea's industrial production data released on Monday, the implications are negative for the KRW. The data points indicate weakening global demand that should be underscored by manufacturing PMIs across economies today.
Oil
Oil remains rangebound as investors continue to express concern about the demand outlook for next year, primarily through the lens of weaker China economic data directly attributable to Covid-zero.
On the supply side, Russian production has held up reasonably well, with preliminary data for October showing an output of 10.7mb/d, but the EU embargo taking effect in December will probably have a material adverse impact on that supply.
Interest Rates
The OIS market says the Fed will reach a terminal rate of about 5% in May, which is where things were before the recent pivot talk.
OIS pricing last week fell to as low as 4.75% for May after Nick Timiraos of The Wall Street Journal said the Fed would soon discuss when and how to slow the rate hikes.
The market is currently pricing 75bp for Wednesday's meeting and a total of 137bp through December FOMC.