After what has been a solid month for equities and bond investors, month end flows have probably play their part in the price action overnight, US equities have lost momentum, UST have led a rise in core global bond yields and the USD is stronger. US and European inflation releases favoured the notion the Fed and ECB are done with their respective tightening cycles.
Markets Today: Fed hikes back on the radar
Two Fed officials suggesting Fed hikes could be coming sooner rather than later.
It was a quite start to the holiday shortened week with European equities closing marginally lower while US equities have ended marginally higher. Other markets were also quiet, however we did have two Fed officials suggesting Fed hikes could be coming sooner rather than later (see more below).
Yesterday’s rally in Chinese equities failed to boost other markets with the rest of Asia closing flat to marginally lower. The Shanghai composite index ended the day 2.2% higher following news that controls on margin lending were loosened. The news was somewhat surprising, not only because it was unexpected, but also given the PBoC warnings over the weekend that the country’s corporate debt levels were too high.
In currencies, the USD has continued to recover some of its lost ground post the FOMC announcement last week. The big dollar is marginally stronger against 9 of the g10 currencies with the Swedish Krona technically the only outperformer, up a whopping 0.04%. The AUD is practically unchanged and the GBP is at the bottom of the leader board, down 0.63%. The resignation of Duncan Smith on Friday, a senior member of the UK government and pro-Brexit supporter as well as a report from the Confederation of British Industry that Brexit could cost Britain GBP100 bn and a million jobs weighed on the GBP.
The USD appreciation was also supported by a modest rise in US treasury yields. The move higher in yields appears to have been propelled by comments from two Fed officials advocating for Fed hike sooner rather than later. Fed Lockhart (non-voter) said that US data may justify a move as soon as April, waring that inflation was being kept artificially low due to falling oil prices and a stronger dollar. Lockhart also predicted that consumer prices would rise “significantly” as soon as oil prices stabilise. Lockhart upbeat assessment on the US economy was also shared by Fed Williams (non-voter). In an MNI interview, Williams said that “assuming everything else is basically the same and the data flow continues the way I hope and expect, then April or June would definitely be potential times to have an increase in interest rates,”
Looking at commodities, oil prices look set to end the day marginally higher, boosted by a report from a private data provider noting that oil inventories at the key US delivery hub in Cushing, Oklahoma, declined last week. Iron ore has climbed another 2.3% and is just under $59. Gold is 0.9% lower at $1243.3 and the CRB index is unchanged at 176.6.
US existing home sales were the only notable data release. The February numbers were disappointing (5.08m vs 5.31m exp), however the figures were dismissed with many expecting a rebound in the spring.
Today’s domestic highlight comes courtesy of the RBA. Governor Stevens is speaking at the ASIC’s annual forum and while no title is available for the speech, we know that he is speaking at 4.15pm (AEDT) and that the topic is likely to be somewhere along the lines of Australia’s ability to withstand a major global shock.
We suspect, however, the real focus for market participants will be on whether the Governor takes the opportunity to jawbone the currency. The AUD/USD is currently trading just under 76c, it has appreciated 11% since it reached a low of 0.6827 in mid- January and it is four cent above the level where RBA Board Member John Edwards recently noted that the currency was still a “bit too high”. Given the sense of market anticipation, if the Governor passes on the opportunity to talk the currency lower, this could be the catalyst for the AUD to move another leg higher.
In terms of data releases, in Australia this morning we get the weekly consumer confidence reading and the ABS releases its own measure of house prices. Both are unlikely to be market movers.
In offshore markets, the all industry activity index (Jan) and small business confidence survey (Feb) are out in Japan and it’s a busy day in Europe where the preliminary manufacturing and services PMI readings for France, Germany and the Eurozone are slotted for release. While still in expansionary mode, both Eurozone PMIs have declined in recent months and it will be interesting to see if further momentum has been lost in March (see chart below). The ZEW and IFO Surveys for Germany are also due for release and in the UK we get the CPI reading for February.
On the other side of the Atlantic, the US releases its FHFA House Price Index (Jan) and the March edition of the Richmond Fed Manufacturing Index is also out. Fed Evans (non-voter) is speaking in Chicago, but at the time of writing there was no tittle to his speech.
On global stock markets, the S&P 500 was +0.10%. Bond markets saw US 10-years +4.41bp to 1.92%. On commodity markets, Brent crude oil +1.07% to $41.64, gold-0.9% to $1,244, iron ore +2.3% to $58.82. AUD is at 0.7581 and the range was 0.7569 to 0.7627.
The 2016 Euromoney FX poll is now open for voting and may be accessed at www.euromoney.com/FX2016
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