A further slowing in growth
The US dollar continued to rise after the FOMC rate decision yesterday and Janet Yellen’s more Hawkish tone.
Yesterday’s US Fed meeting continues to reverberate across financial markets, driving US Treasury yields and the US dollar higher, and giving inspiration to today’s title courtesy of Jimmy Barnes (your love keeps lifting me higher & higher). Equities also joined in to the moves last night with investors seemingly reassured of the prospects of stronger US economic growth even if interest rates are moving higher.
While we wrote about the FOMC yesterday, there are two points worth emphasising here. The first is that the Fed’s forecast track for rates points to three rate hikes in 2017 where previously it was only two. And second, only ‘some’ members had incorporated a change in fiscal policy settings to their projections. That means the Fed has not really incorporated much of the anticipated Trump Administration’s infrastructure and tax policies into its forecasts – this is important as these policies are seen as inflationary given the US is close to full employment. Reinforcing this notion, Fed Chair Yellen in her press conference yesterday noted that “fiscal policy…could potentially affect the economic outlook” and that “fiscal policy is not obviously needed to provide stimulus to help us get back to full employment”.
Given broad US dollar strength (the US dollar was up 1.0% overnight), all G10 currency pairs were lower overnight. The Aussie outperformed, down only 0.6%. Some of that outperformance relates to the headline Aussie jobs figures yesterday which rose 39.1k m/m against expectations of a 17.5k increase. Your scribe cautions that all those gains were concentrated in QLD, with the details being less positive and supporting the notion of some loss of momentum occurring in the larger non-mining states of NSW and Vic. Other currency moves were broadly in line with the US dollar with Euro down 1.1%, Pound down 1.0% and the Kiwi also down 1.1%.
US Treasury yields were broadly unchanged overnight, but have surged 15 basis points since the FOMC meeting yesterday to be at 2.59% (note they did reach a recent high of 2.64). Most government bond markets took their lead from the moves in US Treasurys yesterday, with German Bunds up 6.4 bps to 0.37%, UK Gilts up 10.2 bps to 1.49%, and Australian CGS also up 7.9 bps to 2.87%.
While you would have thought equities would have sold off in the event, equities were also higher. The S&P500 rose 0.4%, while equity markets in Europe were also positive with the DAX up 1.1% and the FTSE up 0.7%. Financial stocks continue to outperform in the US, with the financial sub-index up 1.2% helped by the background of less financial regulation under a Trump Presidency.
Strong economic data likely helped reinforce the view of prospects of stronger US growth. Regional manufacturing indices were very positive with the Philly Fed at 21.5 from 7.6 – a considerable lift and also evidence of momentum building in manufacturing. Homebuilder sentiment also was very strong, recording its strongest reading since July 2005. Low levels of US jobless claims reinforced the view of the US being close to full employment, while on target US CPI will mean inflation will likely pick-up to the Fed’s target (core CPI was 0.2% m/m as expected with the core measure running at an annual pace of 2.1%). Not to be outdone, the Euro flash PMIS were as expected, with better numbers coming in from France, while UK core retail sales outperformed -up 0.5% against expectations of a flat read.
Finally the Bank of England and Norway’s central bank met yesterday, both holding rates steady as expected. The BoE noted that the recent rally in the Pound, up some 6% since the start of November, would “point to less of an overshoot in inflation relative to the target in the medium term”. While Norway’s central bank continues to note that there is a slightly higher probability of a cut than a hike in the year ahead.
A very quiet day ahead with no Australian data. Australian focus today will be on Monday’s Mid-Year Budget Update and the possibility of any credit rating downgrade. S&P and Moody’s said yesterday that if there was a clear case for a downgrade or leaving as is, then that decision could be made fairly quickly – if not on Monday when MYEFO is released then in the few days before Christmas.
Across the ditch, there is the ANZ Consumer Confidence Index. Globally, the Euro area has its trade balance and monthly CPI figures for November, while the UK has CBI Trends, and US has housing starts. Fed talk resumes with the Fed’s Lacker on a panel at the Charlotte Chamber’s 2016 Economic Outlook Conference.
On global stock markets, the S&P 500 was +0.44%. Bond markets saw US 10-years +0.20bp to 2.57%. In commodities, Brent crude oil +0.22% to $54.02, gold-2.6% to $1,131, iron ore +2.9% to $81.50, St. Coal +1.5% to $88.85, Met. Coal +0.0% to $270.00. AUD is at 0.7365 and the range since yesterday 5pm Sydney time is 0.7338 to 0.7428.
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