Fed Speakers Trump Trump and Support Dollar

Capital markets require action and details, not just rhetoric.

Reaction to U.S President Trump’s first address before the joint session of Congress has been largely positive amongst political pundits, however, his speech again failed to provide solid direction for investors.

His address was more of campaign rally-call where the President called for +$1T public-private investment in infrastructure, reiterated his intent to repeal/replace Obamacare, and again pledged massive tax relief for the middle class.

Net result, somewhat of a muted reaction from investors. Why? His rhetoric is unlikely to overcome the infighting and confusion that has stalled his legislative priorities thus far on the ‘Hill.’

It’s back to the drawing board for investors who need to now focus on a much more ‘hawkish’ Fed who seems intent on tightening ahead of the markets expectations thus far.

Note: The odds of a Fed rate hike this month (March 15) rose to more than +60%, pushing up the ‘mighty’ buck while dragging Treasuries prices lower.

Fed’s Harker (hawk, voter) reiterated three interest rate hikes is appropriate this year, while Fed’s Dudley (dove, FOMC voter) indicated that the case for hiking rates “had become a lot more compelling.”

All eyes will be on Fed Chair Yellen’s speech Friday for her clues on a hike this month.

1. Global equities get the green light

Japan’s Topix index increased +1.2% overnight, supported by a weaker yen (¥113.63) on ‘hawkish’ Fed comments. Investors can expect Japanese stocks to take their short-term cues from U.S. yield moves and dollar-yen levels in the next few weeks.

In China, the Shanghai Composite Index added +0.2% after domestic produce price data beat expectations, further proof that China has a solid economic backdrop for now.

In Europe, equity indices are trading sharply higher with financials again leading the gains across Europe. Builders and developers are the notable gainers in the FTSE 100, while energy, commodity and mining stocks also are in the black.

U.S stock futures are pointing to a higher open (+0.5%).

Indices: Stoxx50 +1.2% at 3,365, FTSE +0.7% at 7,135, DAX +1.3% at 11,988, CAC-40 +1.3% at 4,922, IBEX-35 +1.3% at 9,679, FTSE MIB +1.6% at 19,219, SMI +0.7% at 8,606, S&P 500 Futures +0.5%.

2. Oil drops for second day; market awaits U.S. stocks data

Crude oil prices lost more ground overnight, with rising U.S. oil output adding pressure on the market, although OPEC production cuts continue to offer underlying support.

Ahead of the U.S open, Brent crude has fallen -13c or -0.2% percent, to +$56.38, while light crude (WTI) futures have lost -15c or -0.3% to +$53.86 a barrel.

Investors are awaiting today’s weekly inventories data from the U.S. EIA at 10:30 EST.

Note: U.S. crude stockpiles have risen for seven straight weeks and the market expects another build for last week (+3.1m barrels).

Yesterday’s API data saw U.S. stockpiles rise another +2.5m barrels in the week ended Feb. 24.

The stronger dollar is weighing on gold prices for a second consecutive day. The precious metal has dropped -0.3% to +$1,244.36 an ounce after completing a +3.1% gain in February.

3. Fixed income dealers pricing in a March hike

Fed speakers yesterday (Harker, Dudley) have jolted markets into higher expectations for a March 15 Fed rate hike – their comments suggested that U.S policy makers are worried about waiting too long in the face of pending economic stimulus from Washington.

Note: The odds for a Fed hike this month have rallied from +28% on Monday to +60% ahead of this mornings open.

This has pushed U.S 2’s to +1.304%, their highest yield since December, to match their highest levels since 2009. The Bund/Tsy gap has now increased to its widest level in 17-years.

Yields on 10-year Treasuries have backed up +3bps to +2.42%, climbing for a third straight day, while German 10’s have climbed +4bps to +0.25% after a report this morning showed that German unemployment continued to decline (-14k m/m).

Yields on French benchmarks and gilts both have rallied +3bps.

4. Dollar supported by rate differentials

Continued hawkish rhetoric from voting Fed members is keeping the “mighty” USD on firmer footing. Ahead of the open, the USD index has printed a two-month high (DXY +0.4%) in the European session, aided by Treasury yields.

Europe’s single unit, the EUR, has printed a one week low at €1.0525 before consolidating. Better German employment data and regional PMI manufacturing for the region is lending some support ahead of key levels (€1.0475).

The yen has slumped -0.7% to ¥113.52, for a third day of losses, while the pound has slipped to a six-week low outright at £1.2325 after U.K. manufacturing PMI data came in slightly below forecasts (54.6 from 55.7 in January).

5. Eurozone manufacturing growth slower than previous

Data this morning showed that activity in the eurozone’s manufacturing sector picked up in February, but at a slower pace than previously estimated.

IHS Markit said its PMI for the sector rose to 55.4 from 55.2 in January, reaching its highest level since April 2011.

(Beats: Italy, Swiss, Norway, Turkey, Hungary, Poland, Czech; Misses: UK, Germany, France, Euro Zone, Spain)

Note: The measure is consistent with other recent indicators that point to a pickup in eurozone economic growth in the early months of 2017, despite heightened political uncertainty.