March 6, 2017

Markets Today: All Cried Out

Fed chair Janet Yellen sang from the same script as her FOMC colleagues before her on Friday and confirmed that ‘fairly soon’ really does means March. Fed vice-chair Stanley Fischer later chimed in with “If there has been a conscious effort” to boost expectations of a rate rise, “I’m about to join it”.

Given the residual risk of a disastrous payrolls report yet derailing a March hike, market pricing moved up only slightly (to about 80%), while Treasury yields were marginally lower where changed and the dollar fell.

In the words of Alison Moyet (et al) markets look to be ‘All Cried Out’ in fretting about a quarter point Fed rate rise next week.  At the same time, we’d note that Yellen failed to suggest any need to upgrade the inflation view this month compared to last December, or to suggest upside risk around the December FOMC median ‘dot points’ currently indicating three rate rises this year. She did acknowledge rates will likely move up faster this year than prior years, but with only one each in 2015 and 2016, this is hardly a big call.

US data wise, the non-manufacturing ISM exceeded expectations rising to 57.6 from 56.5 and with the new orders and employment sub-series both strong.

In FX the Euro was the best performing of the major currencies on Friday, ending just over 1% higher at 1.0622.  Dollar slippage aside, we’d note that in the wake of last Thursday’s rise in Eurozone CPI to 2% from 1.8% and in Germany from 2.2% from 1.9%, the pressure on the ECB from Germany to shift course is mounting.  We doubt Draghi will have much sympathy for this view (after all, higher inflation in Germany compared to the rest of the Eurozone which raises Germany’s real exchange rate is just what’s needed). That said, the notion that the ECB will be quick to scale back its QE programme early next year is gaining traction.

Also relevant to the euro’s revival (most evident in the likes of the AUD/EUR cross rate) is diminishing risk of Marine Le Pen being victorious in the April/May elections.  Indeed, a weekend poll puts Emmanuel macron ahead of le Pen even in the first round of voting, with added support seemingly being drawn from the rapidly dwindling support for Francois Fillon. He has again just been out saying he won’t stand down. Also to note is that Dutch voters appear to be turning away from Geert Wilders’ populist message.

USD/JPY finished -0.32% at Y114.04 and AUD/USD 0.32% higher at 0.7596.  In contrast NZD was Friday’s worse during the APAC session). Sterling ended NY trade slightly higher (+0.2%) despite a weaker than expected  UK services PMI (53.3 down from 54.5). In contrast the NZD was Friday’s worse performer, -0.45% to 0.7031. In EM, the Mexican peso jumped by 2.5% after US Commerce secretary Wilbur Ross said it could strengthen ‘quite a lot’ if Mexico stuck a sensible trade deal with the United States.

US stocks took Yellen in their stride with the S&P closing +0.05%, the Dow +0.01% and the NASDAQ +0.16%. The VIX fell by 0.85 to 10.96, the first time back below 11 since mid-February.

In rates 2 year Treasuries fell by 0.3bp to 1.307% (+16.2bps on the week); 5s lost 0.6bp to 2.01% (+20.5bps on the week) and 10s finished unchanged at 2.479%, back from an intra-day high of 2.52% and 16.6bps up on the week.

In commodities, gold lost $6.40 and is $30 down on the week at $1,226.50 while oil was 70-80 cents up. Iron ore lost $1.00 to $91.32 but is still $0.82 on the week. Steaming coal lost $1.25 to $80.95 while coking coal didn’t trade, last at $165.00.

Sunday’s CoreLogic’ s Weekend Market Summary showed the combined capital city preliminary clearance rate slipping marginally, to 77.8% from a final 78.4% last week and on lower volumes 2,714 down from 3,232).

Melbourne cleared a preliminary 80.4% versus 81.0% last week, the second week above 80% and Sydney a preliminary 80.5% up from a final 80.0% last weekend and the fourth consecutive week at or above 80%.

Also Sunday, China’s National Policy Committee meeting opened with an affirmation of a 6.5% GDP growth target for 2017 (vs. 6.5-6.7.0% in 2016 and an actual 6.7% reported outturn). The NPC pledges to reduce coal production by 150 million tonnes this year and steel capacity by some 50 million tons (or 18%). Whether this means more or less demand for Australian coal as local production is pared back, remains to be seen. Last year, cuts in China production (under the 272 day rule) was the key driver of the coal price rally.

Coming Up

Next week is such a big one with the promised US budget outline, FOMC, the US hitting the debt ceiling hit, the likely Article 50 triggering of the Brexit process and Dutch elections, that this week pales by comparison even though we get US non-farm payrolls on Friday. Before that the RBA tomorrow and ECB on Thursday are of interest, also China trade, FX reserves and PPI/CPI data. Today sees January Australian retail sales, expected by both NAB and the market consensus to show a rise of 0.4%.


On global stock markets, the S&P 500 was +0.05%. Bond markets saw US 10-years +0.01bp to 2.48%. In commodities, Brent crude oil +1.49% to $55.9, gold-0.5% to $1,227, iron ore -1.1% to $91.32, steam coal -1.5% to $80.95, met.coal +0.0% to $165.00. AUD is at 0.7594 and the range since Friday 5pm Sydney time is 0.7543 to 0.7598.

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