There was always the risk that yesterday’s strong rebound was predicated on the premise that the Federal Reserve might feel compelled to be less hawkish about policy due to the recent volatility in markets, as well as the uncertainty around events in eastern Europe.

Yesterday’s rally saw the FTSE100 briefly move above 7,500, while the Nasdaq 100 surged to its highest levels this week, as did the S&P500, after the initial Fed announcement. 

While there was no surprises around the statement and the decision to keep monetary policy on hold, the Powell press conference saw the heat quickly come out of the rally, as Powell indicated that while a rate hike was likely to come in March, the FOMC wouldn’t hold back from continuing to do so at a faster pace than it did in the last tightening cycle, and that it would be appropriate to start shrinking the size of the balance sheet, as well at the same time.

The press conference also sent the message that the Fed could well raise rates at every meeting, or even consider a 50bps hike if the need arose, as Powell passed up the opportunity to rule out any of those possibilities. While this keeps the Feds options open, which seems entirely sensible, rule nothing out and everything in, it wasn’t the message increasingly nervous markets wanted to hear. In essence it was the Fed saying to markets that the days of handholding are over; our priority now is inflation.

His admission that there was “quite a bit of room to raise rates before it hurts the labour market”, sent the message of a Federal Reserve appearing ambivalent about the risks of moving too quickly to combat an inflation problem that they appear increasingly concerned about.    

This was reflected in a sharp rise in the 2-year yield which put in its biggest one-day jump since March 2020, a rise of over 11bps, while the 10-year pushed above 1.85%, and to within touching distance of its previous peaks.

The sharp move higher in yields pulled US markets off their highs to finish lower on the day, although the Nasdaq 100 finished the day unchanged, having been up by as much as 3.5% at one point.

As we look to this morning’s European open, the late sell off in the US is expected to see European markets open sharply lower, as Asia markets slid bac sharply with the Nikkei down over 3.5%, as we look ahead to this afternoon’s US Q3 GDP numbers, and weekly jobless claims numbers. Sentiment probably wasn’t helped by reports during the press conference that the UK was also considering sending troops to eastern Europe.

The US economy slowed in Q3, although it did better than initial estimates in the final upgrade to 2.3%, which we saw at the end of last year.

Today’s initial Q4 numbers are expected to see a significant improvement, although they are still expected to point to an uneven recovery and better performance, driven by rising employment levels, as well as a strong recovery in both manufacturing and services activity, although we can expect to see a slowdown towards the end of the year due to Omicron disruption, which will impact on consumer spending.

Services ISM activity hit a record high in November, while manufacturing remained steady. After a strong start to the quarter in October consumer spending hit its highest level since March as people brought forward their Christmas shopping plans.

This is likely to have tailed off in December, as Omicron outbreaks caused staff shortages, as well lower economic activity. Notwithstanding all of this the US economy is still expected to show an expansion of 5.8%. Most of the gain is expected to come from a strong personal consumption component of 3.3%, up from 2% in Q3.

Quarter on quarter core PCE is expected to rise from 4.5% to 4.9% in a prelude to tomorrow’s core PCE deflator for December which is expected to rise to 4.8% and its highest level since 1983.

Last week weekly jobless claims jumped sharply to 286k, which may well have been due to post Christmas and New Year disruptions, due to Omicron. This is expected to see a modest fall to 265k, with continuing claims at 1.65m.

EUR/USD – Continued to slide yesterday as it looks to close in on the November lows at 1.1195. We need to see a sustained move through the 1.1380 level to open up a move back towards 1.1500.  

GBP/USD – Ran out of road at 1.3530, with the risk of a test of support at the 50 day MA, and at the 1.3420 area. A move below 1.3420 and the 50-day MA argues for a move down towards 1.3380. We need to see a move back above the 1.3670 area to retest the 200-day MA and 1.3750 area. 

EUR/GBP – The failure at the 0.8420 area has seen the euro slip back, below 0.8380. Still looks toppy above 0.8400 with the lows at 0.8305 very much in focus, on the way to 0.8280. 

USD/JPY – Managed to hold above the 113.40 area for now, moving strongly above the 114.30 area which could see a retest of the 115.30 area. A break below 113.40 argues for a move towards the 112.80 area.

FTSE100 is expected to open 110 points lower at 7,359.

DAX is expected to open 329 points lower at 15,130.

CAC40 is expected to open 157 points lower at 6,825.

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