Good morning,

Since the news from the Fed last week that interest rates are likely to rise at some point in 2023,  markets have seen fit to sell-off stocks by around 2% and increase the value of the dollar by a similar amount,  despite Fed chair Jerome Powell saying that any of the forecasting should be taken with a “big pinch of salt”.  The move higher would have included treasury yields too,  but later in the week the bond market got spooked by a big sell-off in commodities,  which are seen as a barometer for global growth,  and as such all the gains that yields had made have been erased – and then some.

Another key consideration for the Fed,  is the outlook regarding the labour market.  They are anticipating that any factors holding back the labour market are to dissipate over the coming months,  which is crucial,  as a pick-up in the supply of labour,  will have a direct impact on the inflation projection.  Current data shows that there are over 9 million job vacancies,  however job growth has been steadily decreasing recently,  even though employment is 7.6 million below its pre-Covid Level.  This will bring job data into scope,  as a key indicator to wage growth and more importantly,  inflation.

The commodity market is a volatile place at the moment,  with iron ore prices moving from record highs,  to bear market,  to bull market in the space of a month.  Other commodities have seen big movements off the back of news from China’s State Reserves Bureau that they are releasing reserves of key metals,  as well as investigating whether state owned firms are hoarding stockpiles of metals and metal futures through their overseas companies.  The fall back in commodity prices will be welcomed on the provision that they don’t start heading back higher,  particularly as raw material input costs are a key driver of producer price increases and therefore overall inflation.

Away from markets: Iran has a new Prime Minister-elect after elections saw Ebrahim Raisi take a ‘landmark’ victory.  The election has some controversy around it,  with no moderates allowed to stand and voter turnout was historically low.  Mr Raisi is currently on the sanctions list of a lot of countries and is thought to have been responsible mass executions in Iran.  Saying he’s conservative is putting it incredibly mildly and there is now concern over the return to the Iran nuclear accord,  but as he doesn’t take office until August,  there is a hope that a deal can be done with the outgoing administration ahead of the change in power and attitudes. Aljazeera has more detail.

Elections in France have shown a bit of a swing to the right,  with Conservative party Les Republicans expected to make the most gains in regional elections that have taken place over the weekend.  Emmanuel Macron’s En Marche party is expected to fall well short of their expectations,  picking up just 10% of the vote and falling into third place behind Marine le Penn’s far right National Rally party.  Voter turnout was low,  but the outcome ha been described as a “democratic slap in the face” by En Marche members.  This comes a year ahead of French national elections,  which on this basis point to a new president being the likely outcome of those.

Elsewhere in Europe:  The ECB held a three day retreat over the weekend,  their first in-person meeting of the central bank’s governing council since March 2020.  We’re yet to see too much in the way of details from it,  though they have reaffirmed that they don’t see the need to raise rates to temper inflation and they expect it to come back into line next year once the base effects and initial surge of consumer demand work their way through the data.

The driver behind last week’s movements isn’t likely to go away this week either,  as there are now a whole host of Fed members speaking throughout the week and are no doubt eager to get their individual points of view across,  rather than just stand behind the collective wisdom of the FOMC.  The market moves in the Asian and early European sessions have been fairly nuanced,  though the dollar is still on the front foot.

Have a great week.

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