Hot n Cold is one of Perry’s 2008 hits and is not a bad title for today’s daily. Hot events overnight include EU inflation jumping to a 4 year high of 2%, US jobless claims falling to a 44 year low of 223k and Snap, the parent company of message app Snapchat, rallying 41% on its first trading day. Meanwhile on the cold end of the spectrum, US equities look set to record their biggest daily fall in a month ( US equity indices are down between 0.30% and 0.60% ) with bank share leading the way. Most commodities also had a day to forget and although the USD is stronger across the board, the AUD is the worst G10 performer, down 1.38%.

After Fed Brainard speech yesterday, where she noted that a rate hike ‘will likely be appropriate soon’, overnight Fed Powell added his voice to a growing choir of Fed officials who are suggesting a rate hike is imminent. Powel said that “I think the case for a rate increase in March has come together, and I do think it is on the table for discussion,”. Using Fed Funds Futures or OIS, pricing expectations for a March hike are now somewhere between the 80% and 90% mark, suggesting that extremely soft US employment report next Friday is probably the only obstacle that can prevent the Fed from hiking in two weeks’ time.

The record low weekly jobless claims coupled with Powel’s comment helped UST yields continue their recent upward trend. After threatening a break below 2.30% last week, 10y UST yields are now trading at 2.49% and 2y UTS yields are at 1.31% after trading sub 1.15% last week.

The move higher in yields appears to finally be weighing on US equities while at the same time is helping the USD performed. As noted above the USD has continued its ascendency with NZD and AUD bearing the brunt of USD strength. AUD ‘s underperformance began yesterday after the softer than expected January trade balance (A$1.3bn vs A$3.6 exp.), but the move gathered momentum during the London session following a break below the 76c mark. The softness in commodities also didn’t help the AUD with aluminium, last month’s top contributor in our AUD model estimate, down 2.1% while oil fell 2% and gold gave up 1.3%.

The EUR and GBP had modest falls against the USD with EU inflation a notable data release overnight. .  Annual euro area CPI inflation jumped to a 4-year high of 2%, while the core measure remained at 0.9%. Higher headline inflation is likely to see the ECB revise up its inflation forecasts, although soft core inflation helps justify its current QE programme.  EUR is holding up close to 1.05 while GBP has steadied over recent hours around the 1.2260 mark.

Coming Up

This morning the AiG Performance of Services index is due out in Australia and New Zealand gets Q4 buildings work data, crown accounts for the seven months to January along with February’s ANZ Commodity Price Index.  RBNZ Assistant Governor, John McDermott, is scheduled to speak in Nelson, but given that his speech is not public our BNZ colleagues don’t expect anything to come from it.

The data highlight in our time zone is likely to come from Japan with both employment and CPI data due for release. The jobless rate is expected to have declined to 3.0% in January from 3.1% previously while the job to applicant ratio is seen to have climbed to 1.44 from 1.43. If so, the data will reaffirm the BoJ’s view that slowly but surely the tightening in the labour will translate into higher wages, time will tell. Meanwhile, consensus expectations see Japan’s headline inflation rising to 0.4%yoy in January from 0.3% previously. The BoJ’s preferred core measure, CPI ex fresh food, is expected to print at 0%yoy, up from -0.2% previously. Such an outcome would be slightly above the -0.2% expected by the BoJ late in January, but still a long way off from the Bank’s 2% target. So overall today’s data is unlikely to sway the BoJ from keeping its foot firmly on the easing pedal.

Europe gets its final PMI readings and Italy gets its second GDP estimate for Q4. The UK construction, services and composite PMI readings (February) should be of more interest given that we don’t get preliminary estimates and market expectations suggest the UK economy has remained firmly in expansionary mode.

Last but not least the US non-manufacturing is also out later tonight and the market is looking for an unchanged outcome relative to the 56.5 print in January. That said, ahead of non-farm payrolls next week, the employment index will also be important and last month the index came out at a solid 54.7.

Ahead of the pre FOMC hiatus starting next week, Fed Mester is on the roster this morning followed by Fed Evans and Fed Powel tonight, culminating with Fed Vice Fisher and Chair Yellen early Saturday morning, Sydney time. An affirmation by the latter two that a March hike is very much on the cards will confirm the consensus view that a soft non payrolls report next week is the only data release likely to stop the Fed from hiking this month.

Overnight

On global stock markets, the S&P 500 was -0.55%. Bond markets saw US 10-years +4.33bp to 2.49%. In commodities, Brent crude oil -2.25% to $55.09, gold-1.2% to $1,235, iron ore +1.2% to $92.36, steam coal -0.7% to $82.20, met.coal -0.6% to $165.00. AUD is at 0.7571 and the range since yesterday 5pm Sydney time is 0.7558 to 0.7682.

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• Markets Today: 3 March 2017 (PDF, 138kb)

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