Market wrap: US yields remaining near the three-year high of 2.94% - Westpac

Analysts at Westpac offered a market wrap.

Key Quotes:

"Market highlights:

US equities are higher (S&P500 +1.1%), but the US dollar flipped from gains to losses post-FOMC minutes. That caused a brief spike in the AUD but it remained the day’s underperforming currency.

Interest rates: US 10yr treasury yields ranged between 2.88% and 2.91% - remaining near the three-year high of 2.94%. The 2yr yield also remained at or near 2.27% - a 10-year high. Fed fund futures yields continued to price the chance of another rate hike in March as effectively a done deal with a total of four hikes priced by end-2019. The FOMC minutes (just released) created some volatility in both directions but little net change.

Currencies: The USD index was mostly higher on the day, but flipped from a 0.2% gain to a 0.1% loss after the FONC minutes just released. EUR slipped a little, from 1.2340 to 1.2300, weighed by the PMI outcomes, but bounced to 1.2359 after the FOMC minutes (perhaps expecting something more hawkish). GBP fell from 1.4000 to 1.3905 but did rebound later to 1.3990, only briefly ruffled by the disappointing unemployment data. USD/JPY rose from 107.55 to 107.90 before consolidating. AUD underperformed, falling from 0.7880 to 0.7830, but bouncing to 0.7879 post-FOMC minutes. NZD was steady, ranging between 0.7326 and 0.7360, and then to 0.7386 post-minutes. AUD/NZD thus extended its multi-month decline from 1.0720 to 1.0668 – a six-month low.

Economic Wrap

Despite expected pullbacks in EU PMI’s (EZ composite dipped to 57.5 vs exp 58.4 and prev 58.8) they still suggest very strong activity in 1Q.
UK labour data showed underlying strength, with employment rising 88k and wages ticking higher, but it was the miss to expectations (of 165k rise) and the uptick in unemployment (to 4.4% vs expected unch. at 4.3%). The ONS also hinted that unemployment may have seen its low.

BoE’s Carney and fellow MPC members faced Parliamentary Committee grilling and reiterated their positive, if cautious, economic outlook and gradual path of rising rates.

Fed speakers were mixed. Slightly hawkish non-voter Harker thought two more hikes this year was appropriate. Dovish non-voter Kashkari thought the markets were overreacting to recent upbeat CPI and wage data. Hawkish non-voter Kaplan repeated his call for hikes to be gradual and with patience, adding that waiting too long would increase the chance of a recession.

The FOMC minutes delivered little fresh news, reflecting slightly more positivity, with the majority expecting stronger growth which lifted the likelihood of further rate hikes."