Today’s Podcast

Phil Dobbie asks NAB’s Gavin Friend whether they could lift bond yields, particularly given low interest in this week’s big auctions from the Treasury.  Gavin also explains why the UK’s jobless figures are not as bad as they seem, how Brexit talks are reaching the pointy end, and what will be the consequences of yesterday’s rising wages data in Australia.

https://soundcloud.com/user-291029717/whos-buying-bonds-is-britain-really-losing-jobs-are-aussie-wages-really-growing

Overview

• Initial dovish take on the January Fed Minutes boost equities and push the USD and UST yields lower
• Move is quickly reverse, suggesting concerns that the Fed thinking could have evolved since then
• AUD is the biggest loser, down almost 1% and currently trading at 0.7811

Initial reaction to the Fed minutes was on the dovish side putting the dollar under pressure amid a rally in UST yields. The dovish take also boosted US equities, but as type these initial moves look to reversing. The UST yield curve is steepening led by the back end of the curve and USD indices are stronger after dropping about 0.30% immediately after the Minutes release.

Markets were essentially marking time ahead of the Minutes and as seen in previous days, the USD was still on its slow but merry way higher. US equities were also edging a little bit higher while UST yields were essentially going sideways. All that changed post the Minutes, several officials acknowledged an upgrade to their growth and inflation forecast, but the killer line was  that only  “a couple” of officials were worried about the possibility that the economy would overheat. So the market initially run with the idea that even though there has been a mark up to the growth and inflation outlook, no more fruit juice will be added to the punch bowl anytime soon. In the end, however, common sense appears to have prevailed, our take is that the Minutes reflect events prior to the jump in hourly earnings seen in the January Jobs report and also prior to the extra spending bill passed by Congress  early in February. This would suggest that there is a good chance that  the current  FOMC thinking has evolved towards a more hawkish tone since. Today we have a lot of Fed speakers and next week’s Fed Chair Powell testimony before Congress will be important in this regards.

So looking at the post Minutes market reaction in more detail, US equities are up between 0.20% and 0.67%, although immediately after the Minutes the S&P 500, DJ and the NASDAQ were all up by more than 1%. The UST curve has bear steepened, as we type the 10y rate is at 2.95% and the 2y rate is at 2.27%, a week ago the 2 year rate was 10bps lower at 2.16%.

After a sharp drop immediately post the Minutes, the USD is up across the board. In index terms DXY is up almost a full 1% over the past 24hr and now trades above the 90 mark for the first time since February 12^th. In G10, AUD is the worst performer, down 0.94%. The pair currently trades at 0.7811, after briefly trading to an overnight high of 0.7879 just after the Minuets were released.

GBP is the second biggest loser, down 0.54%. The pound initially fell after the UK labour market report showed the UK unemployment rate unexpectedly ticking up and employment grew less than expected.  On the positive side, UK wages data surprised on the upside.  The GBP then moved higher after hawkish comments from BoE Chief Economist Haldane who said the risks around their most recent projections were to the upside while “the long-awaited – and we have been waiting for a long time – pickup in wages is starting to take root.”  BoE Governor Carney, speaking in front of the Treasury Select Committee, wouldn’t be pinned down on when he expected the next BoE rate rise, but the market places around an 80% probability it will be in May.  All this gains have essentially reversed post the Minutes and cable now trades at 1.3921, close to the intraday lows.

The euro was under a little bit of pressure prior to the Fed Minutes amid softer EU PMI data. The Flash February German and French PMI data revealed activity in both manufacturing and services rolled over, leaving the impression that although activity levels remain very elevated, the best has past. That said Euro Zone composite PMI eased from 58.8 to 57.5, so the reading remains comfortably in expansionary mode. The euro traded to an overnight high of 1.2359 after the Minutes, but now is down to 1.2288, a level not seen since Valentine’s day.

NZD and CAD have shown a bit more resilience, nevertheless both currencies are down around 0.3% against the USD. The kiwi now trades at 0.7324 and the Lonnie is at 1.2695.

Looking at the commodity space, oil prices have come under pressure post the Minutes on the back of a stronger USD. WTI is now -1.1% and Brent is -0.35%. Meanwhile, Copper, steam coal and iron ore are a little bit stronger at 0.20%, 0.29% and 0.27% respectively.

Coming Up

• New Zealand credit card spending is the data highlight in APAC this morning. At midday Sydney time, Fed Kashkari speaks in Minneapolis and then late this afternoon Fed Governor Quarles speaks on the Global Economy in Tokyo.
• Fed Kaskari has been a dissenter in recent Fed rate hike decisions, but after the jump in hourly earnings in the January jobs report (0.3 %mom, reflecting an annualized rise of 2.9%), he noted that “with the jobs report, we saw a little hint that wages might finally be rising”. Kashkari is still a dove, but he is showing signs that as the data continues to improve, he might be willing to change his tune.
• The UK gets the CBI retail sales report and Q4 GDP data,   the IFO survey is out in Germany and then today’s big ticket comes courtesy of the ECB  with the release of the Accounts of its Jan 24-25 meeting. We don’t expect major surprises from the ECB, but given with the ongoing uncertainty over the future policy path, the Accounts/Minutes will be carefully read.
• Initial jobless claims are out in the US, Canada releases retail sales figures and Fed Dudley and Bostic are on speaking duties.

Market prices

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