Swissquote Bank: High jump, soft euro, Fed up.

March 9, 2023

Bulls in European equities didn’t’ really get washed out by the Fed hawks.

The DAX index closed higher at the wake of Powell’s first day of testimony before the Senate, which went badly hawkish on the other side of the Atlantic, looks Ipek Ozkardeskaya, Senior Analyst at Swissquote Bank, at devleopments.

The better-than-expected jump in January industrial production in Germany may have helped send the DAX higher on Wednesday, along with a further decline in the German 10-year yield from the March peak levels. 

But beyond Germany, the GDP growth in the Eurozone was null in Q4, and slowed more than expected on a yearly basis, and the European Central Bank 8ECB) won’t move a finger to boost economy, because all the European policymakers want is to abate inflation. 

The expectation is that the ECB will hike by 50bp at this month’s meeting, and also that there will be 150bp hike from now till summer.  The ECB hawks fuelled the European yields to fresh highs since the Eurozone’s debt crisis– which is fundamentally not good news for equity traders. 

Soft euro

The euro is losing ground against the US dollar, as the hawks on the other side of the Atlantic Ocean look very threatening. 

Even though a softer euro could be good for some businesses as a cheaper euro boosts sales abroad, it is obviously bad for abating inflation; it makes the cost of energy and raw materials more expensive for European businesses and boosts inflation. And rising inflation means higher rate hikes, and prospects of slower economy.

As a consequence, the European stocks should be more worried, faced with a sinking euro and rising yields.

Fed up

Fed Chair Jerome Powell’s second day of testimony was as hawkish as the first one, with one little exception.  He said that the data will determine whether the Fed would increase the pace of the interest rate hikes, BUT that ‘no decision has been made on this’ yet. 

If Powell’s intention was to cool down the 50bp hike bets yesterday, it didn’t go according to the plan. That probability went above 80% yesterday, as both the ADP report and the JOLTS data came in hotter-than-expected. The ADP printed 242K new private job additions in February versus 200K expected by analysts, while job openings in the US eased from last month’s peak, but not as much as expected.  In other words, the jobs data was again too strong to soften the Fed hawks’ hand. 

Today, investors will mostly spend the session digesting Powell’s hawkish testimony, the major shift in US rate expectations, and the strong jobs data. They will also watch the US weekly jobless claims and pray that the February NFP print doesn’t surprise to the upside as did the ADP report. 

As such, we could see some relief, and correction after two difficult days for risk assets, but investors will likely refrain from opening fresh positions before Friday’s US jobs data, because only God knows what could happen when the data falls in. Risks are two-sided, as soft data could easily spur a risk rally.