Originally published by Rivkin Securities
US equity markets saw some profit taking on Thursday as the US dollar gained on the rising probability of a March 15th rate hike. Both the S&P 500 and Nasdaq 100 pulled back -0.59% and -0.51% respectively as investors locked in profits following significant gains on Wednesday. The US Dollar Index rose +0.37% as the implied probability of a 25 basis point rate hike on March 15th rose to 77.5 from 66.4 the day prior. The move came as two more Fed officials added to the number of Fed speakers this week that a rate hike would be appropriate soon.
Federal Reserve Governor Jerome Powell, who tends to typically fall in the centre of the doves & hawks and therefore a good indication for which way the committee will lean, noted the case for a March rate hike “has come together” and reiterated his stance that three hikes were appropriate in 2017. Governor Lael Brainard who is perceived as perhaps the most dovish member on the committee said that it would likely be “appropriate soon to remove additional accommodation” stressing a gradual path. This week has now seen seven Fed officials hinting towards a March hike, and tonight the focus will be on commentary by Fed Chair Janet Yellen as well as Fed vice Chair Stanley Fischer.
Yellen will likely confirm the same message we have heard this week, that a hike soon is appropriate and three hikes are still expected in 2017. For investors higher rates coupled with a strong US economy should continue to see the outperformance of cyclical equity sectors, namely financials, consumer discretionary and basic materials.
The euro declined -0.37% on Thursday as a result of the stronger US dollar despite inflation, unemployment and producer price data which should the Euro-zone economy remains stable. For the 19 member Euro-zone headline inflation (YoY Feb) increased to 2.0% as forecast from +1.8% prior. However as seen in previous readings this was a result of a 9.2% change in energy and once we strip away volatility components to look at the core measure, inflation remained stable at +0.9%. The chart below highlights the improving nature of both producer and consumer prices in the Euro-zone as the economy has stabilised.
Unemployment in the Euro-area (MoM Jan) remained unchanged at +9.6% and Euro-zone producer prices (YoY Jan) increased +3.5% surpassing the +3.2% forecast and prior +1.6% with the gains also a result of the increase in energy prices. The ECB has an inflation target of just below 2% and while we have seen encouraging signs out of the Eurozone recently such as French PMI, without any sustained upward momentum in core prices it is unlikely the ECB will taper their stimulus program prior to expiry in December 2017. The combination of continued stimulus with a stable economy continues to create a tailwind for European equity markets with STOXX 600 earnings are forecast to grow 11.5% or 3.7% excluding energy.
Locally theS&P/ASX 200 finished +1.26% higher on Thursday although we can expect a weaker start to trade this morning with ASX SPI200 futures down 26 points in overnight trading.
Data releases:
· Japanese Jobless Rate (MoM Jan) 10:30am AEDT
· Japanese CPI (YoY Jan) 10:30am AEDT
· Japanese Services & Composite PMI (MoM Feb) 11:30am AEDT
· Chinese Caixin Services & Composite PMI (MoM Feb) 12;45pm AEDT
· Euro-zone Services & Composite PMI (MoM Feb) 8;00pm AEDT
· UK Services & Composite PMI (MoM Feb) 8:30pm AEDT
· Euro-zone Retail Sales (MoM & YoY Jan) 9:00pm AEDT
· US ISM non-manufacturing Composite (MoM Feb) 1:45am AEDT
· Fed’s Stanley Fischer Speaks 4:30am AEDT
· Fed’s Yellen Speaks 5:00am AEDT
Chart 1 – Eurozone Consumer & Producer Prices (YoY %)
