US EARLY MORNING: Equity futures have been trading cautiously in US premarkets ahead of Powell

SNAPSHOT: US equity futures are trading a little lower, Treasury yields are rising by a couple of basis points across the curve. The Dollar Index is flat. Major crude benchmarks are off 20-30c. The start of 2023 has been characterised by weak activity data and cooling inflation data, which has helped to underpin a rally in risk assets, as traders bet the Fed will need to pivot its focus onto growth to support the economy. However, it appears we are pausing on that narrative today ahead of commentary from Fed Chair Powell, who in all likelihood will reiterate that the central bank’s focus remains on combatting high inflation, and the economy remains in decent shape as evidenced by the solid labour market, and while growth is expected to slow, the Fed’s base case is not a recession – that is if Powell comments on policy at all (given the subject he is speaking about, there is a risk he could disappoint those looking for any fresh monetary policy insight).

POWELL PREVIEW: Recent data releases (specifically, the trading reaction to these data) suggest that markets have completely discounted the ‘peak inflation’ narrative, and are now becoming more focussed on the dynamic of slowing growth. Accordingly, we will be on the lookout for any commentary that suggests that the Fed is laying the groundwork for a policy pivot in the months ahead (perhaps March, when the FOMC updates its economic projections). To be clear, we do not think the policy pivot comes today, or even this week, but there are some factors we are looking for that will telegraph the way there. This will include commentary from officials on: how much more substantial evidence they need to see that price pressures have peaked, whether they signal 'ongoing hikes' or begin to temper that view, how long they expect to keep rates at terminal, whether concerns on some loosening of financial conditions is abating, whether they begin seeing scenarios where growth could slowdown by more than current forecasts. We detail our thoughts in a little more detail here.

DAY AHEAD: There are heavy hitting central bank speakers on the docket today, with remarks from Fed Chair Powell and BoE Governor Bailey due from a Riksbank conference. Powell will be speaking on 'central bank independence and the mandate – evolving views', and accordingly, some believe that there is a risk that he disappoints those who are looking for fresh insight on the current monetary policy outlook. Nevertheless, we have a primer here discussing the areas of commentary we will be focussing on (any hints of laying the groundwork for a policy pivot). Elsewhere, the ECB’s markets chief Schnabel will deliver remarks at the Riksbank’s conference too, while BoC’s Governor Macklem is also on today’s speaking slate. Data-wise, the release of the NFIB small business optimism gauge, weekly RedBook retail sales data, and the Fed’s discount rates minutes are due. Energy traders will note the EIA’s STEO report, and after the US close, API energy inventories for the week. The Treasury auctions 3s today, ahead of 10yr and 30yr supply later in the week. Our full day ahead schedule can be accessed here.

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10 Jan 2023 - 09:20- Fixed IncomeData- Source: Newsquawk

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