US EARLY MORNING: Equity futures flat with attention on the final Fed speakers pre-blackout after dovish Brainard

SNAPSHOT: US equity futures are a little above flat, yields are higher by 2-4bps, with much of the underperformance in the short-end. The Dollar Index is flat. Crude benchmarks are around 60c higher.

FED TO ENTER BLACKOUT: The Fed will enter its blackout window ahead of the February 1st FOMC meeting at the end of today. Before then, we are due to hear from Governor Waller, who tends to lean on the hawkish side, as well as 2023 voter Harker, who has already spoken a few times recently. Analysts note that the influential Fed Vice Chair Brainard’s remarks on Thursday were focussed on how inflation has cooled as the Fed tightens, with policy now in restrictive territory – she also alluded to the two-sided risks as the Fed further enters the restrictive zone. Brainard has typically leaned on the dovish side, so her remarks were not too surprising, although a few have suggested that if her language finds its way into the upcoming Fed statement, the market may frame it as dovish. Both money market implied pricing and analyst estimates now expect the central bank to lift rates by 25bps at that February meeting, although the focus remains on how far the Fed will go, and how long it will stay at terminal. This was a point made by the FOMC Vice Chair Williams on Thursday, where he reiterated that it was data that would determine where the central bank stops raising rates, speed was less of an issue. It is worth noting that, in the blackout window, we are due to get crucial Personal Income, Spending and PCE metrics – the latter being a measure that the Fed specifically forecasts; additionally, Brainard said that she’d be watching the employment cost index data carefully, due at the end of this month, for signs on how wage growth has decelerated into Q4. This raises the risk that if these data come in hotter than expected, some pricing for 50bps could see a revival; after all, Fed officials have warned that there is the potential for a reacceleration of inflation in the months ahead, and the central bank does not want to be caught wrong-footed (again). The Fed’s recent economic projections have pencilled in a median 5.1% terminal rate, more hawkish than current market expectations of somewhere between 4.75-5.00%; perhaps that is why Fed officials earlier in the week were impressing the need to get rates to above 5.00%. Given Governor Waller’s past form, it is likely that he will reiterate a similar argument.

DAY AHEAD: The data docket is generally benign for the day. Commentary is expected from ECB President Lagarde from Davos (again). IMF’s Georgieva will deliver remarks on the global outlook before the organisation updates its global projections at the end of the month (these are likely to look similar to its previous projections, officials have said). The US Day Ahead will feature commentary from the Fed’s 2023 voter Harker, who has spoken a few times in recent days; remarks from Fed Governor Waller may be more interesting; he tends to err on the hawkish side, and his comments will hit after the European close. NOTE: The Fed’s blackout period before the February 1st FOMC kicks in after today; money markets are anticipating a 25bps rate hike. Data-wise, existing home sales for December, and the weekly Baker Hughes Rig Count data will round out the week. Our full calendar can be accessed here. 

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20 Jan 2023 - 09:20- Research Sheet- Source: Newsquawk

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