Post-pandemic Markets Shift Rapidly From Recession to Overheating Worries
2023.03.03 11:00
It’s incredible how quickly the narrative pivots in post-pandemic markets as we have moved from recession worries to overheating worries in just four weeks.
The global cyclical news has improved in recent weeks, with 1-month data surprises around their highest since late 2021, helped by January’s bumper payroll and retail releases. With the considerable upside to US January inflation prints, better cyclical news has shifted market worries rapidly from recession to overheating, alongside a sharp repricing of rate markets, which has challenged many of the trends that prevailed in January.
So until it is clear that the Fed has broken the back of inflation, it will remain difficult for risk markets to rally substantially absent a clear deflationary signal.
The following two weeks loom critical for the dollar. They are predominantly US-centric: a reaffirmation of a preferred hiking pace of 25bps by Fed officials that reduces right-wing Fed Funds tails, some mean-reversion in the February employment data and prints, and avoidance of exacerbating tensions in the US-China relationship would not only help give investors confidence on the dollar’s February moves being a correction within a downtrend but would also greenlight risk higher. Again if you get the dollar right, you get it all right.
Conversely, continued hawkish news, either from data, on the inflation front or FOMC drum beats, would force the market to continue to debate 6%+ Fed Funds and provide the ultimate wrecking ball for stock market sentiment.
Bank of Japan
The Bank of Japan will hold its Monetary Policy Meeting on March 9-10. The meeting will be the last under Governor Haruhiko Kuroda’s decade-long stewardship. And while traders positioned that the BOJ likely wanted to avoid making yield curve control (YCC) adjustments that could have a wide-ranging impact on bonds and the forex and equity markets.
However, caution should be warranted. Governor Kuroda’s first MPM a decade ago ushered in a regime shift with unprecedented easing, and he has implemented several surprises since). Hence it would not be surprising to see market expectations increase enormously that the new BOJ leadership under the government’s nominee, Mr. Kazuo Ueda, could amend YCC at its first MPM in April.
