The global "risk on" melt-up continues.
After a modestly hawkish Yellen warned that every meeting is live, and refused to take March off the table, sending the dollar and yield higher and the S&P to fresh record highs, world stocks rose hitting a 21-month high on Wednesday with the dollar rising for the 11th straight day, the longest positive streak since July 2015.
Yellen's comments renewed expectations in some quarters for the Fed to raise rates three times in 2017 rather than twice. The futures market did not share this view amid doubts about the U.S. economy's ability to sustain three hikes.
Yellen left the possibility of a March move open but at the same time that wasn’t particularly surprising and in any case there was no great guidance on timing of the next hike. As DB's Jim Reid summarizes In terms of the specifics, Yellen repeated that “waiting too long to remove accommodation would be unwise, potentially requiring the FOMC to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession”. Yellen also said that “incoming data suggest that labor market conditions continue to strengthen and inflation is moving up to 2%, consistent with the Committee’s expectations”. She added that “at our upcoming meetings, the Committee will evaluate whether employment and inflation are continuing to evolve in line with these expectations, in which case a further adjustment of the federal funds rate would likely be appropriate”. When quizzed on the Fed’s balance sheet strategy Yellen said that the Fed will provide further guidance “in coming months” but that any shrinkage would be “an orderly process”. The Chair also confirmed that it still too early to know what fiscal policies will be put in place under the new Trump administration and that “we are not basing our judgements about interest rates on speculation” about fiscal policy.
"At the margin, you could say that Yellen's comments were probably tilted slightly toward to the hawkish side given her upbeat comments around the economic outlook," said Jim Reid, markets strategist at Deutsche Bank.
Propelled by record highs on Wall Street, MSCI's benchmark global equity index rose 0.25% to 442.4 points, its highest since May 2015 and two points off its record high. It has not fallen for six sessions, its longest such run since last July.
“A lot of big investors had doubts about this Trump rally, and are now scrambling to unwind negative positions and turn bullish,” Stephane Barbier de la Serre, a strategist at Makor Capital Markets in Geneva told Bloomberg. “It’s risk-on again, thanks to Yellen.” Before Yellen’s testimony, traders expected an increase in U.S. borrowing costs in June. Now they see one as early as May, according to futures data compiled by Bloomberg, further boosted by soaring inflation "exports" coming out of China.
Yellen's remarks helped push Wall Street by boosting U.S. bank stocks. Goldman Sachs hit a record high, and is up 37% since the U.S. presidential election. Banks elsewhere also led gains in global stocks as traders awaited U.S. inflation data at 8:30am that looks poised to further strengthen the Federal Reserve’s resolve to raise interest rates. Treasuries fell for a fifth day and the dollar extended its advance, nothing its longest winning streak in almost five years after Yellen said on Tuesday the Fed would probably need to raise rates at an upcoming meeting and that delaying could leave the central bank's policymaking committee behind the curve.
European banking shares advanced the most three weeks, tracking peers in the U.S., as the prospect for tighter monetary policy boosted the profit outlook for lenders who’ve been contending with near-zero rates for years. The yield on 10-year Treasuries held at a two-week high. Copper climbed amid stoppages at the biggest mines. Financials also led the way in Europe, with Credit Agricole up more than 3 percent after France's biggest retail bank beat forecasts with a smaller than expected earnings drop in the fourth quarter.
MSCI's broadest index of Asia-Pacific shares outside Japan was up 0.7 percent, rising to its highest since July 2015. Japan's Nikkei added more than 1 percent, buoyed by a weaker yen.
The dollar index against a basket of major currencies chalked up its longest winning streak since May 2015. It was up 0.2 percent at 101.220 near a four-week high of 101.380 scaled overnight. According to CME Group's FedWatch data, U.S. interest rate futures implied a higher than 30% chance of at least three increases this year, little changed from the previous day - though the chance rose above 40% immediately after Yellen's comments. "That kind of rate re-think is dollar-friendly, but too timid to derail the risk rally that starts in U.S. equities and spreads into emerging market currencies," said Kit Juckes, head of FX strategy at Societe Generale in London.
The dollar was supported as U.S. Treasury yields rose on Yellen's comments, with the benchmark 10-year yield climbing four basis points to an 11-day high of 2.50 percent the previous day. They were last at 2.475%.
Meanwhile, the stronger dollar weighed on crude oil prices. WTI was down 0.5% at $52.91 a barrel and Brent shed 0.4% to $55.75 a barrel. Crude was already under pressure the previous day after API reported a nearly 10 million rise in inventories. In other commodities, spot gold was off 0.15 percent at $1,225.91 an ounce. Copper on the London Metal Exchange CMCU3 rose to $6,068 a tonne but relinquished much of that rally to stand slightly higher on the day at $6,036. The metal has enjoyed support recently following a strike at the world's biggest copper mine in Chile that took it to a 1-1/2-year high above $6,200 a tonne on Monday.
It’s a packed calendar in the US, with most of the focus will be on the January CPI report while last month’s retail sales numbers will also be closely watched. The market expects headline retail sales to have increased +0.1% mom but core ex-auto sales to have increased +0.4% mom. Also due out in the US will be industrial and manufacturing production, empire manufacturing, NAHB housing market index and business inventories. Away from the data Fed Chair Yellen will deliver a likely repeat of her testimony to the House Financial Services Committee. Fed officials Harker (1pm ) and Rosengren (1:10pm) are also scheduled to speak today. On the politics front Israel PM Netanyahu is due to meet with President Trump today, while Trump is also expected to meet with the heads of large US retailers which could be interesting.
Bulletin Headline Summary from RanSquawk
- European equities enter the North American crossover modestly higher with financials leading the way
- USD remains on the front foot against the JPY and EUR, and although struggling to garner any fresh momentum
- Highlights include U.S CPI's, DoE Crude Oil Inventory and comments from Fed Chair Yellen, Fed's Rosegren and Harker
Market Snapshot
- S&P 500 futures little changed at 2,336.50
- STOXX Europe 600 up 0.4% to 371.54
- German 10Y yield rose 0.6 bps to 0.372%
- Euro down 0.2% to 1.0554 per US$
- Brent Futures down 0.5% to $55.67/bbl
- Italian 10Y yield rose 0.8 bps to 2.233%
- Spanish 10Y yield fell 1.0 bps to 1.657%
- MXAP up 0.8% to 144.51
- MXAPJ up 0.7% to 465.81
- Nikkei up 1% to 19,437.98
- Topix up 1% to 1,553.69
- Hang Seng Index up 1.2% to 23,994.87
- Shanghai Composite down 0.2% to 3,212.99
- Sensex down 0.6% to 28,166.37
- Australia S&P/ASX 200 up 0.9% to 5,809.07
- Kospi up 0.5% to 2,083.86
- Brent Futures down 0.5% to $55.67/bbl
- Gold spot down 0.1% to $1,226.63
- U.S. Dollar Index up 0.2% to 101.43
Top Global News via BBG
- Fortress Exits Decade in Public Spotlight With SoftBank Buyout
- Trian Targets Procter & Gamble, Discloses New $540 Million Stake
- Buffett Cashes In $1.8 Billion Deere Stake as Shares Surge
- Elliott Adds New Stakes in Arconic, Adient, Platform Specialty
- Jana Partners Adds Stakes in Salesforce, Aetna, Sells Twitter
- Apple Said to Weigh Chinese Supplier for Next-Gen iPhone Screens
- Boeing’s Fortunes Brighten as Trump Warms to Value of Ex-Im Bank
- U.K. Unemployment Falls as Labor Market Edges Nearer ‘Full Capacity’
- Dollar’s Advance Versus Yen on Yellen Runs Into Exporter Offers
- Twitter CEO Jack Dorsey Buys Shares After Post-Earnings Slump
- Aetna to Pay Humana $1b Fee After Judge Blocked $37b Merger
Asia equities traded higher on continuation of the heightened risk sentiment from Wall Street where stocks edged fresh all-time highs once again as financials outperformed amid a hawkish testimonial from Fed Chair Yellen. ASX 200 (+0.9%) was also led by the financial sector after Australia's largest bank CBA reported a record high H1 profit, while Nikkei 225 (+1.1%) surged on JPY weakness after USD/JPY breached the 114.00 level to the upside. Meanwhile, Shanghai Comp. (+0.4%) and Hang Seng (+1.4%) were also higher as participants digested the latest lending data in which Aggregate Financing surpassed estimates and New CNY Loans rose to the 2nd highest on record, while the PBoC also injected funds via reverse repos and its medium-term lending facility. Finally, 10yr JGBs were uneventful overnight and saw minor gains despite the increased risk sentiment as the BoJ's presence in the market kept 10yr JGBs afloat, while the curve was mixed with outperformance in the short-end. PBoC injected CNY 50bIn 7-day reverse repos, CNY 20bIn in 14-day reverse repos and CNY 50bIn in 28-day reverse repos, while the PBoC were also reported to be injecting funds via its Medium-term Lending Facility.
Europe stocks rose after strong earnings from the likes of Credit Agricole and Heineken helped push EU bourses higher this morning. Financials are outperforming with the latest hawkish comments from Fed chair Yellen coupled with the earnings from Credit Agricole helping financials to be the best performing sector. In fixed income markets Bund futures have been trending lower as yields reach weekly highs in the German benchmark. The German/Greek 10Y spread has also widened today after holding around 710bps, the 10Y Greek outright is currently trading at 7.60% with the next real resistance at 8%.
Top European News
- Credit Agricole Shares Rise as Consumer-Banking Profit Climbs
- Danone Plans Cost Clampdown as Profit Growth Set to Slow (1)
- Natixis Charged in France Over Subprime Statements in 2007
- Warburg Said in Advanced Talks to Buy Tata Technologies Stake
- Italy Euro Exit is Unlikely, Might Lead to Default: Moody’s
- Credit Suisse May Not Need Capital Raise or Swiss IPO, UBS Says
In currencies, the Bloomberg Dollar Spot Index climbed 0.2 percent, climbing a fifth day for the longest run of gains since May. The USD remains on the front foot against the JPY and EUR, and although struggling to garner any fresh momentum, continues to grind higher as UST yields stay strong. In the 10yr, there is some resistance developing at 250bps, coinciding with 200bps in the 5yr and this is translating into resistance strengthening ahead of 115.00 in USD/JPY. Add market nervousness over protectionist policy, and one can see the reluctance in fresh demand coming through at current levels.As such, EUR/USD is proving a more viable USD route given the election risk in both Holland and France, but here we are now looking to support levels ahead of 1.0500 — 1.0530 and 1.0510 stand out. The pound extended Tuesday’s decline with a 0.3 percent drop to $1.2433 after the latest jobs report saw average earnings growth dipping, and this will have implications on disposable income amid the inflationary impact of a weaker currency rate. The claimant count fell significantly, but the ONS reported heightened volatility in the experimental series from the roll out of the universal credit system. South Africa’s rand was the biggest gainer in a basket of 17 major currencies, climbing 0.5 percent against the dollar.
In commodities, oil dropped below $53 a barrel as U.S. industry data showed crude stockpiles expanded, signaling a worsening inventory overhang. WTI futures fell 0.5 percent to $52.94. Gold slipped 0.2 percent to $1,225.67 an ounce. Copper rose 0.2 percent in London to $6,036 a ton as UBS Group AG said the rally has “more to go” amid mine supply disruptions and rising Chinese demand. After some fresh gains in base metals, some moderation coming in on the back of the modest USD push higher, which has impacted on commodities across the board. Looking at Gold, we continue to see a range developing inside USD1200-1250, with USD direction hampered by the uncertainty over Trump trade (and foreign) policy measures ahead. Gains in Copper have seen prices return through USD2.70, bolstered by the prospect of drawn out wage negotiations at Chile's BHP Billiton Escondida mine. Nickel also firm as the Philippine president supported his environment minister's decision to cancel contracts for undeveloped mines. WTI prices still contained inside well worn ranges with the surge in API inventories last night causing a move back under $53.
Looking at the today’s calendar, it’s a packed calendar in the US. Most of the focus will be on the January CPI report while last month’s retail sales numbers will also be closely watched. The market expects headline retail sales to have increased +0.1% mom but core ex-auto sales to have increased +0.4% mom. Also due out in the US will be industrial and manufacturing production, empire manufacturing, NAHB housing market index and business inventories. Away from the data Fed Chair Yellen will deliver a likely repeat of her testimony to the House Financial Services Committee. Fed officials Harker (1pm ) and Rosengren (1:10pm) are also scheduled to speak today. On the politics front Israel PM Netanyahu is due to meet with President Trump today, while Trump is also expected to meet with the heads of large US retailers which could be interesting.
US Event Calendar
- 7am: MBA Mortgage Applications, prior 2.3%
- 8:30am: Empire Manufacturing, est. 7, prior 6.5
- 8:30am: US CPI MoM, est. 0.3%, prior 0.3%
- US CPI Ex Food and Energy MoM, est. 0.2%, prior 0.2%
- US CPI YoY, est. 2.4%, prior 2.1%
- US CPI Ex Food and Energy YoY, est. 2.1%, prior 2.2%
- US CPI Core Index SA, prior 249.9
- US CPI Index NSA, est. 242.5, prior 241.4
- Real Avg Weekly Earnings YoY, prior 0.23%
- Real Avg Hourly Earning YoY, prior 0.8%
- 8:30am: Retail Sales Advance MoM, est. 0.1%, prior 0.6%
- Retail Sales Ex Auto MoM, est. 0.4%, prior 0.2%
- Retail Sales Ex Auto and Gas, est. 0.3%, prior 0.0%
- Retail Sales Control Group, est. 0.3%, prior 0.2%
- 9:15am: Industrial Production MoM, est. 0.0%, prior 0.8%; Capacity Utilization, est. 75.4%, prior 75.5%; Manufacturing (SIC) Production, est. 0.2%, prior 0.2%
- 10am: NAHB Housing Market Index, est. 67, prior 67
- 10am: Business Inventories, est. 0.4%, prior 0.7%
- 4pm: Net Long-term TIC Flows, prior $30.8b; Total Net TIC Flows, prior $23.7b
Central Banks
- 10am: Fed Chair Yellen Delivers Semi-Annual Testimony to House Panel
- 1pm: Fed’s Harker Speaks in Philadelphia
- 1:10pm: Fed’s Rosengren to Address NY Assoc for Business Economics
- 7:15pm: Fed’s Dudley Speaks in New York
DB's Jim Reid concludes the overnight wrap
No Valentine’s Day heartbreaks from the Fed then after Janet Yellen pretty much stuck to her well versed script at yesterday’s Congressional testimony in front of the Senate. At the margin you could say that her comments were probably tilted slightly towards to the hawkish side given her upbeat comments around the economic outlook. 2y and 10y Treasury yields edged up 3.3bps and 3.4bps respectively with the former closing at the highest yield (1.236%) in three weeks. The US Dollar (+0.29%) firmed for the tenth day in a row while the implied March rate hike probability crept up to 34% from 30% using Bloomberg's calculator.
Indeed the possibility of a March move was left open but at the same time that wasn’t particularly surprising and in any case there was no great guidance on timing of the next hike. In terms of the specifics, Yellen repeated that “waiting too long to remove accommodation would be unwise, potentially requiring the FOMC to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession”. Yellen also said that “incoming data suggest that labour market conditions continue to strengthen and inflation is moving up to 2%, consistent with the Committee’s expectations”. She added that “at our upcoming meetings, the Committee will evaluate whether employment and inflation are continuing to evolve in line with these expectations, in which case a further adjustment of the federal funds rate would likely be appropriate”. When quizzed on the Fed’s balance sheet strategy Yellen said that the Fed will provide further guidance “in coming months” but that any shrinkage would be “an orderly process”. The Chair also confirmed that it still too early to know what fiscal policies will be put in place under the new Trump administration and that “we are not basing our judgements about interest rates on speculation” about fiscal policy.
So all-in-all a fairly straight bat approach. Risk assets had generally been trading with a soft tone leading into the testimony but reversed with gains for financials as Yellen spoke. In the end the S&P 500 (+0.40%), Dow (+0.45%), Nasdaq (+0.32%) and Russell 2000 (+0.31%) indices all notched up another day of simultaneous record highs. The S&P 500 Financials index also rallied +1.24% while it was widely noted that shares in Goldman Sachs closed above the pre-financial crisis high and at the highest closing price ever. Credit indices in the US also reversed course with CDX IG closing 0.5bps tighter by the closing bell after initially being a similar amount wider. The VIX fell another -3% to close at 10.74 which is only a smidgen above the low mark of last month (10.58). It was a similar story in Europe too with the Euro Stoxx vol index falling just over 1% to 14.64 and back to within a whisker of the two and a half year low set last month of 14.60. That’s after the Stoxx 600 closed +0.02% yesterday.
Away from the Fed, another theme in markets over the past 24 hours has been the steady stream of inflation data released around the globe. One which caught our eye was the data out of Switzerland where we saw the first positive YoY print (+0.3% for January) since August 2014, or 29 months. It’s not quite the 54 months of producer prices deflation that China experienced (which ended 5 months ago and hit +6.9% yoy in January) but it is an interesting development all the same. Other inflation data out yesterday included the UK where we saw the YoY headline rate hit +1.8% which was a little less than the +1.9% expected, but the highest since June 2014 (although the core did stay flat at +1.6%, albeit at the joint highest since August 2014) while the January reading in Germany was confirmed at +1.9% yoy and the highest since July 2013.
Today the mantle passes to the US where we’ll also get the January inflation numbers, amongst a deluge of other data which we highlight at the end. Market consensus for the headline is a +0.3% mom increase in consumer prices which would have the effect of lifting the YoY rate from +2.1% to +2.4%. The consensus for the core is +0.2% mom and +2.1% yoy (from +2.2%). Our US economists expect both the headline and core readings to come in at +0.2% mom. That data is out at 1.30pm GMT.
This morning we’ve seen the rally for financials continue in Asia which in turn is helping to drive bourses higher. The Nikkei (+1.15%), Hang Seng (+1.19%), Shanghai Comp (+0.31%), Kospi (+0.47%) and ASX (+0.91%) have all posted decent gains while US equity futures are a touch higher. Sovereign bond markets are generally weaker with the exception of JGB’s where 10y yields are 1bp lower at 0.079%.
Staying in Asia, shortly after we went to print yesterday the latest bumper credit numbers were released in China. The data revealed that total social financing set a new monthly record at RMB3.74tn, breaking the previous high in January last year. The data also showed that RMB loans went up by RMB2.0tn in January (on 19 working days). While that is smaller than the record RMB2.5tn in January last year it is still a very fast expansion by historical standards. Our Chief Economist for China concludes that this data suggests that the PBoC as yet might not have a firm handle on shadow banking activities and financial leverage risk. In the short-term it implies upside risk to his forecast of GDP growth of 0.6% qoq in Q1, but this credit growth is likely to trigger "mini hikes" on lending facility and reverse repo rates, and potentially loan quotas to contain credit growth. He thinks that the PBoC is still unlikely to hike the benchmark lending and deposit rates, as this might be viewed as too strong a signal (in his view the probability of a hike would rise if CPI inflation was to surpass 3.0% yoy, but he sees this risk as more likely in H2 than in the near term).
Wrapping up the remaining data yesterday, in the US headline PPI came in a little above market in January at +0.6% mom (vs. +0.3% expected) largely driven by surging energy prices. The ex-food, trade and energy reading rose +0.2% mom as expected. Meanwhile the NFIB small business optimism reading last month was up a modest 0.1pts to 105.9 and so extending the 12 and a bit year high. In Europe we also had some important GDP data to digest alongside all the inflation reports. GDP growth in Germany was confirmed at +0.4% qoq in Q4 which was a little softer than expected (+0.5% expected). That means that annual growth has held at +1.7% yoy. That was also the case for aggregate Euro area GDP which also came in at +0.4% qoq for Q4 and a tenth below expectations. Meanwhile, industrial production for the Euro area was particularly soft in December with production down a sharp -1.6% mom (vs. -1.5% expected). The final data was the German ZEW survey which came in at 76.4 for the headline in February, downfrom 77.3 in January.
Staying in Europe, another poll released in France yesterday (Ifop poll) showed a slight tightening in the gap between Macron and Fillon in the first round. The poll showed Macron’s support was stable at 19.5% but support for Fillon edged up to 18.5% from 18%. Socialist candidate Hamon’s support also remained stable at 14.5% while Le Pen’s share fell slightly to 25.5% from 26%. It’s worth noting that the fifth potential candidate, Jean-Luc Melenchon, is holding a rally today in Strasbourg.
The only other notable news from yesterday concerns Italy where various press reports suggest that Italy is in talks with European authorities about a possible €5bn bailout of two Veneto-based regional lenders. The banks concerned are Veneto Banca and Banca Popolare di Vicenza with the FT reporting that the country is supposedly already in talks with Brussels about using the same mechanism as that used for the rescue of Monte.
Looking at the today’s calendar, this morning in Europe the most notable data will come from the UK where we’ll get the December and January employment numbers. The latest trade balance reading for the Euro area is the other data out this morning, while we’ll also get the latest monetary policy outcome from the Riksbank (no change expected). It’s a packed calendar in the US this afternoon. Most of the focus will be on the aforementioned January CPI report while last month’s retail sales numbers will also be closely watched. The market expects headline retail sales to have increased +0.1% mom but core ex-auto sales to have increased +0.4% mom. Also due out in the US will be industrial and manufacturing production, empire manufacturing, NAHB housing market index and business inventories. Away from the data Fed Chair Yellen will deliver a likely repeat of her testimony to the House Financial Services Committee. Fed officials Harker (6pm GMT) and Rosengren (6.10pm GMT) are also scheduled to speak today. On the politics front Israel PM Netanyahu is due to meet with President Trump today, while Trump is also expected to meet with the heads of large US retailers which could be interesting.