January 19, 2017

Markets Today: Walking back to happiness

It’s been a reversal back to USD strength overnight – including a late session kick along from the Fed Chair, more on that below - the Bloomberg spot dollar index up 0.35% before she stepped up to the plate, and another ½% since.

Most major crosses are bearing losses from the re-rising USD.  The mantle has gone to the CAD that was down 1.05% earlier in the session, USD/CAD up from less than 1.31 to over 1.32 (and since Yellen seeing more buying to the mid 1.32s) as the press conference from BoC Governor Poloz kept the prospect of another rate cut alive.  Canadian short term bond yields rallied against what has been a heavy US Treasury market, 2y Treasuries up 5.7bps and 10s up a chunky+8.8bps, at 2.41%.After touching 0.7565 a little earlier in the NY session, the AUD/USD pulled back down to 0.7535 and has given back another 10-20 points since Yellen’s speech, now at 0.7518.

Having rocketed back to hit 1.24 after PM May’s speech, Sterling spent yesterday retracing some of those gains.  That retracement was interrupted in the wake of a better than expected UK labour market report for December revealing somewhat stronger earnings growth and less employment attrition than expected.  Later in the session, Cable has also succumbed to the stronger USD.

The US data set of the December CPI and Industrial Production and January NAHB Home Builders index were not too far at all from expectations, least not reasons to drive any new dollar enthusiasm.  The CPI headline and core were bang on expectations(0.3%/2.1% for headline and 0.2%/2.2% for core CPI), IP was two tenths better in December but came with a negative revision, while the home builders’ optimism index missed slightly, though at 67 (69 expected) remains very upbeat.  While not shooting the lights out, it didn’t dislodge the recovering US economy story either, from what was seen.

In the last hour, the Fed has released its Beige Book regional review of the US ahead of the February 2 FOMC.  It very much played to the positive continued growth story, one of a tightening labour market and signs of rising wages and inflation story, adding some USD support and weakening Treasuries.  Businesses and contacts reported signs of rising price pressure, firms were optimistic about the outlook this year and even in areas reporting some layoffs, most businesses were adding to employment, on balance.

Fed Presidents Kaplan (Dallas) and Kashkari (Minneapolis), both voters this year have been speaking. Kaplan said the Fed should be raising rates in a gradual, patient manner and that it would be healthy to have a balance sheet debate sometime in 2017 (discussion of winding back QE/the Fed’s balance sheet).  He also said more balance will be needed between monetary and fiscal policy.  (We are going to hear a whole lot more about that this year.)  Kaplan is tilted to the more hawkish end of the policy spectrum.  Kashkari said we don’t know enough about Trump policies to alter forecasts, but made no monetary policy comments in his speech.

As we go to press, Fed Chair Yellen has been speaking in San Francisco on “The Goals of Monetary Policy and How We Pursue Them”.  Wire service headlines are carrying such quotes as US near maximum employment and inflation is moving toward its goal, rates will creep higher, not rise dramatically, it makes sense to gradually reduce monetary policy support, that the Fed is close to its dual goals but can’t give the timing of the next hike, and a warning that rates delay risks a “nasty surprise”.  That last one sounds about as hawkish as we’re likely to see from the Fed Chair.

In the immediate aftermath of those grabs hitting the wires, the USD has been bought further.  The AUD/USD has pulled back to 0.7527, with most of the major crosses seeing similar directional moves.  In the commodity space, iron ore was back up, as were base metals in London, but oil and gold were back down.

Coming Up

The main event in our time zone today is the December Labour Force report at 11.30.  We have no model disposition to suggest this is likely to be biased more likely as an especially weak or strong headline.  It’s not to say it necessarily won’t work out that way, it’s just that our models are not suggesting a big correction one way or the other.

NAB’s short-term labour market models point to an increase in employment of 13K (market +10K), sufficient with an unchanged participation rate to keep the unemployment rate steady at 5.7%.  The range of forecasts on employment is -21/+30K, while the range on the unemployment rate is 5.6%-5.8%.  The main interest we suspect will be whether the report plays into the soft/weak full-time employment story or not.  Before employment comes the BNZ/Business NZ Manufacturing PMI (8.30 AEST), NZ Building Permits (8.45), and the NZ ANZ Consumer Confidence survey (11.00).

Tonight, in the European session is the ECB meeting and what ECB President Draghi has to say in his press conference, followed by US Housing Starts, Jobless Claims, and the Philly Fed survey for January.  (The second speech from Yellen comes at midday AEST tomorrow.)


On global stock markets, the S&P 500 was +0.07%. Bond markets saw US 10-years +8.41bp to 2.41%. In commodities, Brent crude oil -2.47% to $54.1, gold-0.6% to $1,205, iron ore +0.6% to $82.05, steam coal -0.8% to $83.85, met.coal +0.0% to $190.00. AUD is at 0.752 and the range since yesterday 5pm Sydney time is 0.7535 to 0.7565.

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Markets Today – It’s oh, so quiet

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US and European markets have begun the new week a subdued mood. But core global bond yields are showing some life, lower across the board while the USD is a tad softer too

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