Fed to Slower Down its Pace? Here’s What Happened on FOMC

Overall, the movements in the markets remain indecisive. Yen is staying soft after reversing all of earlier gains in the week, but holds above near-term support levels. Dollar is stuck in familiar range against European majors and commodity currencies. The hawkish FOMC minutes provided no inspiration to the greenback. While Aussie surged yesterday, there is no follow through buying so far. Traders are generally on the sideline awaiting tomorrow's non-farm payroll data from the US.

Technically, as Yen crosses are rebounding, attention will be on some near-term resistance levels, including 134.49 resistance in USD/JPY, 142.92 resistance in EUR/JPY and 162.32 resistance in GBP/JPY. As long as these levels hold, more downside is still expected in these crosses ahead. However, firm break of these levels together will argue that Yen is under some persistent selling pressure.

In Asia, at the time of writing, Nikkei is up 0.38%. Hong Kong HSI is up 1.38%. China Shanghai SSE is up 1.06%. Singapore Strait Times is up 1.54%. Japan 10-year JGB yield is down -0.0313 at 0.433. Overnight, DOW rose 0.40%. S&P 500 rose 0.75%. NASDAQ rose 0.69%. 10-year yield dropped -0.084 to 3.709.

In the minutes of the December FOMC meeting, the participants agreed that inflation was "unacceptably high". They "concurred" that inflation data showed "welcome reductions in the monthly pace of price increases", but "stressed that it would take substantially more evidence of progress to be confident that inflation was on a sustained downward path."

Also, participants noted that risk to inflation outlook remained "tilted to the upside", with possibility of "more persistent than anticipate" price pressures. Meanwhile, risks to economic activity outlook were "weighted to the downside".

Participants continued to anticipate that "ongoing increases in the target range for the federal funds rate would be appropriate". "No participant" anticipated that it's appropriate to start lowering rates in 2023. They generally observed that a "restrictive policy stance would need to be maintained" for some time. Also, "several participants commented that historical experience cautioned against prematurely loosening monetary policy."

China Caixin PMI Services rose from 46.7 to 48.0 in December, above expectation of 47.5. PMI Composite rose from 47.0 to 48.3, pointing to contraction in business activity for the fourth straight month.

Wang Zhe, Senior Economist at Caixin Insight Group said: "Both manufacturing and services sectors' supply and demand contracted due to the pandemic, with manufacturing demand taking a harder hit than in November. Overseas demand was weak, employment remained sluggish, but inflationary pressure was modest, and optimism among businesses significantly improved.

"Covid outbreaks rapidly spread across China in November, causing a number of macroeconomic indicators to fall sharply. On Dec. 7, China announced 10 new measures to further optimize Covid containment. In the short term, infections are expected to explode, which will disrupt production and everyday life. How to effectively coordinate Covid controls with economic and social development has once again become a crucial question."

Germany trade balance, Eurozone PPI, UK PMI Services final will be released in European session. Later in the day, Canada will release trade balance. US will release ADP employment, jobless claims, trade balance and PMI services final.

Oil prices rebounded on Thursday following two straight days of heavy losses amid rising Covid-19 cases in top crude importer China and growing concerns of a global economic slowdown.

Brent, the benchmark for two thirds of the world's oil, was 1.17 per cent higher at $78.75 a barrel at 9.12am UAE time, while West Texas Intermediate, the gauge that tracks US crude, was up 1.24 per cent at $73.74 a barrel.

Both benchmarks fell more than 5 per cent on Wednesday after exceeding 4 per cent declines the day before.

China, the world's second-largest economy, is grappling with its first national Covid wave, after the easing of its zero-tolerance approach last month.

Earlier this week, the International Monetary Fund's managing director warned that a third of the world's economies may slide into a recession this year.

US crude oil stocks rose by 3.3 million barrels last week, while gasoline stocks jumped 1.2 million barrels, according to market sources citing data from the American Petroleum Institute.

The indicator, which shows the level of oil and product stored, gives an overview of US petroleum demand. If the increase in crude inventories is more than expected, it implies weaker demand and is bearish for crude prices.

Minutes from the Federal Open Market Committee's December meeting showed that the US Federal Reserve would continue to fight inflation and warned that "an unwarranted easing in financial conditions … would complicate the committee's effort to restore price stability".

"Near-term anxiety over the scale of Covid-19 infections in China is weighing against an otherwise bullish market outlook," Edward Bell, a senior economist at Emirates NBD said in a research note on Thursday.

Futures have seen a sharp decline since the start of 2023, as investors continue to worry about China and the growing possibility of a recession. Based on current prices, Brent has lost about 9 per cent of its value since December 30.

Officials also acknowledged that they had made "significant progress" in moving towards a "sufficiently restrictive" stance of monetary policy, according to a statement on the central bank's website.

Last month, the Fed raised its interest rates by 50 basis points to curb inflation that hit a four-decade high in June 2022 and indicated that more increases are planned this year.

The Fed raised interest rates seven times in 2022.

The next FOMC meeting will take place on January 31 and February 1, with markets expecting an increase of 25 basis points.

On Wednesday, Swiss bank UBS said it expects Brent to trade at $110 a barrel in mid-2023, while WTI is estimated to average $107 a barrel.

China's reopening may result in oil demand hitting a "record high" in the second half of this year, the Swiss lender said in a research note.

"Meanwhile, Russian oil production should fall in 2023 due to the European Union's embargo on Russian crude and refined products," UBS strategists said.

An increase in production outside the Opec+ group of countries is expected to be modest, given years of underinvestment in new oil and gas projects, they said.

In its December oil market report, the International Energy Agency increased its global oil demand growth estimate for 2023 based on rising crude consumption in India, China and the Middle East.

The IEA expects oil demand to grow by 1.7 million barrels per day in 2023, up from its previous estimate of 1.6 million.

The Minutes from the December FOMC meeting showed that Fed members observed that a slowing of interest rate increases would allow the central bank to assess the progress on inflation and employment. Recall that the FOMC slowed the pace of interest rates increases to 50bps from 75bps the prior four meetings. However, that didn't mean they were happy with the current situation. Members are still worried about the risk of persistent inflation. Powell mentioned in his press conference that they "welcome the reduction in the monthly pace of price increase, but it will take substantially more evidence to give confidence that inflation is on a sustained downward path." In addition, the Summary of Economic Projections showed that no one expects rate cuts in 2023, as the median forecast for rates increased from 4.6% to 5.1%. As a result, participants felt that ongoing rate increases are "likely appropriate". The committee also noted the need for flexibility and optionality in policy decisions and that unwarranted easing in financial conditions could complicate their effort to restore price stability.

The US Dollar Index barely moved on the release of the Minutes, remaining within a range between 104.24 and 104.31.

However, stock traders noticed the hawkishness that the message conveyed, and the NASDAQ 100 sold off nearly 1% within the first 30 minutes of the release.

On a 240-minute timeframe, the NASDAQ 100 has been rangebound since mid-September, trading between the lows of October 13th and the 50% retracement from the highs of August 16th to the lows of October 13th, at 10440.64 and 12080.78 respectively. The hawkish Fed Minutes confirm the outcome of the meeting on December 15th, 2022. If the index continues to move lower, the first support is at the lows of December 28th at 10671. Below there, price can fall to the October 13th lows at 10440, then horizontal support dating to July 2020 at 9736.57. However, if the markets dismiss the hawkishness of the Minutes as "old news", the NASDAQ 100 could catch a bid. First resistance is at the gap opening from December 22nd, 2022, at 11114.23, then the gap fill from the prior day at 11207.38. Above there, price can move to the gap opening from the highs of December 15th, 2022, at 11591.33.

Despite the hawkishness of the FOMC Minutes, the US Dollar barely budged. However, stock markets sold off, with the NASDAQ 100 falling nearly 1% on the release. Will the downtrend continue, or will the index move towards the gaps above? It may depend on the Non-Farm Payrolls report on Friday!

Vietnam's economy was one of the best performing in Southeast Asia last year, but fears of a global recession weigh on the export-dependent nation.

The country's economy rebounded in 2022, as it recovered from the impact of the COVID-19 pandemic.

Its gross domestic product (GDP) surpassed targets and grew by 8.02 per cent, driven by exports and domestic consumption, marking the fastest pace of growth in 25 years.

Strong export performance and the recovery of domestic tourism have also contributed to Vietnam's economic growth in 2022, economists said. The numbers, however, conceal downside risks that could curtail growth this year, making life uncertain for the masses.

Some are already feeling the pinch.

Ms Bui Thi Tien, a migrant worker in Ho Chi Minh City, lost her job nearly two months ago.

She is among about half a million workers who have been laid off or seen their working hours slashed in the fourth quarter of 2022, due to softening global demand for Vietnam's exports.

"Without work, I don't have enough money to buy milk for my daughter. My husband works at a factory. He makes US$380 per month, but the income is not enough for food and rent for the whole family," she told CNA.

Finding a new job this year could prove challenging for those like Ms Tien, as experts expect demand for Vietnam's exports to slow significantly.

This comes amid major markets like the United States and Europe being hit by a cost-of-living crisis, fuelled by Russia's invasion of Ukraine.

There are also fears that China's reopening, while presenting growth opportunities, could further drive-up energy and commodity prices.

Vietnam's central bank said it will prioritise policies related to the valuation of its currency to support exports and meet the economy's credit demand.

"Our biggest political duty is to control inflation, which is set by the National Assembly at around 4.5 percent for 2023. Monetary policies aim to support further economic growth," said Mr. Dao Minh Tu, deputy governor of the Vietnam State Bank.

According to the Standard Chartered Wealth Expectancy 2022 report, which examines shifts in decisions among emerging affluent, affluent and high net worth investors, 36 percent of Vietnamese investors cited inflation as their top concern.

But cushioning Vietnam's economy from an unfavourable environment may be easier said than done.

Mr. Cuong Minh Nguyen, principal country economist at the Vietnam Resident Mission of the Asian Development Bank, said that external headwinds will further expose internal structural problems of Vietnam's economy.

"We also see a structural problem with all of the regulations, the regulatory framework of Vietnam, especially related to the disbursement of public investment," he said.

Vietnam plans to focus on public investment in major infrastructural projects to boost growth.

But this could be stymied by red tape, bottlenecks, as well as an ongoing anti-corruption crackdown that limits Vietnam's ability to disburse public funding.

"It's not just the question of how fast Vietnam can facilitate public investment, but the question is also how much Vietnam can spend and disburse the investment," Mr. Cuong said.

He also pointed to other challenges facing Vietnam's economy such as overreliance of the capital market on the banking sector, growing number of non-performing loans.

However, there is hope still, with experts saying that Vietnam might be spurred to speed up long-delayed structural reforms that would set further foundations for a market economy that further promotes the private sector for future economic expansion.

The weak start to the New Year has continued for oil. ICE Brent fell by a further 5.19% yesterday, which left the market trading convincingly below US$80/bbl. Time spreads have also weakened along with the flat price. The prompt ICE Brent spread has slipped back into a contango, after trading stronger over much of the second half of December. Chinese Covid infections are a concern for demand in the immediate term, however, the medium to long-term outlook is more constructive following the change in China's covid policy.

The oil market is looking better supplied in the near term and risks are likely skewed to the downside. However, our oil balance starts to show a tightening in the market from the second quarter through to the end of the year, which suggests that we should see stronger prices from 2Q23 onwards.

API numbers released overnight show that US crude oil inventories increased by 3.3MMbbls over the last week. Part of the build would have likely been driven by refinery shutdowns along the US Gulf Coast as a result of the extremely cold conditions seen in December. For refined products, gasoline stocks increased by 1.2MMbbls, whilst distillate stocks fell by 2.4MMbbls.

European natural gas prices have also continued their slide. TTF declined by around 10% yesterday, leaving the market at a little over EUR65/MWh- the lowest level since 2021. Mild weather has meant that storage is still looking very comfortable in the middle of winter and milder weather is expected to continue for a while longer. Interestingly, Europe is no longer trading at a premium to spot Asian LNG. In fact, Asia is trading at a premium of more than US$9/MMBtu to TTF, which suggests that we could start to see more LNG cargoes diverted towards Asia at the expense of Europe.

Demand for industrial metals is being hit by surging coronavirus infections in China following an abrupt exit from Beijing's zero-Covid policy. Any gains are likely to be capped as Lunar New Year approaches. LME copper 3M prices traded below $8,300/t while nickel prices fell by more than 4% on the day and led the declines amongst base metals yesterday.

The latest data from LME shows exchange inventories for zinc falling for a ninth consecutive day by 1.6kt to 30.5kt (the lowest level since 1989), whilst lead on-warrant stocks dropped to the lowest since 1997 as of yesterday.

Nexa Resources has halted production at its Atacocha San Gerardo open-pit zinc mine in Peru due to a road blockade by a local Machcan community. The zinc producer, controlled by Brazilian holding company Votorantim SA, said the obstruction of the road to the mine has not had a material impact on production to date. Atacocha accounts for less than 3% of the company's total zinc production.