World stock indexes soared to record highs on Thursday while the dollar traded close to a one-month low after the Federal Reserve hiked U.S. interest rates but signaled no pick-up in the pace of tightening. European and Asian were broadly higher this morning, with S&P tagging along, driven by two main events: the latest "dovish" Fed rate hike, and the Dutch election results, in which Geert Wilders performed worse than some expected, reducing concerns of Eurozone political risk, and broadly seen as a sign of support for Europe's establishment.
As a result, the MSCI world equity index which tracks shares in 46 countries, jumped 0.7% on the day to reach an all-time high, as yields on 10-year U.S. Treasuries tumbled the most since last August.
"It was a well-prepared hike, and when you consider the fact that Yellen and Co kept the outlook for growth and inflation largely unchanged, I would call this a dovish hike," said DZ Bank analyst Rene Albrecht, in Frankfurt.
A quick recap of the Fed's announcement, starting with the dots, where the median 2017 and 2018 dots were left unchanged at 1.375% and 2.125% respectively. The longer term dot was also left unchanged at 3% while the only shift was the small increase in the median 2019 dot to 3% from 2.875%. However it is worth highlighting some of the finer details of the moves in the dots. Four of the seven below-median dots for 2018 have now moved up to the median. For 2017, previously six members expected less than 3 hikes and now only three members expect such. Five members still expect more than 3 hikes which means that the number of members expecting 3 hikes has increased from six to nine. So this suggests a stronger consensus view this year.
With regards to Yellen's press conference one of the first things the Fed Chair said was that by tightening this month, the move does not reflect a reassessment of the economic or policy outlook, while noting the minor changes in the economic projections. At the same time she also sought to highlight that the "simple message is the economy's doing well" and that "we have confidence in the robustness of the economy and its resilience to shocks". There was little new on the potential impact of fiscal policy with Yellen reiterating that there is still plenty of uncertainty and that no decisions can be based on that for now. The addition of the "symmetric" comment was also brought up in Q&A with Yellen acknowledging that inflation could shoot above 2% temporarily but that the Fed is not targeting such. Indeed she made mention to the fact that 2% is a target rather than a ceiling. Finally on the balance sheet there was little new, rather reiterating that it is an issue still under discussion.
Switching over to Europe, it was all about the Dutch election, where after having counted 93.5% of votes in the Netherlands election, PM Rutte's VVD party is to win 33 seats, Wilders' PVV is at 20 seats, while CDA and D66 parties are to win 19 seats each. Subsequently, this shows a strong win for PM Rutte's VVD party while the far-right, pro-Nexit PVV failed to meet projections. However, the PvdA (Labour Party and potential VVD coalition partner) underperformed with seats falling from 38 in 2012 to around 9 this time round. The read through from the Netherlands to France has been negative for the anti-establishment Marine Le Pen, whose overall odds of winning the French election are back under 30% for the first time in over a month.
The Dutch vote helped Amsterdam's AEX stock index climb to its highest level in more than nine years, while both Germany's DAX and France's CAC 40 hit their highest levels since mid-2015 as fears eased that the euro zone was heading inexorably towards a break-up.
"Some of that fear around Brexit, Trump, and then Wilders and Le Pen, may now be seeping out of the markets - you see some of that fear dissipating," said Arne Petimezas, analyst at AFS Group in Amsterdam, referring to far-right French presidential Marine Le Pen.
In addition to the Dutch elections, which were generally favorable for the European status quo, it was central banks that once again ruled over financial markets, as the Fed's move to raise interest rates without accelerating the timeline for future tightening sent global stocks jumping as Bloomberg notes. The dollar steadied after Wednesday’s losses while Treasuries slipped back after a two-day surge.
Rallies from Seoul to Jakarta pushed the MSCI Asia Pacific Index to the highest since mid-2015, while European shares rose a second day. Hong Kong stocks jumped the most since May as China followed the Fed in raising rates. The yen edged higher after the Bank of Japan kept monetary policy unchanged and Governor Haruhiko Kuroda failed to offer forward guidance on what would trigger a rate hike. The yield on 10-year Treasuries returned above 2.50 percent after plunging Wednesday, while gold and oil extended gains.
Yesterday's key event was the Fed which raised its benchmark lending rate a quarter point and continued to project two more increases this year. U.S. equities extended gains as Chair Janet Yellen said in a press conference that the “simple message is the economy is doing well.” Investors anticipated the tightening and Treasury yields had climbed with the dollar on speculation the central bank might signal a faster pace of tightening. Those trades unwound late Wednesday in the U.S. as the Fed indicated it hasn’t fallen behind with its efforts to keep inflation in check.
“The Fed did a good thing as they signaled they will raise rates without destroying global equity markets,” said Norihiro Fujito, a Tokyo-based senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities Co. “The Fed’s outlook hasn’t changed much from where they were in December, but the markets had gone overboard with rate hike expectations.”
In addition to the Fed, overnight there were decision from the BOJ, SNB and Norway's central bank:
BoJ kept monetary policy unchanged as expected with NIRP held at -0.10%. The BoJ voted 7-2 to maintain yield curve control with Sato and Kiuchi the dissenters. Kiuchi proposed BoJ state that inflation to be extremely slow which was defeated by 8-1 vote. BoJ maintained 10yr JGB yield target at around 0% and kept pledge to buy JGBs around current pace so that holdings rise JPY 80TN annually. BoJ also maintained its assessment that economy continues to recover moderately as a trend. Swiss SNB Interest Rate Decision -0.75% vs. Exp. -0.75% (Prey. -0.75%)
The SNB stated CHF remains significantly overvalued, outlook for Swiss economy is cautiously optimistic and the central bank will continue to remain active in FX markets as necessary. The Norges Bank likewise kepd its interest rate at 0.5% in line with expectations.
Meanwhile, China’s central bank raised borrowing costs as a stable economy and factory reflation give it scope to follow the Fed. The People’s Bank of China increased the rates it charges in open-market operations and on its medium-term lending facility.
The biggest recipient of the overnight risk on sentiment has been Europe, where initially, both the Euro and European bonds followed equities higher, with the spread between French and German 10Y bonds collapsing to the lowest since January...
... however as the European trading session progressed, the Euro faded some of its gains, which French bonds erased the strong open and German bonds slid as the Dutch election prompted an improvement in risk appetite, while the overall move was supported by yesterday’s dovish Fed outlook shift. No material follow through buying seen in France, with some investors still apprehensive over election risks, said a trader quoted by Bloomberg. In Germany, Bund futures fell, with the 10-year yield rising 4bps from the open, before bouncing from support at 159.66-60; swap spreads tighten acorss the curve, credit spreads tighter by 7bps and EuroStoxx 50 rises 1%
In equities the story was diferent, with the German DAX powering higher, up 1%, and fast approaching its lifetime high of 12,156 on what can be best described as euphoric sentiment from yesterday's events.
The Stoxx Europe 600 Index climbed 0.7 percent as of 10:25 a.m. in London. The gauge is trading at the highest level since December 2015.
In Asia, the MSCI Asia Pacific Index climbed to the highest since mid-2015. Hong Kong’s Hang Seng and the Hang Seng China Enterprises Index jumped more than 2 percent, the most since May, as China followed the Fed in raising rates. Japan’s Topix reversed an early loss after the Bank of Japan kept monetary policy unchanged. The MSCI Emerging Markets Index jumped the most since July, with benchmarks in Indonesia and Malaysia soaring more than 1.2 percent. The Australian dollar and kiwi slipped amid disappointing reports on unemployment and gross domestic product.
Futures on the S&P 500 were up 0.3% after the benchmark gauge rose 0.8% to 2,386.75 on Wednesday, the highest level since reaching a record on March 1.
Market Snapshot
- S&P 500 futures up 0.3% to 2,386.75
- Brent Futures up 1.4% to $52.53/bbl
- Gold spot up 0.4% to $1,225.30
- U.S. Dollar Index down 0.1% to 100.64
- U.S. 10Y yield 2.5257%, up 1.31%
- STOXX Europe 600 up 0.4% to 376.73
- MXAP up 1.5% to 147.86
- MXAPJ up 1.6% to 477.54
- Nikkei up 0.07% to 19,590.14
- Topix up 0.09% to 1,572.69
- Hang Seng Index up 2.1% to 24,288.28
- Shanghai Composite up 0.8% to 3,268.94
- Sensex up 0.5% to 29,542.85
- Australia S&P/ASX 200 up 0.2% to 5,785.79
- Kospi up 0.8% to 2,150.08
- German 10Y yield rose 1.7 bps to 0.432%
- Euro down 0.2% to 1.0718 per US$
- Brent Futures up 1.4% to $52.53/bbl
- Italian 10Y yield fell 3.9 bps to 2.302%
- Spanish 10Y yield fell 3.0 bps to 1.809%
Top Overnight News
- Dutch Liberals Defeat Wilders’s Party in Blow to Populist Surge
- Oil Extends Advance as U.S. Stockpiles Drop First Time This Year
- China’s Central Bank Raises Borrowing Costs in Step With Fed
- GoPro Camera Maker Cuts Jobs Again in Search of Profit
- Costco’s Private-Label Booze Helps Warm Spirits During Dry Spell
- Blackstone Said to Put Sime Darby Singapore Property on Sale
- Chevron CEO Sells $13.8 Million in Personal Company Shares
- Japan Carmakers Will Consider U.S. Policies Seriously: Saikawa
- Lufthansa Says Fare Slide to Slow as CEO Seeks Further Cost Cuts
- Swatch Sees Rebound in U.S., Europe as Watch Sales Improve
In Asian markets, stocks traded mostly higher as the region reacted to the dovish-perceived FOMC where the Fed hiked rates as expected, but kept projections mostly unchanged and Fed chair Yellen commented that the economic outlook is highly uncertain. This initially supported the ASX 200 (+0.2%) with mining names outperforming following a rally in commodities, although weakness in financials slightly clouded sentiment. Upside in Nikkei 225 (+0.1%) was limited by a firmer currency, while Shanghai Comp. (+0.4%) and Hang Seng (+1.5%) benefitted after the PBoC upped its liquidity injection to CNY 80bIn and announced a CNY 303BN Medium-term Lending Facility. 10yr JGBs tracked gains in T-notes as global yields decline post-FOMC dovish FOMC, while the curve flattened amid underperformance in the short-end. As noted last night, the PBoC conducted a CNY 303BN 1yr Medium-term Lending Facility at 3.2% and injected CNY 20bIn 7-day reverse repos, CNY 20bIn in 14-day reverse repos and CNY 40bIn in 28-day reverse repos, with the 7-day, 14-day and 28-day offer yield raised by 10bps each to 2.45%, 2.60% and 2.75% respectively. PBoC stated that the change in rates on reverse repos does not equate to a change in monetary policy and reflects market changes, while it added that there is no need to over interpret monetary tools actions.
Top Asian News
- Samsung’s New S8 Said to Adopt Facial Recognition for Payments
- Hong Kong Stocks Jump to 2015 High as Fed, China Energize Bulls
- Chow Tai Fook Adds Australia Power Firm to Property, Jewelry
- BOJ Stays the Course With Policy Unchanged After U.S. Rate Hike
- Top Indonesia Nickel Miner Seeks to Export 6 Mln Tons of Ore
- Hedge Funds’ Lost Alpha Sends $750 Million Fund as Far as Seoul
- Japan Government Denies Claim Abe Donated to Scandal-Hit School
European bourses trade higher after the FOMC rate decision and Dutch election result. Materials outperform after yesterday's aftermarket reports that an Indian business tycoon is looking to invest GBP 2bIn in Anglo American, this led shares to trade higher by 11% at the open. Elsewhere, Sainsbury's shares fell after a disappointing trading update in which like-for-like sales, which strip out new stores, fell by 0.5% in the period to 11 March. Bund weakness was put down to supply this morning, with several dealers stating they have not seen too much in the way of selling despite a 1/2 point fall at the open. Also of note today, OAT's saw some relief in early trade after some analysts noted following the Dutch elections it makes sense to sell German bonds to hedge non German supply.
Top European News
- Volkswagen Is Proving More Reliable in Court Than on the Road
- European Car Sales Growth Cools as VW, PSA Lose Market Share
- Bunds Slide as Election Premium Unwinds; Investors Fade UST Move
- Hexagon Says Rollen to Remain CEO Even as Norway Indicts Him
- Behind Trump’s Russia Romance, There’s a Tower Full of Oligarchs
In currencies, the MSCI Asia Pacific Index climbed to the highest since mid-2015. Hong Kong’s Hang Seng and the Hang Seng China Enterprises Index jumped more than 2 percent, the most since May, as China followed the Fed in raising rates. Japan’s Topix reversed an early loss after the Bank of Japan kept monetary policy unchanged. The MSCI Emerging Markets Index jumped the most since July, with benchmarks in Indonesia and Malaysia soaring more than 1.2 percent. The Australian dollar and kiwi slipped amid disappointing reports on unemployment and gross domestic product. Much of today's FX price action has been a continuation of yesterday's post FOMC sell off, where USD bulls were clearly looking for a little more hawkishness from the Fed. That Kashari dissented and voted for no change compounded the unchanged dot plot reaction, but given prospective yield differential widening ahead. USD dip buyers have not been put off. USD/JPY has tested below 113.00 and has run into fresh demand, but looking to the 2 weeks ahead, traders best be wary of sporadic JPY buying/repatriation into Japanese year end (31 March). 111.50-115.50 looks to be the near term range ahead, with the unchanged BoJ policy stance also supportive of the pair. Gains in EUR/USD saw 1.0700 taken out last night, but 1.0750 has been rejected so far despite some modest relief from the Dutch election outcome. Nevertheless, range limits likely to be test on the upside should we negotiate the French elections in the same way, with a more neutral stance at the ECB underpinning the spot rate well ahead of 1.0500 it seems.
In commodities, in the wake of the FOMC last night, where some describe the outcome as a 'dovish hike', the USD has pulled back across the board, and this has had natural consequences for commodities across the board. Gold and Silver have clearly been revived on the tight correlation with Treasuries, as risk sentiment is having less of a factor, and would be negative in any case under the current circumstances. Gains in base metals have been led by copper as the strikes in Chile look to have taken a turn for the worse, pushing prices further towards USD2.70 — trading session highs at present just shy of USD2.68. Oil prices have moved higher with WTI eyeing a move on USD50.00 again, with this week's EIA drawdown adding to the near term positive backdrop perpetuated by last night's USD weakness.
Looking at the day ahead, data due out includes February housing starts and building permits, the latest weekly initial jobless claims print, the Philadelphia Fed manufacturing survey for March and the BLS JOLTS report for February. Away from the data the ECB's Praet is due to speak again, the SNB are due to also make their latest policy decision and finally President Trump is scheduled to outline his (skinny?) fiscal 2018 budget.
US Event Calendar
- 8:30am: Housing Starts, est. 1.26m, prior 1.25m; MoM, est. 1.4%, prior -2.6%
- 8:30am: Building Permits, est. 1.27m, prior 1.29m; Building Permits MoM, est. -1.94%, prior 4.6%
- 8:30am: Initial Jobless Claims, est. 240,000, prior 243,000; Continuing Claims, est. 2.05m, prior 2.06m
- 8:30am: Philadelphia Fed Business Outlook, est. 30, prior 43.3
- 9:45am: Bloomberg Consumer Comfort, prior 50.6; Bloomberg Economic Expectations, prior 50
- 10am: JOLTS Job Openings, est. 5,562, prior 5,501
* * *
DB's Jim Reid concludes the overnight event-heavy wrap
You might want to make sure you've got your morning coffee within reach as there is no shortage of things to get through in today's EMR with a highlight reel that includes the Fed, BoJ, China and Dutch election and a final comment about how Governments are ever going to see balanced budgets again after the UK's tax raising U-turn yesterday.
There is only one place to start though and that is with the Fed. As expected a 25bp hike was delivered on the back of a 9-1 majority vote with Minneapolis Fed President Neel Kashkari the lone dissenter in favour of keeping rates on hold.
There were much more interesting snippets to come out of the summary of economic projections, statement and Yellen's press conference however. Starting with the dots, the median 2017 and 2018 dots were left unchanged at 1.375% and 2.125% respectively. The longer term dot was also left unchanged at 3% while the only shift was the small increase in the median 2019 dot to 3% from 2.875%. However it is worth highlighting some of the finer details of the moves in the dots. Four of the seven below-median dots for 2018 have now moved up to the median. For 2017, previously six members expected less than 3 hikes and now only three members expect such. Five members still expect more than 3 hikes which means that the number of members expecting 3 hikes has increased from six to nine. So this suggests a stronger consensus view this year.
Next up is the press statement and there were a few interesting subtle changes in wording. The biggest takeaway for us is the addition of "symmetric" in the passage concerning "the committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal". That seemed to prompt plenty of debate and added some contention that the Fed is happy letting inflation run past its 2% target for a while or in other words letting the economy run a little hot. Another important addition was that of the "sustained" reference in the mention of the "the stance of monetary policy remains accommodative, thereby supporting some further strengthening in labour market conditions and a sustained return to 2% inflation". This had previously been "a return to 2% inflation". The other thing to highlight from the statement was the dropping of the reference to improvements in consumer and business sentiment.
With regards to Yellen's press conference one of the first things the Fed Chair said was that by tightening this month, the move does not reflect a reassessment of the economic or policy outlook, while noting the minor changes in the economic projections. At the same time she also sought to highlight that the "simple message is the economy's doing well" and that "we have confidence in the robustness of the economy and its resilience to shocks". There was little new on the potential impact of fiscal policy with Yellen reiterating that there is still plenty of uncertainty and that no decisions can be based on that for now. The addition of the "symmetric" comment was also brought up in Q&A with Yellen acknowledging that inflation could shoot above 2% temporarily but that the Fed is not targeting such. Indeed she made mention to the fact that 2% is a target rather than a ceiling. Finally on the balance sheet there was little new, rather reiterating that it is an issue still under discussion.
Leading into the Fed, on balance it felt like expectations were tilted more for a more slightly hawkish hike than anything and instead we ultimately had Yellen reaffirm that there is no change in the Fed's thinking of the economic or policy outlook. Indeed DB's Peter Hooper made the point that it felt like the Fed was seemingly striving not to heighten market expectations of any additional rate hikes.
Over in markets the most eye catching moves post the Fed came in rates. 10y Treasury yields rallied 10.7bps to close at 2.494% and had their strongest day since June last year. 2y yields were also 7.7bps lower at 1.299% and back to the lowest level since March 1st. Given that the Fed acknowledged that they are happy letting the economy run hot and let inflation go above 2% for a while, the sharp re-pricing lower in rates suggests that there was a lot of emphasis on the fact that the dots didn't move and expectations were clearly high. EM bond yields were also sharply lower with hard currency yields in Brazil, Argentina and Mexico between 15bps and 22bps lower. The Dollar index tumbled -0.94% and weakened by the most since January 5th. EM FX was the biggest beneficiary with currencies in the likes of South Africa (+2.89%), Mexico (+2.34%) and Brazil (+2.11%) leading the way. The Aussie (+1.99%) and Kiwi (+1.83%) Dollar led the way for the G10. US credit had a bumper session with CDX IG 4bps tighter while in equities the S&P 500 (+0.84%) had its third strongest session this year. Again EM was the big outperformer though with the likes of the Brazilian Bovespa up +2.37%. The biggest takeaway from the moves in commodities was Gold (+1.73%) which rallied by the most since the UK Brexit referendum.
So with the Fed out of the way the focus has temporarily deviated over to the BoJ where the latest monetary policy meeting outcome was out this morning. Like the Fed there was no surprise on the policy front with the BoJ keeping rates at current levels and maintaining the current pace of asset purchases. It also made no change to targeting the 10y JGB yield at around 0%. The Yen has barely blinked following the move and is hovering around 113.40 while 10y JGB yields are at 0.065% and about 1.5bps lower. The Nikkei is currently +0.15%.
That's not all to report in Asia this morning however with the other significant news coming from the PBoC with the announcement that the Bank has increased borrowing costs on 7, 14 and 28 day reverse repo agreements by 10bps each. This follows a similar mini hike back in February. The PBoC were quick to mention that the mini hikes reflect market conditions rather than a change in policy. The Shanghai Comp (+0.66%), CSI 300 (+0.41%) and Hang Seng (+1.17%) were already higher prior to the news and have generally consolidated gains.
Finally, it's taken us a while to get there but the current situation in the Dutch election is that, after 93% of votes counted, the Liberal Party is on track to take 33 seats in the 150-seat lower house. The Freedom Party is on track to take 20 seats with the Christian Democrats and D66 parties on 19 seats each. That outcome for Wilders' Freedom Party is slightly worse than what opinion polls had suggested and it's expected that the Liberals will start the process of putting together a coalition today. One would expect the European session to see some relief that populism doesn't always out-perform and expectations of a Le Pen shock fade further for now.
Moving on. Yesterday was also a busy day for important US data releases. Indeed the most important of all was the February inflation data where we learned that headline CPI rose +0.1% mom and a little ahead of the 0.0% expected by the market. That puts the YoY rate at +2.7% now and up two-tenths from January. Meanwhile the core rose +0.2% mom, matching the consensus however due to base effects the annual rate slipped one-tenth to +2.2% yoy. Elsewhere, headline retail sales were reported as rising +0.1% mom in February and the core ex auto and gas print was reported as rising +0.2% mom. Both prints were in line with the market while we also got some upward revisions to the already strong January sales data. Away from that empire manufacturing printed at 16.4 for March which is a little ahead of expectations (15.0 expected) but down from 18.7 last month. Finally the NAHB housing market index jumped 6pts to 71 and the highest since June 2005. All told the Atlanta Fed is now forecasting GDP growth of 0.9% in Q1 which is down from the 1.2% estimate on Friday. That forecast continues to fly in the face of that from the NY Fed which as of Friday, was pegged at 3.2%. So a huge divergence still between the two GDP trackers.
Closer to home yesterday and ahead of the BoE meeting this afternoon, the UK's latest employment indicators painted a slightly mixed picture. In the three months to January the ILO unemployment rate fell one-tenth to a new low of 4.7% while the claimant count also continued to fall in February. Wages growth was softer than expected however with average weekly earnings only climbing +2.2% yoy in January versus +2.6% in December. Expectations was for +2.4%. Meanwhile in France headline CPI in February was revised up one-tenth to +0.2% mom.
Staying with the UK, the Chancellor yesterday made a remarkable U-turn over a policy in last week's budget to increase taxes on self-employed people. On a macro angle one wonders how on earth you're ever going to balance the books when any tax rise is reversed a week later. As we said last week the UK still forecasts an annual budget deficit out to 2021 (at least) which will make it 20 in a row. The graph from last Thursday's EMR showed that the UK is by no means alone on this. Government deficits are now so ingrained in our way of life it's hard to remember that through most of peace time history before the last 40 years budgets were pretty much always balanced.
Looking at the day ahead, there's another reasonably full diary ahead of us. In Europe this morning the early data will be the final February CPI revisions for the Euro area. After that all eyes turn to the BoE meeting around midday. As a short preview, DB's Mark Wall is expecting the BoE to maintain its neutral bias. At the margin, global growth and fiscal policy may be more supportive of the UK economic recovery than expected in February. However, evidence of the real income shock on household consumption is beginning to appear and there is no need for the BoE to front run the triggering of Article 50. As such the MPC can afford to leave the monetary policy stance unchanged until it updates forecasts again in the May inflation report.
Over in the US this afternoon data due out includes February housing starts and building permits, the latest weekly initial jobless claims print, the Philadelphia Fed manufacturing survey for March and the BLS JOLTS report for February. Away from the data the ECB's Praet is due to speak again, the SNB are due to also make their latest policy decision and finally President Trump is scheduled to outline his (skinny?) fiscal 2018 budget.