US stocks declined amid banking sector fears and Powell's pushback against a March cut - Newsquawk Asia-Pac Market Open

• US stocks were sold throughout the session with underperformance in the Nasdaq after Microsoft and Google's earnings, while a dismal NYCB report ignited some fears on the regional banking sector and saw the stock, KRE, and the Russell 2000 index tumble. Attention then turned to the FOMC where the Fed kept rates unchanged and removed the reference to possible additional rate hikes but downplayed near-term cuts.
• USD initially weakened following softer-than-expected ADP jobs data and Employment Costs but later rebounded amid a hawkish reaction to the FOMC in which the Fed unsurprisingly kept rates unchanged at 5.25%-5.50% and although the reference to possible additional rate hikes was removed, it downplayed near term rate cuts, while Powell also stated he does not think a March rate cut is likely and is not the base case.
• Looking ahead, highlights include Australian Manufacturing PMI, Building Approvals & Quarterly Business Confidence, South Korean Trade Data, Regional PMIs, Chinese Caixin Manufacturing PMI, Indian Budget, Supply from Japan.

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LOOKING AHEAD

• Highlights include Australian Manufacturing PMI, Building Approvals & Quarterly Business Confidence, South Korean Trade Data, Regional PMIs, Chinese Caixin Manufacturing PMI, Indian Budget, Supply from Japan.
• Click here for the Newsquawk Week Ahead.

US TRADE

• US stocks were sold throughout the session with underperformance in the Nasdaq after Microsoft and Google's earnings, while a dismal NYCB report ignited some fears on the regional banking sector and saw the stock, KRE, and the Russell 2000 index tumble. Attention then turned to the FOMC where the Fed kept rates unchanged and removed the reference to possible additional rate hikes but also downplayed near-term cuts.
• SPX -1.61% at 4,845, NDX -1.94% at 17,137, DJIA -0.82% at 38,150, RUT -2.45% at 1,947.
• Click here for a detailed summary.

FOMC

• Fed kept rates unchanged as expected at 5.25-5.50% and removed its reference to possible additional rate hikes but does not expect it will be appropriate to cut rates until there is greater confidence inflation is moving sustainably towards 2%. Fed said recent indicators suggest that economic activity has been expanding at a solid pace (prev. slowed from a strong pace in Q3) and the Committee judges that the risks to achieving its employment and inflation goals are moving into better balance. Fed removed the line that "tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring and inflation", while it stated in considering any adjustments to the target range for the federal funds rate, the committee will carefully assess incoming data, the evolving outlook, and the balance of risks.
• Fed Chair Powell said the economy has made good progress and inflation has eased but added the path forward is uncertain and they are fully committed to returning inflation to 2%. Powell also said the policy rate is well into restrictive territory and they have been seeing effects of economic activity and inflation, while he noted the policy rate is likely at its peak for this tightening cycle and it will likely be appropriate to begin reducing rates sometime this year if the economy evolves as expected.
• Fed Chair Powell said during the Q&A that almost everyone on the committee believes it will be appropriate to reduce rates and in theory, real rates go up as inflation goes down but can't mechanically adjust policy and does not know where the neutral rate of interest is. Powell also said they are not looking for a slide in employment, but the Fed would cut rates if they saw a weakening and in the base case where the economy is healthy with a strong labour market, the Fed can be careful as they think about the rate cut timing. Furthermore, he does not think a March rate cut is likely with a March rate cut not the base case and said it is to be seen but does not think the Fed will have enough confidence by March, while they will be data dependent taking decisions meeting by meeting and said the balance sheet run-off so far has gone very well with Fed is getting to the point where questions on the pace of the runoff are coming into focus and will have an in-depth discussion on the balance sheet at the March meeting.

NOTABLE HEADLINES

• US is to sell USD 54bln of 3yr notes (prev. 52bln) on February 6th, USD 42bln of 10yr notes (prev. 40bln) on February 7th and USD 25bln of 30yr bonds (prev. 24bln) on Feb 8th, while it announced a quarterly refunding of USD 121bln (exp. USD 121bln). Furthermore, it stated that based on the current projected borrowing needs, the Treasury does not anticipate the need for further increases in nominal coupon or FRN auction sizes beyond those announced today, for at least the next several quarters.
• WSJ's Timiraos commented via X that the employment-cost index is seen inside the Fed as the highest-quality measure of compensation growth and that Q4 data shows the labour market continued to cool.

DATA RECAP

• US Chicago PMI (Jan) 46.0 vs. Exp. 48.0 (Prev. 46.9, Rev. 47.2)
• US Employment Costs (Q4) 0.9% vs. Exp. 1.0% (Prev. 1.1%)
• US ADP National Employment (Jan) 107.0k vs. Exp. 145.0k (Prev. 164.0k, Rev. 158k)

FX

• USD initially weakened following softer-than-expected ADP jobs data and Employment Costs but later rebounded amid a hawkish reaction to the FOMC in which the Fed unsurprisingly kept rates unchanged at 5.25%-5.50% and although the reference to possible additional rate hikes was removed, it downplayed near term rate cuts, while Powell also stated he does not think March rate cut is likely and is not the base case.
• EUR gave back its early gains and briefly dipped below 1.0800 as the dollar strengthened post-FOMC.
• GBP slid to sub-1.2700 territory against the firmer buck, while the focus turns to the BoE on Thursday.
• JPY outperformed in which USD/JPY briefly tested 146.00 to the downside after recent hawkish BoJ SoO although it bounced off its lows and reclaimed the 147.00 handle as the dollar was lifted by the Fed.
• China's major state-owned banks were seen selling dollars in the onshore foreign exchange market on Wednesday, according to Reuters sources.

FIXED INCOME

• Treasuries bull-steepened after soft Employment Cost Index and banking fears, despite Fed Chair Powell's pushback of a March rate cut.

COMMODITIES

• Oil prices were lower amid the broader risk-off sentiment, a faltering Chinese economy and following a surprise build in DoE crude inventories.
• US EIA Weekly Crude Stocks +1.2M vs. Exp. -0.3M (Prev. -9.2M)
• US crude oil production rose 84k BPD in November to 13.308mln BPD (prev. 13.224mln BPD in October), according to the EIA.
• OPEC January oil output fell to 26.33mln BPD (-410k BPD from December) on new cut pledges and Libya outage, according to a Reuters survey.
• Saudi Arabia's decision on capacity was reportedly at least six months in the making based on uncertainty around the need for additional spare capacity, according to industry sources cited by Reuters.
• Saudi-Kuwaiti joint statement acknowledged the close cooperation between the two sides in the field of energy and the successful efforts of OPEC+ countries in enhancing the stability of global oil markets, according to Asharq News.
• Russia's Deputy PM Novak said current oil prices adequately reflect the market situation and oil global demand growth is widely seen at around 2mln BPD in 2024, while he added that there are currently no talks with Ukraine and EU on a gas transit deal.
• Russia's Energy Ministry said operations at the Ust Luga port terminal have been restored and the fuel market situation is stable. Furthermore, it stated that Russia cut gasoline exports outside of the ex-Soviet Union to tackle unplanned maintenance at refineries and the supply of gasoline and diesel to the domestic market is up 7% Y/Y in January.

GEOPOLITICAL

• US President Biden is being urged by Congress to leverage the nation's relationship with Qatar to help free the remaining hostages from the October 7th attack, according to Axios.
• US Secretary of State Blinken will return to the Middle East in the coming days for his fifth visit to the region since October 7th.
• White House said National Security Advisor Sullivan and Israeli official Dermer met to discuss the flow of humanitarian aid to Gaza and hostage talks, while it also said the US is not looking for war with Iran.
• IRGC chief Salami said no US threat will be left unanswered, according to Tasnim.

ASIA-PAC

NOTABLE HEADLINES

• Chinese President Xi chaired a Politburo meeting on Wednesday.
• PBoC Shanghai branch said will keep reasonable credit growth this year and it is to stabilise banks' net interest margin.
• US added companies to the defence department's list of Chinese military companies.
• US senior cybersecurity official Easterly said the US has ‘found and eradicated’ Chinese cyber intrusions in aviation, water, energy and transportation infrastructure.

EU/UK

NOTABLE HEADLINES

• ECB Chief Economist Lane said inflation is a "smaller problem" but it is still a challenge and the ECB needs more confidence that inflation is headed to the 2% target.
• ECB's de Guindos said his personal estimate is that the greater part of the tighter financing conditions, perhaps two-thirds, has been passed through to the real economy already, via an interview with Die Zeit.

DATA RECAP

• German CPI Prelim MM (Jan) 0.2% vs. Exp. 0.2% (Prev. 0.1%)
• German CPI Prelim YY (Jan) 2.9% vs. Exp. 3.0% (Prev. 3.7%)
• German HICP Prelim MM (Jan) -0.2% vs. Exp. -0.1% (Prev. 0.2%)
• German HICP Prelim YY (Jan) 3.1% vs. Exp. 3.2% (Prev. 3.8%)
• German Unemployment Change SA (Jan) -2.0k vs. Exp. 11.0k (Prev. 5.0k)
• German Unemployment Rate SA (Jan) 5.8% vs. Exp. 5.9% (Prev. 5.9%)