February 14, 2017

Markets Today: Crawling back to you

The message in American band Daughtry’s 2011 song later covered (with aplomb) by the Arctic Monkeys is, according to the writer, “Your significant other is in the right and just like she said it would happen, you come crawling back”

Being Valentine’s Day, this seems at least slightly prophetic, while as a market metaphor, we note that the US dollar is continuing to crawl back higher. The narrow DXY index has now risen every day since January 31st and the broader BBDXY index on each of the last seven trading days. DXY, dominated by the Euro and Yen, is now almost 1.5% off its January lows, while the BBDXY is up a less impressive 0.7%.  Gains nevertheless, after a period where many US dollar bulls were getting ready to throw in the towel on the ‘Trump reflation’ trade and already becoming evident in the likes of FX futures market positioning which has witnessed a steady erosion in ‘speculative’ dollar longs so far this year.

The nascent revival in the fortunes of the big dollar is evidently doing nothing as yet to upset the performance of the local one, now the only G10 currency to be showing a month-to-date gain against the USD. It’s up 0.78% and which means it is now up more than 1% against every major non-dollar currency (including by over 2.5% against the kiwi dollar).

In asking why, the failure of the RBA to express any overt negative opinion about its value alongside a more upbeat economic view is obviously one factor, but more pertinent is the relentless rise in the price of iron ore. Reflecting the strong showing by the Chinese futures market yesterday, the benchmark import price has jumped by 6.5% overnight to $92.23. This is its first time above $90 since August 2014 and now its highest level since July 2014.

Accompanying – or leading – the revival in the big dollar’s fortunes overnight has been a further tick higher in US Treasury yields with 10s up another 2.5bp to 2.432% and so some 10bps off their recent lows. U.S. stocks meanwhile are continuing to make new record highs by the day, the S&P500 currently 0.75% up on the Dow and other indices not far behind.  President Trump’s promise of phenomenon fiscal policy announcements in coming weeks are still resonating, with the risk of disappointment obvious.

Coming Up

Just two weeks after the December survey, this morning sees the January NAB business survey. Recall that the December survey showed conditions rising from +6 to +11, and confidence unchanged at +6.

Internationally, the first of Janet Yellen’s two semi-annual Congressional testimonies looms large, due to commence at 02:00am AEDT Wednesday (11:00am in Washington). We’d assess that the Fed chair will struggle to offer concrete guidance outside of the existing ‘gradual’ approach to reducing accommodation, given the still highly uncertain picture regarding US administration fiscal policy proposals. It’s therefore also highly doubtful she’ll move to either rule in or out the possibility of a next rate rise coming as soon as March 15 – currently afforded a 36% probability by the OIS market.

One point of focus independent of trying to read the Yellen tea-leaves regarding near term interest rate risk will be any discussion regarding plans for shrinkage and eventual normalisation of the Fed’s balance sheet. This is a topic which as we’ve seen during the 2013 ‘taper tantrum’ and last year regarding possible ECB QE tapering, can be very bond market sensitive.

We’d also guess that some Senators will be quizzing her on the prospects of (or her enthusiasm for) being reappointed to the Fed chair when her current term expires next January. And/or whether – if not reappointed – she intends to stay on as Governor (and where her term doesn’t expire for another 4 years). Expect tight-lipped diplomacy to reign.

There’s plenty else on the international calendar today besides Yellen Dallas Fed President Robert Kaplan and Atlanta Fed President Dennis Lockhart are both speaking, in the early hours of tomorrow morning (05:00 and 05:15 AEDT). Neither has offered up an opinion on the March Fed meeting of late.

The US data highlight is the NFIB Small Business Optimism survey, whose hiring index last week rose to a new post-2012 high, and producer prices.

The UK has latest inflation data, more interesting after (outgoing) MPC member Kristen Forbes last week said that “I am beginning to grow uncomfortable with the trade-off embodied in our current forecast… If the real economy remains solid and the pickup in the nominal data continues, this could soon suggest an increase in bank rate.”  The Bank of England won’t be raising rates anytime soon, but if CPI does spring an upside surprise versus consensus (+1.9%) chances are the British pound will get at least a temporary lift.

In the Eurozone, the second estimate of Q4 GDP is due, expected to be unchanged at 0.5%, and preceded by the first estimate of Germany’s contribution to that total (also expected at 0.5%, up from 0.2% in Q3).  The German ZEW survey is also due while China CPI and PPI for January is due at 12:30 AEDT.


On global stock markets, the S&P 500 was +0.62%. Bond markets saw US 10-years +2.68bp to 2.43%. In commodities, Brent crude oil -2.19% to $55.46, gold-0.7% to $1,226, iron ore +6.5% to $92.23, steam coal -0.2% to $79.90, met.coal -0.6% to $163.00. AUD is at 0.7649 and the range since yesterday 5pm Sydney time is 0.7631 to 0.7686.

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