Marketmind: Wings of a Dove

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

With markets wary of just how much tough love the Federal Reserve will have to show the economy to get inflation back under wraps, the exit of one of the central bank’s leading policy doves may rankle.

U.S. President Joe Biden is expected on Tuesday to name Fed Vice Chair Lael Brainard to a top White House economic policy position, replacing National Economic Council Director Brian Deese. Biden confidant Jared Bernstein is expected to replace Cecilia Rouse as chair of the Council of Economic Advisers.

Brainard was seen as a powerful voice cautioning against over-aggressive Fed policy tightening. Her departure will shift the balance of power on the Federal Open Market Committee at a critical time as it could take months for the Senate to confirm her successor.

All other Fed governors and permanent FOMC members are viewed as hawkish on monetary policy right now, with Tuesday’s critical consumer price inflation (CPI) report now the next test of just how many more interest rate rises may be agreed before the Fed hits peak rates.

Analysts expect the headline CPI to rise 0.5% in January, with the core number seen advancing 0.4%, compared with 0.3% in the previous month, according to a Reuters poll. However, annual consumer price inflation likely eased to 6.2%, from 6.5% in December.

Revisions to December’s CPI numbers last week and recalculations around seasonal adjustments of the data mean today’s outcome is tricky to call and could see considerable market volatility.

With Wall Street stocks rallying sharply again on Monday, it appears investors are going into the number leaning on hopes of another positive surprise on disinflation.

That could cut across the rates rethink that’s followed the blockbuster January employment report and which has seen futures market pricing agree with the Fed’s central assumption of a terminal rate just above 5% around midyear.

As it stands, Fed futures now see the terminal rate at 5.2% in July, compared to the current policy target range of 4.5-4.75%, and they still factor in only about a quarter point cut to around 4.90% by yearend – something the Fed is also increasingly pushing back on.

Economists polled by Reuters over the past week reckon the Fed will raise rates at least twice more in coming months, with the balance of risks that they go even higher. Some 46 of 86 economists in the Feb. 8-Feb. 13 survey predicted the U.S. central bank will go for two more 25 basis point hikes in March and May.

U.S. stock futures and world equities were higher on Tuesday, U.S. Treasury yields and the dollar were steady to lower.

Elsewhere, Japan’s government named academic Kazuo Ueda as its pick to become next central bank governor, possibly heightening the chance of an end to its unpopular yield control policy. Ueda, a 71-year-old former Bank of Japan policy board member, will succeed incumbent Haruhiko Kuroda, whose second, five-year term ends on April 8, according to documents presented to parliament on Tuesday.

Euro zone economic growth slowed in the last three months of 2022 but avoided a contraction many had predicted for months.

In corporate news, Thyssenkrupp’s shares dropped almost 6% as the German warship-to-car parts conglomerate said operating profit fell by a third in the first quarter – in part because its wholesale business was hit by falling cost of steel.

And in investment, Allianz, one of the world’s biggest investors, said it planned to exit “alternative” investments for plain vanilla bonds.

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

* U.S. Jan consumer price index, NFIB small business survey

* New York Federal Reserve President John Williams, Dallas Fed President Lorrie Logan, Philadelphia Fed chief Patrick Harker, Richmond Fed chief Thomas Barkin all speak

* European finance ministers meet in Brussels* U.S. corp earnings: Coca-Cola, Airbnb, Marriott, First Quantum Minerals, Akamai Technologies, Devon Energy, Eversource Energy, Zoetis, Leidos, Exelon, Ecolab

Graphic 1: The Fed waits on services, https://www.reuters.com/graphics/USA-FED/INFLATION/lbpggbxgepq/chart.png

Graphic 2: CPI and wage growth, https://www.reuters.com/graphics/USA-STOCKS/dwpkdenodvm/cpiwages.png

Graphic 3: Reuters PolL-U.S. economy and Federal reserve rate outlook-Feb 2023, https://fingfx.thomsonreuters.com/gfx/polling/dwvkdenxdpm/Reuters%20PolL-U.S.%20economy%20and%20Federal%20reserve%20rate%20outlook.png

Graphoc 4: Inflationary heat persists in the UK labour market, https://www.reuters.com/graphics/BRITAIN-ECONOMY/UNEMPLOYMENT/lbvggbxmdvq/chart.png

Graphic 5: U.S. carmakers post lower revenue, higher boss’s pay, https://www.reuters.com/graphics/CAR-CEO/dwvkdemegpm/chart_eikon.jpg

(By Mike Dolan, editing by Tomasz Janowski mike.dolan@thomsonreuters.com. Twitter: @reutersMikeD)