MNI US OPEN - Markets Watch for Softer Fed Language Amid Evolving Risks

NEWS

MNI FED PREVIEW - MARCH 2023: Balancing Evolving Risks

MNI expects the FOMC to hike the Funds rate by 25bp to 4.75-5.00% at the March meeting, with markets implying a 60% chance of a quarter-point raise and 40% of a pause. This will come alongside a new Dot Plot that raises the 2023 median rate expectation by 25bp to 5.4%, and tweak of the Statement's forward guidance to indicate that the terminal rate is nearing. Of the 28 analyst previews of the March FOMC decision whose previews MNI have seen, 23 expect a 25bp hike at the February FOMC. 4 see a pause, and 1 sees a cut.

MNI BOE PREVIEW - MARCH 2023: Services Inflation Strong; MNI Looks for 25bp from BOE Tomorrow

The MNI Markets team look for a 25bps hike from the BOE tomorrow on the UK CPI release. This data gives the hawks on the MPC ammunition to push for a 25bp hike tomorrow. The MNI Markets team looks for a 25bp hike from the BOE tomorrow on the back of this data.

MNI SNB PREVIEW - MARCH 2023: Bank Liquidity Provision Should Clear Path for More Hikes

The Swiss National Bank enter this quarter’s policy meeting caught between burgeoning price pressures and increased fragility of the domestic financial sector. The pressured, and swift, tie-up of UBS and Credit Suisse has raised questions about the viability of Swiss banks, however the central bank should see financial instability as a tangential risk at this stage. This makes a 50bps rate hike the most likely outcome, maintaining the prevailing Eurozone-Swiss rate differential evident ahead of last week’s ECB decision.

ECB (MNI): No Price, Financial Stability Trade-Off - Lagarde

The ECB needs a "robust" strategy that takes into account today's high levels of uncertainty, president Christine Lagarde said Wednesday, as she reiterated the importance of taking a data-dependent approach to rate-setting and said there was "no trade-off" between price stability and financial stability" in the wake of the collapse of SVB and Credit Suisse.

ECB (MNI): Bundesbank Chief Says Rate-Setters Must Be 'More Stubborn' In Inflation Fight (FT)

German central bank chief & ECB Governing Council member Nagel tells the FT that "eurozone rate-setters must be "stubborn" and continue raising borrowing costs to tackle inflation, discounting fears that recent financial turmoil could further affect Europe's banks."

"Our fight against inflation is not over," he said. "There's certainly no mistaking that price pressures are strong and broad-based across the economy. If we are to tame this stubborn inflation, we will have to be even more stubborn."

US/CHINA (BBG): Biden Stunts Growth in China for Chipmakers Getting US Funds

The Biden administration unveiled tight restrictions on new operations in China by chipmakers that get federal funds to build in the US, potentially hampering efforts to expand in the world’s largest semiconductor arena. mThe $50 billion CHIPS and Science Act will now bar firms that win grants from expanding output by 5% for advanced chips and 10% for older technology. The Commerce Department also outlined other measures including a $100,000 spending cap on investments in advanced capacity in China.

JAPAN (MNI): Japan's Govt Maintains Economic Outlook, Cuts Output View

Japan's government lowered its outlook for industrial production and corporate profits despite keeping its assessment of the domestic and overseas economies unchanged, the Cabinet Office said on Wednesday. “The Japanese economy is picking up moderately, although some weakness is seen," the government said. The updated assessment said the world economy continues to recover moderately, “although some weaknesses have been seen in some regions" such as Thailand and Germany.

DATA

UK DATA (MNI): No Cheer for BOE As Alcohol Costs Push CPI Higher

• UK FEB CPI +1.1% M/M, +10.4% Y/Y
• UK FEB CORE CPI +1.2% M/M, +6.2% Y/Y
• UK FEB RPI +1.2% M/M, +13.8% Y/Y
• UK FEB OUTPUT PPI -0.3% M/M, +12.1% Y/Y
• UK FEB INPUT PPI -0.1% M/M, +12.7% Y/Y

UK inflation surprised to the upside in February, as sharp rises in the cost of alcohol at pubs, restaurants and cafes helped push services inflation to 5.6% year-on-year. Headline inflation rose to 10.4% from 10.1% in January, confounding expectations for a decline to 9.9%, the Office for National Statistics said Wednesday. The Bank of England is meeting Wednesday, ahead of Thursday's policy announcement, to decide whether to raise interest rates for an 11th consecutive meeting.

UK DATA (MNI): UK Pay Awards Likely Peaked in Q1

• UK DEC-FEB MEDIAN PAY AWARDS +6%: XpertHR

UK pay settlements rose at a 32-year record pace in the three months to February, but nominal wage growth likely peaked in the first quarter of 2023, the head of XpertHR's monthly survey told MNI. XpertHR's latest forecast sees the median private-sector basic pay award in the 12 months to end-December 2023 at 5% -- with pay awards peaking at the current 6% in Q1 and then easing throughout the year.

FOREX: GBP on Top as CPI Revives Confidence in Rate Hikes

• UK inflation data kickstarted the European session with a solid beat on expectations: headline Y/Y CPI rose to 10.4%, well ahead of the 9.9% analyst consensus, while the core measure similarly topped forecast (6.2% vs. Exp. 5.7%). Services inflation remained a key driver, with restaurants and hotels prices accounting for the largest upward effect on the headline.
• The release saw markets further bake in expectations of a 25bps hike at Thursday's BoE meeting - a prospect that was on much shakier footing this time last week. Suitably, GBP rallied, putting GBP ahead of all others in G10 to put GBP/USD briefly ahead of resistance to print 1.2286.
• The greenback is edging lower, slipping against most others despite a shakier equity backdrop that indicates a lower open on Wall Street later today. The USD Index trades within range of this week's lows and the lowest level since mid-February. Markets keep a close eye on key resistance at the 1.08 handle for EUR/USD - a break above which could help the next leg lower for the dollar.
• Focus Wednesday remains on the FOMC rate decision, at which markets look for a 25bps rate rise from the Fed, as the markets hone in on any clues for the sensitivity of the Fed's tightening cycle to the ongoing banking woes across the US.

BONDS: UK Inflation the Big Driver Ahead of the Fed

• Gilts have been the big movers this morning, with the curve bear flattening following the higher-than-expected inflation print this morning. We are particularly focused on the jump in services inflation which rose from 5.2%Y/Y in January to 5.6%Y/Y in the February data. The MNI Markets team think that this will be enough to push the MPC to hiking 25bp tomorrow (which is now pricing around 23bp up from 14bp at yesterday's close). The terminal rate has shifted higher too and 2-year gilt yields were as much as 21bp higher earlier this morning but at writing are around 17bp higher on the day.
• Bunds and Treasuries were also pulled around by UK inflation data this morning, both on the release of the data and the gilt open. Both curves have flattened but Treasuries are a little higher ahead of the FOMC meeting later today.
• TY1 futures are up 0-6 today at 114-010 with 10y UST yields down -2.2bp at 3.590% and 2y yields down -3.4bp at 4.136%.
• Bund futures are down -0.33 today at 135.69 with 10y Bund yields up 2.3bp at 2.311% and Schatz yields up 3.4bp at 2.636%.
• Gilt futures are down -0.89 today at 103.96 with 10y yields up 8.5bp at 3.449% and 2y yields up 16.6bp at 3.429%.

EQUITIES: Equity Futures Partially Retrace Some of Tuesday's Gains

The Eurostoxx 50 futures outlook remains bearish, however, the strong recovery from Monday’s low of 4057.00 has resulted in a break of both the 20- and 50-day EMAs. A continuation higher would signal scope for 4184.50, a Fibonacci retracement. Key resistance and the bull trigger is at 4268.00, the Mar 6 high. On the downside, a reversal lower and a breach of 3914.00 would resume the recent downtrend. S&P E-Minis have continued to climb as the contract extends the recovery from 3839.25, Mar 13 low. Key short-term resistance to watch is the 50-day EMA at 4025.43. The average was breached yesterday and a clear break would strengthen a short-term bullish theme and signal scope for a climb towards 4119.50, the Mar 6 high. A failure to hold on to recent gains would refocus attention on key support at 3839.25, the Mar 13 low.

• Japan's NIKKEI closed higher by 520.94 pts or +1.93% at 27466.61 and the TOPIX ended 33.63 pts higher or +1.74% at 1962.93.
• Elsewhere, in China the SHANGHAI closed higher by 10.098 pts or +0.31% at 3265.748 and the HANG SENG ended 332.67 pts higher or +1.73% at 19591.43.
• Across Europe, Germany's DAX trades higher by 17.07 pts or +0.11% at 15185.4, FTSE 100 lower by 10.26 pts or -0.14% at 7516.39, CAC 40 down 9.09 pts or -0.13% at 7091.88 and Euro Stoxx 50 up 0.95 pts or +0.02% at 4175.25.
• Dow Jones mini down 63 pts or -0.19% at 32713, S&P 500 mini down 9.75 pts or -0.24% at 4026.75, NASDAQ mini down 52 pts or -0.4% at 12820.5.

COMMODITIES: WTI Future Gains Considered Technically Corrective

WTI futures remain vulnerable and recent short-term gains are considered corrective. The contract traded to a fresh low Monday. Last week’s sell-off resulted in the break of key support at $71.10, the Dec 9 low. The break lower confirms a resumption of the medium-term downtrend. Note too that price has also cleared the psychological $70.00 handle. Attention is on $62.43, the Dec 2 2021 low. Initial resistance is at $69.83, last Friday’s high. A strong rally in Gold last week saw the yellow metal trade to a fresh YTD high of $1989.4. This confirmed a resumption of the uptrend that started in late September 2022. Monday’s gains resulted in a print above the psychological $2000 handle and this further strengthens bullish conditions and opens $2034.0 next, a Fibonacci projection. The latest pullback is considered corrective, last Friday’s low of $1918.3 marks firm support.

• WTI Crude down $0.4 or -0.57% at $69.22
• Natural Gas down $0.08 or -3.58% at $2.267
• Gold spot up $3.58 or +0.18% at $1942.27
• Copper up $1.7 or +0.43% at $401
• Silver up $0.11 or +0.49% at $22.4301
• Platinum up $8.22 or +0.84% at $982.98