A further slowing in growth
Markets continue to digest Yellen’s speech yesterday which was seen as mildly more hawkish and positive US economic data overnight played into that view. The ECB also met last night with Draghi coming off as slightly dovish, playing down the recent uptick in inflation and remaining committed to the asset purchase program.
Draghi’s soft tone despite evidence of inflation picking up also gives inspiration for today’s title “Some Like it Hot” by The Power Station.
Following the ECB meeting last night, President Draghi reinforced notions that the ECB remains committed to its recently calibrated asset purchase program amid “no signs yet of a convincing upward trend in underlying inflation”. That comes despite the pace of headline inflation picking up – which Draghi attributed to the oil price and a further pick-up in headline inflation was expected in the near term. With Germany’s inflation rate at 1.7%, and close to the ECB’s 2% target, there is some debate amongst council members – some tentative evidence for that was seen in last week’s Minutes where it was revealed “a few members” did not support an extension to the asset purchase program – we would expect this to continue in the following months.
While Draghi’s press conference captured headlines, most of the market reaction was in relation to Yellen’s speech yesterday. The two main takeaways for your scribe here was that Yellen sees the economy as being “near maximum employment” and that she expects to increase rates “a few times a year until, by the end of 2019, it is close to…its long-run neutral rate of 3%”. That suggests she is aligned with the three rate hike camp for 2017 and the OIS market now prices a 46% chance of a Fed rate hike by March and is pricing in 2.2 rate hikes for 2017.
With that background, bond yields were mostly higher overnight. US Treasuries rose 5.5 bps to 2.48%, UK Gilts were up 7.2 bps to 1.41%, while German Bunds rose 2.4 bps to 0.38%. Aussie yields followed moves in Treasuries the previous day, up 7.7 bps to 2.76%.
The US dollar generally reflected the move in rates, with the US dollar up 0.14% overnight, and 0.5% higher since Yellen’s speech yesterday (note it did rise by as much as 0.8% on the back of dovish comment by Draghi – see above). The Yen fell 0.6% along with the CAD which was down 0.5%. The Euro was unchanged, while the Kiwi and Aussie outperformed, both up around 0.4-0.5%. The Aussie employment data yesterday had little enduring impact on the currency.
US economic data reinforced notions that the economy is near full employment levels. Weekly jobless claims fell to 234k, well below the consensus of 252k while the Philly Fed Manufacturing Index rose to 23.6 in Jan, the highest level since Nov 2014. Interestingly, the prices component of the survey leapt to 26.8 from 8.0 – the highest since July 2008 and so perhaps indicative of inflationary pressures starting to build. That now sees the US economic surprise index at its highest levels since Jan 2014.
Finally in regards to Brexit, UK PM May played into the view that she may not be as hard as a brexiter as everyone thought, noting that “I want to ensure that we can keep financial services in the City of London…I believe that we will do just that”.
As for other major markets, global equities were mostly lower overnight. The S&P500 fell 0.5%, along with the Dow. European equities were also lower with the EuroStoxx down 0.1% overnight. In commodities, the oil price rose 0.6% with WTI at $51.38 and Brent at $54.27. For Australia’s main export commodities, iron ore fell 1.3% to $81.0, thermal coal also fell down 0.8% to 83.90 while coking coal was unchanged at $190 a tonne.
Domestically there is nothing of note with all attention today on China and the US. Fed Chair Yellen speaks again at 12pm AEDT. Given the market moves already to her speech earlier in the week we do not think it will yield too much in the way of new news.
China releases Q4 GDP figures along with the key monthly partial data of Industrial Production, Retail Sales and Fixed Asset Investment – all at 1pm AEDT. It is likely the GDP figures will be in line with the expectation of 6.7% with President Xi Jinping in Davos earlier in the week noting that “GDP is expected to grow 6.7% on a year-on-year basis”. As for the other pieces the market consensus for Industrial Production is 6.1% y/y, Retail Sales 10.7% y/y and Fixed Asset Investment 8.3% y/y.
Donald Trump is inaugurated as the 45th US president today. While policy detail is unlikely in his inauguration speech, the focus of his speech will be closely watched. If Trump emphases protectionist trade policies then that could see some unwinding of the Trump rally. On the other hand, if he focuses on making ‘America great again’ through infrastructure spending then it is likely the market will react positively.
Finally there are a number of other pieces of data out that shouldn’t trouble the scorers too much. The BoJ’s Nakaso speaks in Japan, the US Fed’s Harker does likewise. The UK has Retail Sales along with Canada who also has its monthly CPI.
On global stock markets, the S&P 500 was -0.47%. Bond markets saw US 10-years +5.53bp to 2.46%. In commodities, Brent crude oil +0.54% to $54.21, gold-0.7% to $1,203, iron ore -1.3% to $80.99, steam coal -0.5% to $83.45, met.coal +0.0% to $190.00. AUD is at 0.7554 and the range since yesterday 5pm Sydney time is 0.752 to 0.7571.
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