Originally published by Rivkin Securities
The US dollar continued to strengthen overnight following testimony from Fed Chair Janet Yellen where she signalled a rate hike in December and that she would serve out her full term until January 2018. Keeping with a theme highlighted by FOMC members recently Yellen noted that “holding the federal funds rate at its current level for too long could also encourage excessive risk-taking and ultimately undermine financial stability”. Looking to US data initial jobless claims dropped to the lowest levels since the early 1970’s, with a reading of 235,000 against expectations of 256,000. At the same time continuing claims also surpassed expectations with a reading of 1.977m vs 2.030 forecast.
CPI data released overnight showed that prices rose +1.6% as expected year-on-year for October up from +1.5% previously. A core measure which excludes volatile items such as food & energy rose +2.2% missing forecasts of +2.3%. Real wages (YoY Oct), which are adjusted for inflation, were unchanged at 0% from +0.8% previously, although the most recent gauge of wages by the Federal Reserve of Atlanta showed nominal wages grew at +3.9% year-on-year.
The U.S. dollar index was +0.50% as the outlook for rate hikes improves. The S&P 500 gained +0.47% as did the Nasdaq 100 up +0.72%. Expectations of fiscal stimulus and higher rates continue to benefit cyclical stocks and financials which led gains overnight up +1.16% & +0.87% respectively. The recent bond sell-off continues as the markets price in higher inflation, two-year treasury yields gained +2.5 basis points to +1.0229% and ten-year yields rose +6.2 basis points to +2.2866%.
In Japan the Yen weakened -0.84% as the Bank of Japan announced its first operate to buy government bonds in order to target a ten-year yield around 0%. This is the first action we have seen since the BOJ announced the changes back in September and it appears it is having the desired effect. While no market participants took up the BOJ’s offer to buy bonds, it did push yields down, the two-year yield fell -4.3 basis points to -0.152% and the ten-year yield declined -0.5 basis points to +0.005%.
This is an important moment for central banks who will be watching the BOJ closely, particularly the ECB who have their own concerns about liquidity for their own asset purchase operations. Without making any actual purchases that have been able to influence rates by setting expectations, initially this has been successful although the real challenge will come later with the BOJ yet to be tested around what is effectively a promise to make unlimited bond purchases if necessary to keep the ten-year yield around 0%. Japanese equity markets reversed initial declines to close flat thanks to the weaker Yen and they look set to be boosted this morning with Nikkei futures up 200 points.
In the UK the Pound was little changed against the dollar, up just +0.04% after data showed that retail sales exceeded expectations. Year-on-year sales increased +7.6% surpassing the +5.4% forecast and month-on-month the reading gained +2% against estimates of only +0.4%. Retail sales are an important indicator of economic health with consumer spending accounting for around 60% of the economy in the UK.
In mainland Europe CPI data (YoY Oct) increased +0.5% as forecast, up from +0.4% previously. The focus will now be on the December 8th ECB meeting where general expectations are that the ECB will extend its current purchase program past it’s expiry date in March 2017. The economic story of the EU has been one of stabilisation in recent months, the outlook is not as dire as it has been. That said there is still a long way to go until we see the ECB’s target of 2% inflation reached.
The Euro continued its recent downtrend against the dollar, down a further -0.66% overnight. Equities markets were higher across the board, the Euro Stoxx 600 gained +0.63%, as did the DAX +0.20% and CAC40 +0.59%.
Domestically the Australian dollar fell -0.80% as unemployment data continued to show there is slack in the labour market. Since December 2015 full time employment has decreased by 69,900 while part-time work has increased by 132,700. The unemployment rate remained stable at +5.6% with forecasts for an increase to +5.7%. While it is evident there is slack in the labour market reflected by the unemployment and wage growth data, it is not dire enough to warrant the RBA acting in the coming months to lower interest rates.
The S&P/ASX 200 reversed initial declines to close modestly higher, up +0.20% and we can expect a stronger start to trading this morning with ASX SPI200 futures up 19 points in overnight trading.