Sentiment weighted by recession risk

Wall Street turned on the risk-off mode during Wednesday's trading. Major indices lost significantly. The Dow Jones ended the day with -1,81 percent. The SP500 lost 1,56 percent. and the Nasdaq fell 1,24 percent. This is mainly due to the disappointing data from the US. The dollar gained in the afternoon, although in the first half of the day EUR / USD pair again approached around 1,09.

Results worse than expected

Both US retail sales (-1,1%) and industrial production (-0,7%) underperformed expectations. In addition, information about plans to reduce employment by key companies hurt sentiment on the US stock market. The strong decline in producer prices should only be viewed positively (PPI 6,2 percent, PPI "core" 5,5 percent), which turned out to be the largest since the beginning of the pandemic. It can be said that fears about the risk of recession overshadowed optimism related to a possible slowdown in Fed rate hikes.

in the US debt market we are seeing a decline in profitability. The dollar, in turn, is finally traded at the same level as the day before at the end of the day. In the first half of the day, it weakened, which caused the main currency pair to temporarily rise to a level not recorded since April 2022 and approach 1,09. In the afternoon, due to data from the US, the USD was strengthening, although there is no breakthrough in EUR/USD so far.

Beige Book, published in the evening hours of our time, showed that price increases in the US should moderate next year. Sales price growth slowed down and is expected to remain moderate. The labor market remains tight and wage pressures have remained high. However, the publication of this report itself did not cause much volatility on the dollar. Bigger movement around 20:00 was visible on the indices, which throughout the session successively lost the profits earned in the previous days.

The market is pricing in a full interest rate hike.

Yesterday we received some comments from Fed representatives. We learned that Dallas Fed president Lorie Logan supports the cause of slowing down rate increasesso that the bank can better calibrate its policies to the uncertain economic outlook. However, she added that the final level of interest rates should rise to a level higher than currently assumed by the market.

Patrick Harket, president of the Fed from Philadelphia, is of a similar opinion regarding the slowdown in the pace of tightening. He stated that a hike of 25 basis points in February was appropriate. In his words, there was also a statement that the cycle should end above the 5% level. He also expressed concerns about the economic outlook for the US economy.

Cleveland Fed Chairwoman Loretta Mester said the signs of easing inflation showed that aggressive rate hikes were working as intended, but further steps were still needed to significantly reduce strong inflationary pressures. Bullard, chairman of the St. Lousi belongs to the "hawkish camp" - he calls for monetary policy to remain restrictive in 2023 and points out that the Fed should reach the 5,25-5,5% range for its main interest rate during this time.

Currently, the market is pricing in a full hike of 25 bp. February 1 and 53 bps in total. until June. Still, futures contracts indicate that in the second half of the year we will see a reduction in the cost of money by a total of 50 bps.

Source: Łukasz Zembik, OANDA TMS Brokers