Pound Pummeled on Inflation Miss

Tuesday February 14: Five things the markets are talking about

Risk-off is back in vogue as the dismay in the Trump administration is overshadowing optimism for an improving U.S. economy.

Trump’s promises that tax cut and infrastructure spending plans are coming, some good-tempered meetings with world leaders (Japan’s PM Abe and Canada’s Trudeau), as well as expectations of a more “dovish” Federal Reserve had temporarily rekindled investors’ appetite for risk. However, this has come to an abrupt end in the overnight session.

After lengthy DoJ investigations, Trump’s NSA advisor Michael Flynn has submitted his resignation after admitting he gave “incomplete” information regarding phone calls with Russia about U.S sanctions – stocks have retreated, the dollar is under pressure, gold is better bid and U.S yields a tad lower.

Investors will now turn their attention to Fed Chair Yellen’s testimony in Congress today for market guidance (10:00am EST).

Her testimony will be watched for hints on rates, deregulation and global concerns – fixed income dealers are pricing in a +30% chance the Fed will lifts rates at its March 15 meeting.

1. Global stock indices see “Red”

In Japan, stocks fell as investor sentiment soured after Toshiba Corp delayed its earnings release, including details of a multibillion dollar charge related to cost overruns at its U.S. nuclear arm.

With Toshiba’s stock nose-diving -8% helped drag the Nikkei down -1.1%.

In Hong Kong, stocks ended little changed as growing profit taking after a two-month rally offset sustained inflows from main land Chinese investors.

Note: The Hang Seng has risen about +8% ytd, riding a wave of optimism that global economic growth is improving.

In China, the Shanghai Composite Index was largely unchanged after data showed the country’s inflation (see below) picked up to multi-year highs and reinforced a shift by Beijing to a more tighter policy stance.

In Europe, the Stoxx Europe 600 Index has slipped -0.1% in early trade, after a five-day rally that brought it to the highest level in more than a year. The FTSE 100 Index has lost -0.3%.

U.S stocks are set to open in the red (-0.1%).

Indices: Stoxx50 -0.1% at 3306, FTSE +0.1% at 7286, DAX -0.1% at 11768, CAC-40 flat at 4889, IBEX-35 +0.1% at 9494, FTSE MIB +0.3% at 19111, SMI -0.3% at 8442, S&P 500 Futures -0.1%

2. Oil prices range bound, gold supported

Crude oil has strengthened slightly overnight, supported by the OPEC-led effort to cut output while rising U.S production is keeping prices within the narrow ranges that have contained them so far this year.

Brent crude is up +45c at +$56.04 a barrel, while U.S. light crude oil (WTI) is up +35c at +$53.28.

Note: The two benchmarks fell -2% yesterday and both remain in the middle of a $5-per-barrel trading ranges seen since early December.

Capping global prices are U.S. oil drillers – they have added the most drilling rigs since 2012 over the past month, bringing the total count to 591.

Gold prices have edged higher (+0.3% to $1,228.90 per ounce) ahead of the U.S open as the dollar underperforms. Investors are turning their attention to the Fed’s Janet Yellen testimony in Congress for clues on U.S interest rates.

The techs see support at +$1,215 and strong resistance on top at +$1,240.

3. U.S curve will take shape after Humphrey-Hawkins

Fed Chair Yellen takes the stand for two days in Washington for her Humphrey-Hawkins testimony beginning at 10:00 a.m. EST (today, senate committee).

Note: She will deliver her monetary policy report and prepared remarks and will also present the same report and remarks to the House Financial Services Committee at 10 a.m. tomorrow.

Expect fixed income dealers to get a better handle of the U.S curve once Yellen is questioned on the economy, the path of interest rates, the labor market, financial regulation and the potential impact of the Trump administration’s economic policies.

Investors started the week embracing risk, which has backed up Treasury yields +4bps to +2.45%, steepening the curve – a change from the past couple of weeks.

4. Pound pummeled on inflation miss

Ahead of the U.S open, sterling has fallen to an intraday low against the dollar (£1.2452) and the EUR (€0.8524) after data showed that U.K. CPI rose by +1.8% on the year in January.

It was the fastest rate in nearly three-years, but slightly below the consensus (+1.9%). Inflation is being caused mainly by the fall in the pound since the Brexit referendum vote, and there are concerns higher prices will dampen consumer spending and certainly should discourage the BoE from raising interest rates any time soon.

Elsewhere, the USD is keeping within recent ranges, as traders seem to be positioning themselves for potential “dovish” language from the Fed’s Yellen.

The EUR is back above the psychological €1.06 level, while the yen (¥113.27) has added +0.4%, after falling -0.5% yesterday.

5. China inflation data continues to improve

Overnight, China released its January CPI and PPI numbers, both topped expectations. The CPI hit a 32-month high (2.5% vs. 2.4%e), while the PPI registered its fifth consecutive increase and highest print since Aug 2011 (6.9% vs. 6.5%e).

Note: The CPI increase was more heavily skewed to food inflation (2.7% vs. 2.4% prior) as non-food component slowed to 0.7% vs. 2.0% prior. China Stats Bureau noted the CPI was skewed by the Lunar New Year effect, since it came in January this year as opposed to February of last year.

Other data released showed that China January new yuan loans missed expectations, but still recorded its second highest reading on record (+¥2.03T vs. +¥2.44Te).

Note: The U.S Commerce Secretary may not choose to name China as a currency manipulator, but rather designate the practice of “currency manipulation as an unfair subsidy when employed by any state.”

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