European Outlook: Yellen may have signaled that the Fed remains on track to raise rates, but stock markets seem to have taken it in their stride. Asian markets mostly posted robust gains and the Nikkei closed up 1.03% on the day, amid hopes that a weak currency will continue to underpin exporters and earnings. European markets closed narrowly mixed yesterday and U.S. stocks were also higher at the close and against that background Bund and Gilt futures, which were knocked lower by Yellen yesterday are likely to remain under pressure, with long yields on the rise again. Peripheral yields, spreads and curves remain volatile amid political risks and ongoing ECB asset purchases. The local calendar calm down after yesterday’s bumper day. The Swedish Riksbank is expected to keep monetary policy on hold. The U.K. releases its monthly labour market report, and the Eurozone has trade numbers for December and some national inflation data.
Fedspeak: Fed Chair Yellen said yesterday, the Fed will adjust the rate path as the economy evolves, and will evaluate progress at our “upcoming meetings.” Hence, she has kept March on the table (it’s always been “live” in the Fed’s rhetoric). She added that further policy adjustment will likely be needed if the economy remains on track. She also warned that it would be “unwise” to wait too long to tighten. The gradual approach to rate hikes was reiterated as the FOMC expects further moderate expansion in the economy, and a gradual rise in inflation to the 2% target. She also indicated that the economic outlook is uncertain, especially with potential changes in fiscal policy. Some of the headwinds that have restrained growth were mentioned, and she reiterated the “notable improvement” in business sentiment from the February 1 FOMC statement. She also addressed inflation and its pick up over the past year amid the diminishing effects of earlier declines in energy prices and import prices. For the balance sheet, Chair Yellen hopes the asset purchase program was unusual intervention, and the Fed hopes it will be much smaller, eventually. The Fed doesn’t want to use its portfolio as an active policy tool, but would rather use interest rates. Stopping the reinvestment will be a gradual process. Chair Yellen also reiterated that the Fed remains data dependent, so upcoming reports on CPI, retail sales, and employment will matter a lot.
Germany: The ZEW investor confidence weaker than expected, with the headline reading falling to 10.4 from 16.6 in the previous month. A slight decline to around 15 was expected, but in the event, it seems rising political risks are hitting investors and the ZEW dropped for the first time since July last year, when confidence fell back after the Brexit vote in the U.K. The fact that the reading remains in positive territory, which indicates that optimists continue to outnumber pessimists, but even the current conditions indicator fell back and the Eurozone expectations index dipped to 17.1 from 23.2. More reasons for Mr. Draghi and Co to keep the insurance policy of ongoing asset purchases in place for now.
UK: Sterling dove 0.5% before settling in the wake of the UK inflation data, which saw both the headline and core CPI measures miss expectations, although the former still hit a two-and-a-half-year peak of 1.8% y/y. Cable hit yesterday a low of 1.2445 before steadying, leaving Monday’s low at 1.2440 unchallenged and leaving the pound at about the midway point of the choppy range that’s persisted for nearly three weeks now. Additionally, there is a caveat in the inflation data as PPI output prices spiked to 3.5% y/y, the sharpest rate in five years and suggesting that higher CPI prices are in the pipeline. PPI input prices rose 20.5% y/y, up from 17.0% y/y in December, itself revised up from 15.8%. The start of the UK’s exit negotiations with the EU — the point that the rubber will hit the tarmac — is now nearly, with PM May reportedly gunning for a March-7 trigger-date of Article 50.
Main Macro Events Today
- US CPI & Retail Sales – January CPI is out today and should reveal a 0.4% headline with the core up 0.2% for the month. This follows December figures of 0.3% for the headline and 0.2% for the core. January retail sales data should reveal a 0.1% headline increase with the ex-autos component up 0.6% for the month.
- US Manufacturing data – U.S. NY Fed “Empire State” Index for February expected to climb to 9.0 after January’s dip to 6.5 from 7.6 in December. Producer sentiment firmed into year end and in January we saw the ISM-adjusted average of all measures climb to 54 from 53 in both December and November.
- Fed’s Yellen – Fed Chair Yellen testifies to the House Financial Services Committee.
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