Proactive Investors -
- FTSE 100 flat early afternoon trading
- Markets reacting to hawkish comments from Fed chief Powell
- Insurer Admiral leads fallers after dividend cut
US stock market pre-open changeable
The Footsie is looking rather undecisive in the run-up to the US open, now paring its losses again.
A boost to European markets was expected not long ago, but now we seem to be poised for Wall Street to open lower, extending losses from yesterday's sell-off, though the FTSE 100 is now minutely in the green at 7,919.52.
Ahead of a second day of testimony from Federal Reserve chief Jerome Powell today, futures for the Dow Jones, S&P 500 and Nasdaq-100 are all pointing to a 0.1% fall.
Yesterday it was the Dow that tumbled most sharply, closing 1.7% lower, versus 1.5% for the S&P 500 and 1.3% for the Nasdaq Composite, while the small-cap Russell 2000 index fell 1%.
“Any prospect that we might see a dovish Powell yesterday was quickly dashed as the Federal Reserve chairman struck quite a different tone to the one he used at the last FOMC press conference,” commented Michael Hewson, chief market analyst at CMC Markets.
“While markets focussed on his comments about disinflation at the beginning of February, there was only one mention of that word in his statement, in his remarks to US lawmakers yesterday, and that was to say there was little sign of it.”
Powell’s comments that the pace of rate hikes may need to be accelerated, and that the likely rate peak could well be higher than expected, were not well received by markets, though as Hewson noted, the strength of recent data did not make this a huge surprise.
Also due today is a ADP payrolls report for February, expected to reveal an improvement to about 200,000 from 106,000 in January.
This provides clues as to Friday’s non-farm payrolls numbers, said TickMill analyst Patrick Munnelly. “Although the two data points are rarely perfectly aligned, markets will certainly have an eye on the release.
Any print at or above 200,000 for private payrolls would suggest the employment landscape remains tight stateside, though a 50-basis-points Fed hike on March 22 is already widely expected after Powell's comments.
However, Marc Ostwald, chief economist and strategist at ADM Investor Services, said it is "quite unlikely that the Fed would revert to 50 bps or 75 bps, above all because it would damage their credibility, having only recently reverted to a more normal 25 bps pace".
"But by dangling the threat of a more aggressive move, the Fed effectively lets markets do some of their work for them, by pricing in a more aggressive move, and at the same time this also unwinds the unwanted easing in financial conditions seen at the turn of the year."
Markets stumble on new predictions of higher US interest rates and later pivot
The FTSE 100 is sliding again, having flattered to deceive with a late morning rise. It's now down 17 points or 0.2% at 7902.46.
Markets are stumbling today as they have started to price in a half-a-percentage point rate rise from the Federal Reserve in two weeks, rather than the quarter-point hike that was overwhelmingly predicted a month ago.
What's more, the peak Fed funds rate is now seen at 5.75%, a full percentage point above the level set at February’s meeting of the Federal Open Market Committee, with some forecasting a peak of 6.25%, with markets on average expecting a delay in the first rate cut until the first quarter 2024.
The broad rally in stocks and bonds since lows in October rested upon a conviction that retreating inflation will allow the global economy to suffer no more than a shallow recession and interest rates will be cut before long, but adding to the recent run of US data strength, including a fresh inflation spike, yesterday's statement from US Federal Reserve chair Jay Powell offered a further challenge to this cosy consensus, says analyst Russ Mould at AJ Bell.
This confirmed a view that has been steadily building on the back of macro data in recent weeks.
“Instead of going for the Goldilocks option so beloved by bond and share prices – namely that the economy will be neither too hot to stoke inflation and force interest rate rises nor so cold as to threaten corporate profits – Mr Powell is saying the US economy is running hot and that interest rates may go higher than expected, faster than expected.
“This is having knock-on effects upon a range of financial markets," he noted, with "share prices wobbling as hopes for that hat-trick of a deceleration in inflation, a soft landing and decline in rates start to ebb.
"Perversely, this currently means that good news for the economy is seen as bad news for markets, as a strong economy means faster growth and higher inflation than expected and thus higher interest rates. And higher interest rates improve returns on cash and bonds and mean investors may not have to take as much risk, in the form of shares, to get a return on their cash (at least in pre-inflation, nominal terms)."
The US two-year Treasury yield now exceeds 5% for the first time since 2007 and the benchmark US ten-year is back at 4% for the first time since 2010.
And the spread between 2- and 10-year Treasury yields - one of the market’s favourite gauges of impending US recessions - fell further, to levels not seen since September 1981.
As for the pound, see below.
Pound climbs off three-month low
In the early hours the pound scraped its lowest levels since November last year, but today is rallying slightly, up 0.1% 1.1839.
TickMill analyst James Harte said the pound has been "among the chief victims of the fresh strength we’ve seen in USD on the back of Powell’s comments yesterday.
"With better UK data out yesterday (housing and retail sales), the reasoning might seem unclear. However, the move can be easily explained by considering traders’ expectations with regard to future Fed and BOE monetary policy."
While the Fed is widely expected to press ahead with more aggressive tightening this year, this contrast with the Bank of England, Harte says.
"It’s fair to say has been reluctant throughout its tightening cycle, has recently signalled that it might be about to pivot on rates."
After the BoE recently hiked rates to 4%, their highest level in 14 years, governor Andrew Bailey acknowledging that disinflation had begun and that further rate increases would be data dependant.
"Traders are now expecting a smaller 0.25% hike from the bank ahead of tightening be paused altogether before summer," Harte says.
"This view is creating downward pressure in GBPUSD and the pair looks set to continue lower while incoming data and commentary support this narrative."
Another Budget leak
More leaks on next week's Spring Budget, with reports that the Chancellor could give companies tax relief on capital investment.
It would be a way for Jeremy Hunt to balance the impact on corporates of the rise in corporation tax from 19% to 25% that is due to start in April, for which the government has received a few brickbats in recent weeks - even though it would still leave the UK with the lowest rate in the G7.
A report from the Guardian says Hunt is going to use the results of a consultation launched by predecessor (and now his boss) Rishi Sunak last year that set out a range of options for replacing the tax break.
One of the measures could be a full expensing of company investment to would allow certain capex spending to be written off in the year it is incurred, though the Treasury has estimated this could cost £11bn a year.
Some giveaways are expected in the Budget but a downgrade to the Office for Budget Responsibility’s (OBR) medium-term GDP growth forecasts will prevent an unwinding of the fiscal consolidation announced last November, says Ruth Gregory at Capital Economics in a preview today: "That will have to wait for later this year, or early next year, ahead of the next general election."
That does not mean the Chancellor will sit on his hands completely, she said, predicting a temporary package of measures worth about £18bn or 0.7% of GDP for 2023/24, reflecting the scrapping of the 20% increase in the Energy Price Guarantee (EPG) from £2,500 to £3,000 on 1st April and the scrapping of the 23% scheduled rise in fuel duty.
"A one-off top up to the defence budget of about £5bn in 2023/24 and a bonus payment for public sector workers may also be a feature of this Budget. The Chancellor is reportedly also eyeing a medley of other measures to boost labour market participation," Gregory said.
The UK's stock market benchmark is hovering just below the waterline as we move into afternoon trading, down just under six points or less than 0.1% at 7913.64.
Four of FTSE's five biggest stocks (Shell, AstraZeneca, HSBC and BP) are all in the green, which is helping, with Unilever oscillating either side of positive.
The more domestically exposed index, the FTSE 250, is down 0.6% at 19,839.