February 15, 2017

Markets Today: Beware the ides of March

Reaction to Fed Chair Yellen’s semi-annual testimony before the senate triggered a sell-off in US Treasury yields and a broad USD rally as she left the door open for a rate hike as soon as the next FOMC meeting in March.

US equities initially wobbled, dragged lower by the rate sensitive utility sector, but they have now recovered and look set to end the day higher between 0.15%- 0.35%.

In line with previous comments, Dr Yellen  noted “waiting too long to remove accommodation would be unwise, potentially requiring the FOMC to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession”. She also noted that if job gains and rising inflation continue as the Fed expects, an increase in the benchmark federal-funds rate likely would be appropriate “at our upcoming meetings,”. In regards to potential changes to fiscal policy, the Fed Chair reiterated her view that it is too early to know, noting that most Fed officials “have taken the view that they want greater clarity about the size, timing, and composition” of fiscal policy before factoring its impact in their forecast.

Ahead of Yellen’s testimony the USD was trading with a soft tone and UST yields were essentially range bound following yesterday’s news of the resignation of Trump’s National Security Adviser Michael Flynn. But reaction to Yellen’s testimony triggered a selloff in UST yields and a broad USD rally. 10y UST initially jumped from 2.4376% to 2.50% and have settled around 2.47%.  2y UST climbed 3bps to 1.23% and OIS pricing for a March rate hike nudged up slightly from 9bps to 10bps. Meanwhile more than two full hikes are now priced for this year, some 57bps (previous close was 54bps).

The USD index is up 0.36% and the currency is stronger against most G10 with AUD and CAD the two exceptions. The AUD is once again at the top of the leader board, up 0.13% seemingly still basking in the sun following yesterday’s solid NAB business survey. The report showed Conditions jumped a solid 6 points to +16 in January, while confidence also rose, up 4 to +10, both clearly above their long term average. GBP and JPY are at the bottom of the pile, down 0.44% and 0.39% respectively. UK CPI figures were expected to show 1.9% y/y but actual print was 1.8%; lower than US, China and Germany despite last year’s Brexit vote. Meanwhile, the move lower in JPY was consistent with its inverse relationship with longer dated UST yields.

As for commodities, it has been a bit of a mixed night. Iron ore had a quiet day, down 0.6%, but it is still trading above $91. Oil prices are up between 0.6% and 0.8%, gold is unchanged at $1223.6 and copper is down 1.5%.

Fed Lockhart (none voter) said that he could easily be persuaded 3 hikes would be appropriate in 2017, but he doesn’t see compelling reason for a March hike. Meanwhile Fed Kaplan (voter, hawk) said the US is making good progress toward full employment and inflation near its 2 percent goal. He then added that if you wait to see evidence of overheating, you’ve probably waited too long.

Coming Up

This morning RBA’s chief economist, Alexandra Heath, gives a speech and participates in a panel at the ABE Forecasting Conference in Sydney. Yours truly will be attending and hopefully we get some interesting snippets on how the RBA goes about its forecasting as well as further colour on the Bank’s glass half full outlook on the economy. Australia’s monthly consumer confidence reading and new motor vehicle sales are also out this morning.

There are no major Asian data releases on the roster today and the UK labour market report is the highlight in Europe. The UK unemployment rate is expected to have remained unchanged at 4.8% in December and importantly for the BoE, weekly earnings are also seen unchanged at 2.7%. Following the softer than expected CPI print overnight we probably need to see a big upward surprise in weekly earnings to pose any challenge to the current policy stance by the BoE.

Fed Chair Yellen delivers her Testimony before the House Financial Services Committee. The speech is expected to be an almost exact replica to her Senate testimony, but there is always the potential that we may learn something new in the Q&A session.

Meanwhile it is going to be a busy day of US data releases with CPI (Jan), retail sales (Jan), industrial production (Jan) and Empire Manufacturing (Jan) all due out tonight. The median forecast in Bloomberg suggests a 0.2%m/m Core CPI print should be expected resulting in a 2.1% y/y reading, down from 2.2% in the previous month. Retail sales ex autos likely rose by 0.4% versus a 0.2% rise in the previous  month and industrial productions was probably flat dragged, lower by a sharp drop in utility output thanks to warmer than usual weather.


On global stock markets, the S&P 500 was +0.24%. Bond markets saw US 10-years +3.05bp to 2.47%. In commodities, Brent crude oil +0.59% to $55.92, gold+0.4% to $1,229, iron ore -0.6% to $91.71, steam coal +0.0% to $79.90, met.coal -0.9% to $161.50. AUD is at 0.7652 and the range since yesterday 5pm Sydney time is 0.7618 to 0.7696.

Good luck.

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