- QT Talk Weighs on Risk Appetite
- Equities, Cryptos and Cross-JPY Dumped
- Market Sensitivity to Upcoming US Data Heightened
Quicker Return To QT
Markets have been taken by surprise (me included) by the depth of the discussion surrounding balance sheet normalisation, in other words, quantitative tightening. Among the key headlines from the minutes, some members observed that “the balance sheet could potentially shrink faster than last time if the Committee followed its previous approach”, this is a result of the current weighted average maturity of the Fed’s Treasury holdings being shorter than previously. Additionally, “almost all participants agreed that it would likely be appropriate to initiate balance sheet runoff at some point after the first increase in the target range for the federal funds rate” with the runoff happening closer to liftoff compared to 2018, where the runoff took place 2yrs after liftoff.
Now while the talk of QT has stepped up in recent weeks (as mentioned yesterday) and a reminder that Powell did mention it in his presser, my view is that markets were caught out by how much was discussed, particularly with Fed Officials signalling that QT is on the way sooner than what many had expected. With 2018 still fresh in the mind regarding QT, equities have taken a hit taking cross-JPY and cryptos with it as Europe digests the minutes. Although, I suspect we see a reprieve heading into the US session.
S&P 500 Struggled in 2018 When Fed Embarked on QT
US Data to Watch
Going forward, this will likely increase the market sensitivity to the upcoming US data, particularly with money markets raising bets of a March rate hike. Yesterday’s ADP smashed estimates at 807k vs exp. 400k. However, as I have said previously, the predictive value of ADP for NFP is tenuous at best, but it does hold relevance for how markets may position themselves in anticipation of the NFP report. As such, the bar is set high for NFP to surprise on the upside.
ADP Link with NFP is Tenuous
Elsewhere, ISM Non-Manufacturing PMI will garner attention, particularly the prices paid component, after the sizeable drop in the Manufacturing PMI prices paid index. Should we see a similar drop in today’s release, expectations that inflation is close to its peak will likely rise and thus provide reprieve for US fixed income as well as equities.