Feb 5th Morning Note
Powell reiterates that a March interest-rate cut is unlikely
Friday Recap: The Magnificent Seven rose +5.45% on Friday alone with Meta adding the most amount of daily market cap ever ($197bn), this sent the S&P 500 to a fresh all-time high even though 73% of the Russell 2000 fell on Friday, while the US Regional Bank index fell -7.23% on the week. This was despite the 2Y and 10Y yields rising 16bps (the largest since March) and 14bps, respectively on Friday, and a March Fed cut pricing falling to ~22% (from 50% a week earlier). At the time of print, the odds have reduced further to ~15%, on the back of Powell’s hawkish tone during the 60 minutes interview (more below).
Apart from PMIs, the US investors would be closely watching the Fed Senior Loan Officer's survey (SLOOS) to see if bank lending is tightening further, though so far that has not translated into reduced activity as it has done in the past. Perhaps, excess savings or cash are still high enough in the economy that businesses and consumers don't need much access to bank lending.
On Friday, the Bureau of Labor Statistics (BLS) is scheduled to release its annual revisions to the seasonal factors affecting the Consumer Price Index (CPI). These revisions are crucial, as highlighted by both Waller before the FOMC blackout and Powell during the FOMC, for fine-tuning potential rate cuts. Notably, last year's revisions resulted in a decrease in inflation figures for the first half of the year and an increase in the second half, significantly altering the perceived momentum of inflation.
This morning, Chinese stocks experienced notable volatility. The small-cap CSI 1000 index initially plunged 8% but later recouped some losses. The Shanghai Composite also fell over 3.5% before nearing a break-even point. This market instability continued despite recent assurances from the Chinese securities regulator (CSRC) to maintain stability. Additionally, China's services activity growth slowed slightly in January, as evidenced by a marginal decline in the Caixin services PMI due to reduced new orders.
Highlights of Fed Chair Powell’s interview on CBS's 60 Minutes
Powell reaffirmed comments from last week that the Fed might not cut interest rates until after March. He cautioned about acting prematurely, as recent positive trends might not accurately predict future inflation.
Powell hinted at a potential rate cut around mid-year, although this was not explicitly stated in the aired interview.
Powell also mentioned that the Fed's 2024 interest rate forecasts are unlikely to change significantly, with most participants anticipating rate reductions this year.
The timing of potential rate cuts is politically sensitive, especially in an election year, with accusations that the Fed might influence the economy to benefit Democrats. Powell, however, firmly stated that the Fed's decisions are not politically driven.
In light of the recent NYCB stock price drop, he didn’t sound too concerned and mentioned that commercial real estate was a manageable problem -"We looked at the larger banks' balance sheets, and it appears to be a manageable problem. There's some smaller and regional banks that have concentrated exposures in these areas that are challenged. And, you know, we're working with them."
What to Watch this Week
Economic data:
Feb. 5: Fed Senior Loan Officer's survey (SLOOS)
Feb. 5: S&P Global US Services PMI; ISM services index; Senior loan officer survey
Feb. 7: MBA mortgage applications; trade balance; consumer credit
Feb. 8: Initial jobless claims; wholesale trade sales and inventories
Feb. 9: BLS inflation revisions
Fed calendar:
Feb. 5: Atlanta Fed President Raphael Bostic
Feb. 6: Cleveland Fed President Loretta Mester; Minneapolis Fed President Neel Kashkari; Boston Fed President Susan Collins; Philadelphia Fed President Patrick Harker
Feb. 7: Federal Reserve Governor Adriana Kugler; Richmond Fed President Tom Barkin; Fed Governor Michelle Bowman; Collins
Feb. 8: Barkin
Feb. 9: Dallas Fed President Lorie Logan
Auction calendar:
Feb. 5: 13-, 26-week bills
Feb. 6: 42-day cash management bills; three-year notes
Feb. 7: 17-week bills; 10-year notes
Feb. 8: 4-, 8-week bills; 30-year bonds
Other news
Iran Used Santander, Lloyds Accounts to Evade Sanctions, FT Says BBG
Read the Full Transcript of Powell’s Interview With CBS’s ‘60 Minutes’ BBG
Senators Reach Deal on Ukraine Aid and US Border, But Hardline Republicans Still a Threat BBG
World Cup 2026 Final Goes to NYC in Victory Over Dallas, LA BBG
Why central banks are reluctant to declare victory over inflation FT
Magnificent Seven’s grip on markets slips as investors look past AI hype FT
Thank goodness we’ve reached peak MBA FT
Bank of Japan grows more confident about imminent exit from negative rates FT
New quality glitch to delay some Boeing 737 MAX deliveries RTRS
China's Jan services activity expands at slower pace - Caixin PMI RTRS
China's tumbling prices push some exporters to the brink RTRS
The Money and Drugs That Tie Elon Musk to Some Tesla Directors WSJ
New York and New Jersey Selected to Host 2026 World Cup Final WSJ
Invest in America, Live in Europe—a Mantra Some Just Can’t Shake WSJ
Why You Keep Getting Useless Alerts on Your Phone WSJ