Originally published by Rivkin Securities
All traders were focused on Janet Yellen’s speech on Friday where she added to the chorus of Fed officials last week shifting market expectations towards a rate hike at the March 15th meeting. Yellen’s overall tone was slightly more hawkish noting that “the process of scaling back accommodation likely will not be as slow as it was during the past couple of years”. Referencing this month’s meeting Chair Yellen stated that a “further adjustment to the federal funds rate would likely be appropriate”, with the caveat that inflation and employment continue to evolve with expectations.
This Friday non-farm payroll data for February will be released with expectations for 190,000 jobs and it would take a reading less than 100,000 to prevent the Fed hiking rates this month. We will also get inflation data released during the two-day meeting although the Fed’s preferred gauge of inflation, measured by the PCE index, is currently at 1.9% modestly below their 2% target.
The implied probability calculated by CME’s Fedwatch tool increased modestly to 79.7% from 77.5% the day prior, the U.S. dollar index fell -0.84% while US two-uear treasury yields declined 1.9 basis points. This reaction suggests the speech served as a classic buy the rumour, sell the fact scenario with the majority of repricing already done prior to the speech. Leading into the March 15th meeting we may now see some profit taking across rate sensitive instruments including the US dollar and treasuries.
This week the ECB will meet on Wednesday where no changes are expected to their current monetary policy. The chart below highlights the spread between the US and Germany 2-Year yields which has risen to the highest levels since 2000. While the ECB is expected to begin tapering back the current QE program after the expiry date in December 2017, the divergence we are seeing in yields looks set to continue as the Fed gradually tightens policy.
On Friday Markit Economics released the composite PMI survey for the Euro-zone which continued to paint a bright picture as we look for the transition from stabilisation to more robust growth. The measure remained stable at 56 as forecast (MoM Feb) with the commentary noting an increasingly sustainable and robust looking upturn with growth accelerating in the four largest member states.
The euro gained +1.08% against the US dollar and German bond yields rose with both the two and ten-year gaining +2.6 and +4.4 basis points respectively. Equities were mixed, the DAX declined -0.27% while the CAC 40 rose +0.63% as a poll showed for the first time that Independent Emmanuel Macron was favoured as the first round winner in the upcoming elections.
Locally the S&P/ASX 200 fell -0.81% on Friday however we look set to start trading on a stronger footing this morning with ASX SPI200 futures up +21 points on Friday.
Data releases:
· Australian Retail Sales (MoM Jan) 11:30am AEDT
· Eurozone Retail PMI (MoM Feb) 8:10pm AEDT
· U.S. Durable Goods Orders (MoM Jan) 2:00am AEDT
Chart 1 – US and German Two Year Yields
Source: Rivkin