Will Yellen Douse the Rate Flame?

Friday March 3: five things the markets are talking about

U.S economic data continues to be bullish and above expectations, coupled with the most recent comments from Fed officials this week are supporting growing expectations of a rate hike in a fortnight by the Fed.

Expect Fed Chair Yellen’s speech today (01:00 pm EST) to be highly scrutinized. Her remarks are likely to further shape market expectation toward a rate increase. Should Yellen signal to wait a bit longer to act, in other words, deflate expectations on an imminent increase then this Friday afternoon of trading will be rather frantic.

The macro backdrop supports the Fed’s plan of a moderate increase in its short-term interest rates – the U.S labor market nears full employment and inflation readings are either above the Fed’s 2% target or near it – however, in the past, the Fed has been a fickle bunch usually looking for the ‘sure’ bet.

The danger the Fed faces currently is that too much jawboning and no action will crush the Fed’s credibility and their tool of rhetoric used to prep the market will have dealers/investors take less notice.

For the dove, they have been able to find some cover with the Atlanta Fed lowering its GDPNow forecast yesterday to +1.8% amid slower consumer spending growth, but is it enough?

1. Mixed reaction from global stocks

Concerns over valuations, building expectations of March Fed hike, and political controversy in the White House are being attributed for the decline in global stocks.

In Japan, equities fell as investors took profits before the weekend, after hitting a 14-month high Thursday. The Nikkei dropped -0.5% on the back of a stronger yen (¥114.10). The index rose +1% on the week. The broader Topix dropped -0.4%.

In Hong Kong, the Hang Seng closed at a one month low, down -0.7%. For the week the index is down -1.7%. In China, stocks also fell and snapped a three-week winning streak. The blue-chip CSI300 index fell -0.2% on the day and -1.3% on the week. Aside from some underwhelming China services data (see below) investors are also worried about potential China regulatory reforms.

In Europe, equity indices are trading lower as market participants look to realize some weekly profits. Banking stocks are trading mixed in the Eurostoxx while commodity and mining stocks are weighing on the FTSE 100.

U.S equities are set to open in the red (-0.3%).

Indices: Stoxx50 -0.3% at 3,375, FTSE -0.3% at 7,358, DAX -0.5% at 11,998, CAC-40 -0.2% at 4,953, IBEX-35 -0.3% at 9,691, FTSE MIB -0.1% at 19,423, SMI -0.2% at 8,645, S&P 500 Futures -0.3%

2. Oil edges higher after sell-off on weaker dollar, gold under pressure

Oil prices have ticked a tad higher this morning, reclaiming some of yesterday’s losses, as a weaker dollar encourages buying. However, the market remains cautious after Russian production figures this week showed weak compliance with a global deal to cut output.

Brent crude futures are up +19c at +$55.27 a barrel, recovering some of Thursday’s losses that amounted to more than -2%. U.S light crude (WTI) is trading at +$52.69 a barrel, up +8c on yesterday’s close.

The markets remains range bound and expect dealers to take their cue from the dollars direction after Yellen’s speech today.

Ahead of the U.S open, gold prices are holding above of some key support levels (-0.3% to +$1,231.31 per ounce) after falling more than -1% yesterday. The yellow metal is on track for its first drop in five-weeks and sitting atop its weakest level since December on expectations of U.S. Fed rate hike on March 15.

Silver prices hit a 3-week low of +$17.64 Thursday, after falling -3.5% – it was metals worst one-day fall since December 15 and is on track to end the week down -3%.

Note: This is silver’s first weekly drop in ten-weeks.

3. Fed anxiety keeps yields high

The reflation trade remains on track as bond markets continue to put downward pressure on bond prices and short-term paper.

This week ‘hawkish’ Fed sentiment has been rattling the bond market hard, sending yields climbing especially those highly sensitive to the Fed’s policy outlook.

The panic has sent the yield on the two-year note (+1.316%) to the highest in more than seven-years. While U.S Bills or short-term paper, has been the hardest hit with the yield on the benchmark 3-month bill jumping +5bps to +0.7%.

Yields on 10-year Treasuries are little changed at +2.48%.

4. The pound woes continue

Sterling fell to a fresh six-week low outright (£1.2214) and reached its weakest level in three-weeks against the EUR (€0.8623) after a purchasing managers’ survey on the key U.K. services sector for February came in at 53.3, below forecasts for 54.9.

Brexit discussion worries are also hampering the pounds efforts. The U.K’s House of Commons is set to debate the Brexit bill amendment on March 13 and 14, keeping PM May’s self-imposed deadline to trigger Article 50 on track.

Elsewhere, the EUR is consolidating its recent losses and is holding above the psychological €1.05 level at €1.0536. USD/JPY is trading atop of ¥114.30 in the European session. China’s yuan has breached the ¥6.9 handle on the back of the overall USD strength and is poised for its worst week since mid-Dec against the greenback.

5. Eurozone composite PMI unrevised, China disappoints

Data this morning shows that the eurozone’s composite PMI for last month was unrevised at 56.0, up from 54.4 in January and at a six-year high that suggests economic growth has picked up in the early months of 2017.

Digging deeper, the details suggest the pickup may be sustained, with new orders and backlogs of work also on the rise, prompting businesses to hire more aggressively than at any time in the past nine-years. And there are also signs that inflationary pressures are building, with costs and prices charged both rising.

In China, February’s Caixin Services PMI slowed to a four-month low (52.6 vs. 53.1 m/m), even as the overall composite improved – the employment component rallied for the first time in nearly two-years.

Note: China’s annual National People’s Congress (NPC) begins on Sunday with anticipated announcement of 2017 economic targets.

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