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Markets Enter Winter Freeze After Fed Minutes

Markets are struggling to dig themselves out of the snow this morning as a steady tightening in financial conditions threatens to cool global demand growth and weigh on corporate earnings.

Yields inched higher and the dollar climbed after a record of the Federal Open Market Committee’s meeting at the beginning of the month, released yesterday, showed a “few” non-voters lobbying for a half-percentage-point interest rate hike, even as a quarter-point move garnered unanimous support from the core group. According to the minutes, “A number of participants observed that a policy stance that proved to be insufficiently restrictive could halt recent progress in moderating inflationary pressures”.

Speaking at a conference, New York Fed President John Williams said demand growth continued to outpace supply in the US economy, making additional policy tightening necessary. He said “Our job is to make sure that we restore price stability which is truly the foundation of a strong economy”.

The Australian dollar is recovering some ground after new data showed business investment climbing by more than expected in fourth-quarter 2022. According to the Australian Bureau of Statistics, equipment, plant and machinery spending rose 0.6 percent from the previous quarter, while buildings and structures grew 3.6 percent, suggesting that businesses turned more confident on the economic outlook.

Japan’s yen is very modestly weaker going into parliamentary confirmation hearings for incoming central bank Governor Kazuo Ueda. With recent speeches and interviews painting a fairly cryptic picture, markets are unsure on Ueda’s current views, and traders will be watching for evidence of a hawkish or dovish bias in his comments.

The British pound is hardly gaining altitude, even after hawkish comments from Monetary Policy Committee member Catherine Mann. Gilts remained relatively stable when Mann warned “Monetary policy has been insufficiently aggressive,” with “further tightening needed, sooner rather than later”. The muted reaction is likely related to the heightened state of alert already in place: yields rose sharply through the early part of February as a series of surprisingly-strong economic data releases eroded recessionary narratives, and as traders positioned for an accelerated hiking timetable.

The Canadian dollar remains on the defensive, struggling to make headway in an environment characterized by higher interest rates and declining credit availability. Few expect the Bank of Canada to narrow rate differentials against the US when it meets next on March 8.

The data calendar remains relatively light. Markets think roughly 200,000 new jobless claims were submitted in the week ended February 18, up slightly from 194,000 a week earlier. A second reading of fourth-quarter US gross domestic product is due, but the element of surprise has been largely removed. The Atlanta Fed’s Raphael Bostic and San Francisco’s Mary Daly – both non-voters – are unlikely to shed new light on the central bank’s reaction function in speeches on banking and leadership, respectively.

Tomorrow’s personal income and expenditures data is expected to a show a month-over-month acceleration in January, helping support bets on a higher terminal rate in coming months. Household incomes, consumer demand, and underlying inflation pressures all remain stronger than the Goldilocks who populate financial markets had hoped earlier in the year – and when the porridge is too hot, the dollar is too.

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