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Traders convinced the Fed’s easing cycle starts in March

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We move past the US CPI and PPI releases and the market has become even more convinced that the Fed’s easing cycle starts in March, with a 25bp cut priced for every meeting from this starting point.

Bond yield curves are steepening

Yield curves are steepening, driven by the short-end where US 2-year Treasury yields fell for six straight days, losing 23bp on the week.

US 5-year real rates (i.e. US 5-year Treasury adjusted for expected inflation over the coming 5 years) have printed new cycle lows and sit at the lowest yield since May ’23.

Some have stated the case that the US CPI print gives the Fed less scope to ease in March. Perhaps, but when we take the components from CPI and PPI that feed into the core PCE calculation (released on 27 January), and we’re looking at an estimate of 0.2% mom, which sees the 6-month annualised rate of core PCE around 2%.


Federal Reserve rate cuts

Given core PCE is what the Fed set policy to – bingo, we have a clear justification as to why the bond and rates market feels March is the starting point.

Tuesday’s speech from Fed member Christopher Waller will be one of the key focal points this week, where we recall he set off the rally in late November with definition on a timeline and a path to cut rates, which essentially started the Fed pivot and the year-end risk rally.

With talk of an earlier start to Quantative Tightening tapering and lower relative US bond yields, it’s a surprise that the USD is holding in so well with the DXY tracking a sideways range of 102.70 to 102.10.

On the week, the GBPUSD was the best performer in G10, with price pushing 1.2800, while the Brazilian Real (BRL) got spoils in the Emerging Markets FX space.

Nikkei 225 up 6.9% last week

Gold has seen somewhat of a renaissance against this backdrop though, where on the 4-hr chart price closed above the recent downtrend, where on the daily price closed above the 5-day EMA. A weak US retail sales could offer renewed life for gold bulls and see price target 2075.

It’s been a mixed picture in equity land, with much focus on the Nikkei225 gaining a massive 6.9%. The risk-to-reward trade-off suggests refraining from new longs and waiting for some of the heat to come out of the move. An RSI of 80 aside, 87% of stocks are above the 50-day MA, and 68% of stocks closed at a 4-week high. A sign of euphoria and a signal for contrarians or solid participation and therefore bullish? I favour the latter.

US stocks to be hampered by options expiry?

While US earnings continue to trickle in and the US election process officially kicks off in Iowa, China takes centre stage once again with retail sales, Q4 GDP, and property sales. China/HK equity remains challenged, but the tape is turning, and shorts are seeing signs that we may be turning from a trend position to one of trading a consolidation, where range trading in the CHINAH, HK50 and CN50 may be the strategy. We’ll see but if the data comes in softer, or we don’t see the level of monetary policy easing that’s priced, then frustration will likely see renewed selling flows.

The set-up in US equity indices look balanced with 2-week risk – the risk bulls will naturally want the S&P500 to clear 4800 and the NASDAQ100 through 17k, but with options expiry across the VIX, index and single stock plays this week, one questions if we see a higher volatility post expiration. An obvious consideration for your risk management.

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This article does not constitute investment advice. Do your own research or consult a professional advisor.

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