Investors continue to weigh the risk of faster rate hikes

The war in Ukraine has tended to increase uncertainty regarding inflation and growth prospects. When and with what consequences this war will end is pure speculation, but capital markets are expected to build a certain immunity to the headline risks in the coming weeks. The medium- to long-term consequences, on the other hand, could be significant. It is possible that we are at the beginning of a new bloc formation or a new Cold War. This would put a significant damper on globalization and further fuel higher structural inflation. 

US equities finished mixed on Wednesday, as investors digested a second day of testimony from Fed Chair Jerome Powell.  The Chairman remained hawkish in his commentary, where he suggested rates may need to accelerate more than initially expected and may need to stay higher for longer than originally anticipated.  The economic calendar was tilted toward labour data, as job openings dipped but remained elevated, and ADP’s private sector employment report bested forecasts ahead of Friday’s key nonfarm payroll release.  The Dow Jones decreased 0.2%, while the S&P 500 Index inched up 0.1% higher, and the Nasdaq Composite gained 0.4%. Meantime, European markets ended the session slightly higher, with the Euro Stoxx 50 gaining 0.2%. 

Summary as at 09.03.2023 

• Asian equity markets were mixed on Thursday as caution dominated sentiment amid expectations that the Federal Reserve will raise interest rates further.  Investors also digested data showing China’s inflation rate dropped to a one-year low in February, while Japan’s economy stagnated in Q4.  Meanwhile, the Bank of Japan is set to decide on monetary policy on Friday in what would be BOJ Governor Haruhiko Kuroda’s final meeting.  Shares in Australia and Japan advanced, while Hong Kong, mainland China, and South Korean equities fluctuated. 
• European equity markets head for a lower open while US futures are flat as the market continues to weigh the likelihood of higher rate hikes. 

• Oil prices kept to a tight range this morning, nursing two days of steep losses as middling demand cues from China and hawkish signals on US interest rates brewed increasing concerns over more headwinds to crude consumption this year. 
• Federal Reserve Chair Jerome Powell on Wednesday reaffirmed his message of higher and potentially faster interest rate hikes but emphasized that debate was still underway, and a decision would hinge on data still to be issued before the U.S. central bank’s policy meeting in two weeks. 
• The ADP Employment Change Report in the US showed private sector payrolls rose by 242,000 jobs in February, above forecasts calling for a 200,000 gain, while the prior month’s figure was upwardly revised to a 119,000 increase. The report, which does not include government hiring and firing, comes ahead of Friday’s broader February nonfarm payroll release, expected to show headline employment rose by 224,000. The unemployment rate is forecasted to remain at 3.4% and average hourly earnings are projected to rise 0.3% month-over-month and be up 4.7% year-over-year. 
• US President Joe Biden is proposing a series of new tax increases on billionaires, rich investors, and corporations in his latest proposal for how Congress should prioritize taxes and spending. Biden’s budget request to Congress, which is slated to be released Thursday, calls for a 25% minimum tax on billionaires, according to a White House official familiar with the proposal. It would also nearly double the capital gains tax rate for investment to 39.6% and raise income levies on corporations and wealthy Americans. However, the proposal has little chance of passing Congress, particularly now that Republicans control the House of Representatives. 
• In other employment news, the Labor Department’s Job Openings and Labor Turnover Survey (JOLTS), a measure of unmet demand for labour, declined to 10.82 million jobs available to be filled in January, above estimates of 10.55 million, and versus December’s upwardly revised level of 11.23 million. The report showed the hiring rate was 4.1%, up from December’s 4.0% level, and total separations—including quits, layoffs, discharges, and other separations—remained at December’s 3.8% rate. The quit rate for January dipped to 2.5% from the prior month’s 2.6% pace. 

• The Netherlands, home to ASML Holding, is preparing restrictions on certain chipmaking machines amid pressure from the US to clamp down on China’s access to critical semiconductor technology. A new proposal would rein in exports of so-called immersion DUV lithography products, adding to restrictions that already exist for the most cutting-edge lithography machines, which are critical to producing the world’s most advanced chips. The rules are expected to be published before the summer, according to a letter sent by the government’s minister of foreign trade to lawmakers on Wednesday.   
• United Parcel Service Inc. yesterday reiterated its 2023 guidance for revenue, operating margin, capital expenditures, and free cash flow. 
• Adidas on Wednesday reported a big Q4 loss and slashed its dividend after the costly termination of its partnership with Kanye West’s Yeezy brand in October.  The German sportswear giant posted a Q4 operating loss of €724 million and a net loss from continuing operations of €482 million.  The company will recommend a dividend of €0.70 per share at its May 11 AGM, down from €3.30 per share in 2021.