Originally published by Rivkin Securities
On Wednesday the market tuned in as Donald Trump addressed a joint sitting of congress with high expectations he would outline further details or provide time lines for stimulatory policies. While Trump re-affirmed his commitment to such policies, including infrastructure programs, tax cuts and immigration reform, he did not elaborate on the details. Still the speech had a strong sense of optimism calling for bipartisan agreements as well as a toned down rhetoric when it came to mentioning both China and renegotiating the NAFTA agreement. The reaction in financial markets immediately after the speech suggested investors were underwhelmed with the US dollar only marginally higher while equity market futures came off their highs.
Instead the US dollar drove financial markets on Wednesday as investors continue to bet on the reflationary trades. PCE, the Fed’s preferred measure of inflation, increased +1.9% year-on-year in January from +1.6% prior although slightly less than the 2% forecast. The core measure over the same period remained stable at +1.7% as forecast. With employment at what is considered to be “full” and financial risks balanced it’s hard to make a case that the Fed has not achieved its dual mandate of 2% inflation and full employment.
Unlike 2016 the Fed now seems very committed to raising rates in 2017 and the market is responding very positively to this. If the Fed aims to raise rates gradually three times in 2017 it’s better to get started sooner rather than later. Fed Fund futures are now pricing in a 64.6% chance of a rate hike on March 15th, recent Fed speak seems to have had the intention to shift market expectations towards this meeting and on Friday a speech by Janet Yellen should either confirm or dispel this idea. Of course the final piece of data will be the non-farm payrolls for February on March 10th although it would take a number below 100,000 or very weak wage growth to have a significant impact.
In reaction to the PCE inflation data the US dollar jumped +0.59% against basket of currencies as US treasuries jumped with both the two and ten-year yields rising +7.2 and +9.8 basis points respectively. The first chart below shows the US two-year yields which now look set to break higher after remaining range bound since December.
Reflationary trades led equity markets higher as both the S&P 500 and Nasdaq 100 moved to new all-time highs up +1.37% and +1.14% respectively led by Financials (+2.40%), Energy (+2.03%) and Basic Materials (+2.01%). Rivkin’s Global Momentum portfolio was a beneficiary of this, with 50% of the current holdings directly exposed to financials such as Citizen Financial Group & Regions Financial Corp (NYSE:RF). both of which gained +5.94% and +4.19% overnight.
Given the moves in financials and basic materials overnight, both of which hold a heavy weighting for the S&P/ASX 200 we can expect a significantly stronger start to trading this morning with ASX SPI200 futures up +50 points in overnight trade.
Data releases:
· Australian Trade Balance (MoM Jan) 11:30am AEDT
· Australian Building Approvals (MoM & YoY Jan) 11:30am AEDT
· Euro-zone Producer Price Index (MoM & YoY Jan) 9:00pm AEDT
· Euro-zone unemployment Rate (MoM Jan) 9:00pm AEDT
· Euro-zone CPI (YoY Feb) 9:00pm AEDT
Chart 1 – US Two Year Treasury Yields
