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Rising oil creates a headache for the Fed

Via Bloomberg

The Fed has currently told markets that it is not thinking of hiking until 2023. However, oil pushing higher could mean the Fed have to shift rate rises sooner than 2023. This is why. Rallying oil increases inflation expectations. Higher energy costs get passed on. Look at the chart showing how WTI prices lift inflation.

Via Bloomberg

The argument against the Fed reacting is that the Fed see energy costs as ‘transient’ , so look through them. However, there is a strong case for rising oil prices. In brief they are as follows:

 

  • OPEC is determined to cut supply
  • The leap to green enemy causes key oil infrastructure, like Keystone, to be cancelled
  • Economies re-opening will cause oil demand to surge
  • The new normal is that higher energy costs are part of the landscape

 

So, remember the Fed’s ‘target’ is at 2.5% inflation and rising oil prices could be the factor that get’s it there even sooner than 2023. Watch out for oil adding inflationary pressures and possibly triggering a taper tantrum.

Japan Core Machinery Orders for December +5.2% m/m (expected -6.1%)

Japan Core Machinery Orders for December

+5.2% for a good beat

  • expected -6.1%, prior +1.5% m/m

+11.8% y/y

  • expected %, prior % y/y

This is better news again for the Japanese economy (the news has been less bad so far this week for the economy … however with the new state of emergency in January the data may well deteriorate again.

The Government has rtasied its assessment on machinery orders in response to this better data.
A caveat with this data point each month is it is highly volatile. Still +11.8% y/y is good news. the data is indicative of capex 6 to 9 months ahead.
After its move above 106 earlier and highs over 106.20 (briefly) USD/JPY is little changed circa 106.10.

USD catches a fresh bid, EUR/USD now under 1.2100

Overnight moves carrying on further

  • USD/JPY circa 106.20
  • AUD/USD under 0.7740
  • Cable losing ground also
  • USD/CAD above 1.2700
  • NZD/USD under 0.7200 (ps. the country has just reported two new cases of the virus in the community)
Rising US bond yields were pretty much ignored in Asia yesterday but they continued climbing and impacted during US time … the FX moves continuing now

Reuters Japan Tankan for February: Manufacturing index +3 (prior -1)

The monthly Reuters Tankan is intended to be a guide to the quarterly BOJ Tankan

 

  • February manufacturers’ sentiment index +3 vs January -1, first positive since the middle of 2019
  • Manufacturers’ mood positive for 1st time since July 2019
  •  Service-sector index -7 in February vs January -11
The background to this in Japan is improving overseas demand though emergency pandemic measures covering Tokyo and other cities hit domestically.
More:
  • index for manufacturers seen recovering to 8 in May
  • non-manufacturers’ index expected to be flat in May

Yellen and Lagarde spoke on policy tools to boost growth and jobs in US & Europe

US Treasury Secretary Yellen and European Central Bank President LaGarde

US Treasury issuing the readout in a statement:

 

  •  Yellen commended ECB’s ‘swift and decisive policy response’ to Covid-19 pandemic, discussed policy tools to foster growth, create jobs in Europe, US
  • Yellen emphasized deepening transatlantic cooperation on economic and financial issues in call with Lagarde
  • Yellen discussed with ECB’s Lagarde support for strong global recovery, financial stability, addressing climate change

 

Dow closes at a record

S&P and Nasdaq (and Russell 2000) trade lower

The Dow close at a record level. The other indices made new intraday all-time highs but close lower on the day. A snapshot of the final numbers shows:
  • Dow industrial average, +63.36 points or 0.20% at 31521.76. The new all time high reached 31608.63
  • The S&P index closed down -2.26 points or -0.06% at 3932.57. The all time high price was reached today at 3950.43
  • The Nasdaq closed down 47.974 points or -0.34% at 14047.56. The new all time high price reached 14175.11 before backing off.
Leading the Dow today was:
  • Salesforce, +3.45%
  • Boeing, +2.92%
  • Bank of America, +2.67%
  • J.P. Morgan, +2.4%
  • Caterpillar, +2.23%.
Other gainers today were focused and financials and airlines:
  • PNC financial, +4.77%
  • Doordash, +4.76%
  • Charles Schwab, +4.74%
  • Corning, +4.66%
  • United Airlines, +4.02%
  • Wells Fargo, +3.76%
  • American Airlines, +3.18%
  • Delta airlines, +3.14%
  • Twitter, +2.88%
  • Zoom, +2.71%
  • Bank of America, +2.67%
  • J.P. Morgan, +2.4%
Losers today included:
  • Palantir, -12.75%
  • Corsair, -6.95%
  • Papa John’s, -6.04%
  • Black Knight, -6.02%
  • GameStop, -5.5%
  • Chewy, -3.31%
  • LivePerson, -3.11%
  • Gilead, -3.11%
  • Chipotle -2.96%
  • Tesla, -2.44%
  • AMD, -2.44%