This podcast is originally published at https://www.bfm.my/podcast/morning-run/market-watch/fed-rate-hikes-oil-price
The minutes from December’s FOMC meeting have been released. Tony Nash, CEO of Complete Intelligence gives us his insights on what this means for the pace of rate hikes in the US. He also gives us his views on the oil prices as black gold has fallen by 9% in the last two trading days.
In this episode of BFM 89.9’s “Morning Run” podcast, hosts Shazana Mokhtar and Wang Xiao Ning recap how global markets closed overnight and provide insight on where they may be heading. They also interview Tony Nash, the CEO of Complete Intelligence, to get his thoughts on the state of international markets and trends to watch for in 2023.
The hosts turn to their interview with Tony Nash, who is on the line to discuss the Fed’s intentions on rate hikes and the impact on the dollar. Nash mentions that the Fed’s notes from the December FOMC meeting clearly communicated that there is no expectation for a rate cut or pivot in 2023, as no participants anticipate it would be appropriate to begin reducing the federal funds rate target in 2023. Nash also notes that while markets ended higher, people will realize that there will likely be a number of 25 basis point hikes in 2023 to ensure that inflation subsides.
Wang Xiao Ning then asks Nash to explain what’s happening with the dollar, as it gave back half of Tuesday’s gains despite the hawkish FOMC minutes. Nash explains that it is not only the Fed that is affecting the dollar markets. He adds that treasury actions and hopes for a stronger China also play a role, as well as concerns about China’s slower opening, which has hit the dollar as there were hopes that an accelerating China would help to strengthen US exports and economies around the world.
The hosts then ask Nash to share his outlook on some of the trends that have dominated 2022 and how they might play out this year, specifically the Ukraine conflict and its impact on agri and metal commodities. Nash explains that if we assume no major escalation, no major drought, and a relatively status quo war continuing, he expects wheat prices to rise by 15% to 20% between now and Q2 2023, however he doesn’t expect wheat to show any rise by the end of the year and expects slight down pricing. Additionally, he expects industrial metals prices to drop as a result of the slower China open and recession expectations around the world, while oil is expected to remain relatively stable.
Overall, the podcast provides a good overview of the current state of global markets and insight into what may be coming in 2023. Tony Nash provides expert analysis on the Fed’s plans for rate hikes and the impact on the dollar, as well as trends to watch for in commodities such as wheat and industrial metals, and the ongoing conflict in Ukraine.
Transcript
BFM
This is a podcast from BFM 89.9. The Business Station.
BFM
The World Market Watch is brought to you by CIMB Preferred.
SM
BFM 89.97 06:00 a.m. on Thursday 5 January 2023. You’re listening to the Morning Run. I’m Shazana Mokhtar with Wang Xiao Ning taking you up to 10:00 a.m. This morning. But as always, let’s kick start the morning with a recap on how global markets closed overnight.
WXN
Oh, it was a much better day in the United States because the Dow was up 0.45%, and SP 500 was up by 0.8%. NASDAQ was up by 0.7%. Meanwhile in Asia, a bit of a mixed day. Nikkei was down 1.5%, Hang Seng was up by a whopping 3.2%. Shanghai was flat because it was only up by 0.2%. Same for the Straits Times Index. It was down 0.1%. And our very own FBMKLCI was down by 0.3%.
SM
So for some thoughts on where international markets could be heading, we have on the line with us Tony Nash, CEO of Complete Intelligence. Good morning, Tony. And a happy New Year to you. Now, we’re going to start with what news is coming from the US. The minutes from December’s FOMC meeting were released last night. Did they give any clues to the Fed’s intent on rate hikes in the coming weeks?
TN
Yeah, the Fed notes are communicating that hopes for a rate cut or a pivot are over-enthusiastic. So the minutes, and this is a quote from the minutes they say “no participants anticipated that it would be appropriate to begin reducing the federal funds rate target in 2023.” So there isn’t a single one. Even the doves who are on the Fed are not thinking about pulling back rates in 2023. So I think markets ended higher. But I think as that settles in, I think people are going to realize that we’re going to see a bunch of 25 basis point hikes going into 23 to make sure that inflation subsides.
WXN
Okay, but Tony, help me understand what’s happening about the dollar because the FOMC minutes were more hawkish, yet the dollar gave back half of Tuesday’s gains. What’s going on here? It’s rather strange, isn’t it?
TN
It is. I think well, if you see, sorry to say here, I think what’s happening is there’s treasury action that is reducing the dollar value. I also think that we’re not necessarily seeing the full impact hitting the dollar markets. Now, if you look a DXY, that’s mostly looking at the Euro values, of course. Right. So we’ve seen the Euro strengthen and the pound strengthen. So I think there is concern about China’s opening slower that’s also hitting the dollar because there have been hopes in the US that an accelerating China would help to strengthen, say, US exports and economies around the world. So that could be hitting the dollar. Other mechanics are happening, but I think generally it’s not necessarily the Fed that’s hitting the dollar today because I think these are just, I guess, forward-looking expectations. Nobody thought there would be a rate cut, say, in the next three months. People have really all been talking about it, say, in the six-month horizon or longer. And what you’re seeing in dollar markets isn’t necessarily reflecting Fed comments because it’s kind of long-term.
SM
And let’s take a look at some of the trends that have dominated 2022 and how that might play out this year. If we look at the Ukraine conflict, it caused massive supply shocks for Agri and metal commodities when it began last February. What’s your outlook for those same commodities as the war drags on into 2023 with really no foreseeable end in sight?
TN
Yeah, if we assume no major escalation, no major drought, those sorts of things. So a fairly status quo war continuing, we do expect things like wheat to rise to go into Q2. We expect a 15% to 20% rise between now and, say, sometime in Q2. But we don’t expect wheat by the end of ’23 to show any rise. We expect a slight down pricing in wheat by the end of the year. Industrial metals prices, because of the slower China open and because of recession expectations across the west, there is a feeling that industrial metals won’t necessarily come back in ’23. So, again, it’s a fairly moderate outlook for industrial metals. If central banks were to change their course, that would, of course, change the industrial outlook and the consumer spending outlook. But as things look now, they don’t necessarily look either industrial metals or AGS don’t necessarily look to accelerate as they did in, say, Q2 or Q3 of ’23.
WXN
Okay. The other thing I want to look at is oil prices, because on a year-to-date basis, if we look at brand crude down 9%, WTI is down 8%. That’s quite a shocker, considering it’s only 5 January. Can you help us understand what’s driving this weakness?
TN
Yeah, again, there’s been a lot of expectation that China opening rapidly would have an impact on things like jet fuel, petrol, on crude oil. And as we see that openings slow down because of rising COVID cases, there is fear that the demand side of the market won’t necessarily come back. There have also been some pieces here in the US. Come out over the last, say, a few days talking about the demand. Expectations for crude have been a little bit exaggerated. And today there was a prominent investor out saying that he expects crude to fall pretty dramatically this year. So, you know, I think what we’ve seen over the last, say, six months are expectations that going into ’23, we would see a shallower recession and we would see supply side factors that would push crude prices up. I think right now, you’re seeing investors take another look at that and question that hypothesis.
SM
A spike in oil prices would negatively affect a lot of oil-importing countries in Asia, like Japan. With the Japanese currency already under severe pressure, would this be the last straw that breaks the yen’s back?
TN
Well, I don’t think so. No. I think our outlook at Complete Intelligence is for crude to hit about $100 by, say, April. Certainly in the second quarter. I don’t think $100 or say $130 crude would hurt Japan. The BOJ and the Finance Ministry have plenty of resources to deal with. One hundred dollars to one hundred and thirty dollars crude oil. If we were to see something like $300 oil, which would be extreme and very much outside of our view, that would stress not just Japan, but it would stress a lot of countries, not just in Asia, but across the world.
WXN
But what’s your outlook for the Japanese economy, though? Because if you look at them as a country, the first time you’ve ever seen inflation rates rise, the Bank of Japan has taken a slightly more hawkish tone. So what’s your outlook for their economy?
TN
Well, yeah, I think that move in Japan, the slightly more hawkish tone was more about preparing for the next BOJ head instead of a dramatic policy change. So there was a little bit of preparation for the next person so that they could maybe change the policy slightly hawkish if they wanted to. So in general, for Japan, in terms of growth, we see the first half around one and a half, one to one and a half percent. But in the second half, we see it slowing slightly to, say, just over 1%. So in general, look at about a 1.41.31 .4% growth in 23 in Japan. So it’s not a stellar year, but it’s not a terrible year either.
SM
Tony, thanks very much for speaking with us. That was Tony Nash, CEO of Complete Intelligence, giving us his take on some of the trends that he sees moving markets in the days and weeks and for the year ahead, covering things like the Fed interest rates, oil price trajectory, as well as the outlook for the economy in Japan.
WXN
Yeah, well, the year started quite rocky, especially for oil. But I do keep hearing more and more analysts saying, look at the commodity space, especially when it comes to the metals because China is reopening. But even on a year-to-date basis, metals, actually most of them, are still down. The only ones that are up at the moment are nickel and gold, which is just up. Nickel is up 3.5%, while gold is at 1.6%.
SM
So if we take a look at some of the other headlines that have caught our eye this morning, I see that Salesforce is planning to cut jobs by 10% and close some offices after rapid pandemic hiring left it with a bloated workforce amid an economic slowdown. They hired too many people, and now they need to cut jobs to maintain their bottom line.
WXN
Okay, so let’s remind everybody, what is Salesforce? They are a cloud-based software company. They were one of the winners during the Pandemic. It was a work-from-home kind of champion. But since then, their share price has come under a lot of pressure. And I think the question is, this type of company, were they too aggressive when times were good? And the answer is yes. But it looks like they weren’t the only ones, right? Because Amazon also did it. There’s now job free. There’s no more hiring. When it comes to Microsoft, it’s the same at Meta. So I think all these technology companies are kind of looking ahead and saying, hey, the outlook isn’t so positive. So the one thing we can control is our cost. And in the US, actually firing people is extremely easy. There’s hardly any legislation or protection. So that’s what they’re doing.
SM
And a question I think everyone’s asking is, when will these job cuts start to affect the unemployment rate in the US? And that’s when we start to see the unemployment rate go up, inflation goes down. I think that’s sort of where the Fed will then maybe start to look at reducing its rate hikes or starting to cut interest rates again.
WXN
But the point is, there’s always a lag effect, right? And the question is, how long is this lag effect? And then by then, would the Fed have been overly hawkish? Would it have raised rates by so much that it has paralyzed the economy? So that’s, I think, the challenge that the Fed is facing now.
SM
Indeed. Indeed. All right, 717 in the morning. We’re going to head into some messages and when we come back, we’ll continue looking at the top stories in the newspapers and portals this morning. Stay tuned. BFM 89.9, the World Market watch, is.
BFM
Brought to you by CMB Preferred moving forward with you, visit cmbpreferred.com for their preferential services beyond banking.
BFM
You have been listening to a podcast from BFM 89.9, the business station. For more stories of the same, download the BFM app.