Marketmind: Interminable anxiety

A look at the day ahead in U.S. and global markets from Mike Dolan.

U.S. inflation is not falling fast enough, the Federal Reserve is stamping its foot and the assumed ‘terminal’ interest rate in this brutal monetary policy tightening cycle is climbing upwards once again.

The net impact of Tuesday’s sticky U.S. inflation report for January and the red hot employment readout for the same month has been to catapult market pricing of both peak Fed rates and where they’ll be at year-end well above 5% and above where even Fed guidance had been late last year.

Deutsche Bank, for one, has raised its U.S. terminal rate forecast by half a percentage point to 5.6% since the CPI release, with some market players already mulling the chance that even 6% now comes on the risk radar.

And as one of the leading doves on the Fed’s policymaking council – Vice Chair Lael Brainard – is set to depart the central bank later this month, her colleagues seem happy for markets to look ever higher for the rates summit.

“Clearly there are risks that inflation stays higher for longer than expected, or that we might need to raise rates higher” than current forecasts, said New York Fed President John Williams, adding that a year-end rate between 5.0% and 5.50% was “the right kind of framing”.

The about-turn in rates markets in just two weeks has been extraordinary – with Fed funds futures pricing moving from a terminal rate as low as 4.8% to 5.26% on Wednesday. Year-end pricing has moved above 5% too. Two-year Treasury yields soared to a 3-month high of 4.64% on Tuesday – where current Fed rates sit – and only gave back a fraction of that on Wednesday.

The dollar extended gains against Japan’s yen and the pound but was restrained against the euro by speculation the European Central Bank faces a similar rethink on inflation and rates that’s also pushing up where its peak tightening might be.

U.S. stocks held up remarkably well on Tuesday – helped by hopes recession fears are easing even as rate speculation intensifies. But futures and world stocks in general were feeling the heat today.

U.S. January industrial production and retail sales data are now the next gauge of what’s happening on the ground in the U.S. economy.

Sterling slipped as UK inflation fell faster than expected last month, even though the annual inflation rate remains in double digits.

Despite many banks benefiting from the higher interest rate environment, Britain’s Barclays has proven an outlier and its shares dropped almost 10% on Wednesday after a dire 2022 earnings update.

Barclays reported a 14% fall in full-year pre-tax profit as earnings were pole-axed by surging costs, a collapse in deal fees and multi-million dollar fines relating to an administrative blunder.

There was better news on the inflation front in energy markets. Oil dropped for a second day on Wednesday, as an industry report pointed to ample supplies in the United States and anticipation of further rate hikes sparked concerns over weaker fuel demand and the economic outlook.

Warren Buffett’s Berkshire Hathaway, meantime, slashed its stake in Taiwanese contract chipmaker TSMC as well as in some banks in the fourth quarter, while bolstering its holdings in Apple Inc.

Berkshire cut its position in Taiwan Semiconductor Manufacturing Co – roughly three months after it said it had bought more than $4.1 billion worth of the stock.

Key developments that may provide direction to U.S. markets later on Wednesday:

* U.S. Feb NAHB housing index, Empire manufacturing index, Jan retail sales, industrial production, Dec business inventories, Dec TIC Treasury holdings data

* European Central Bank President Christine Lagarde speaks in European Parliament

* U.S. Treasury auctions 20-year bonds* U.S. corp earnings: Cisco, Analog Devices, Marathon, AIG, Equinix, Kraft Heinz, Biogen, Albemarle, ROBLOX, Zillow, Roku, Rollins, EQT, Synopsys

(By Mike Dolan, editing by Emelia Sithole-Matarise; mike.dolan@thomsonreuters.com. Twitter: @reutersMikeD)