European Outlook: Asian stock markets headed south. Investors peddled back in China amid concerns that recent gains were overdone and the ASX ended the weak lower as metal prices dropped. Metal and machinery groups also dragged down Japanese markets, and the Topix closed with a 0.4% loss. U.S. and U.K. stock futures are equally in the red and global markets remain wobbly and investors in cautious mode. In Europe, the rebound in Sterling continues to weigh on the FTSE 100 and core yields continue to head south, with France now catching up again, as election jitters eased somewhat. Other Eurozone peripheral markets, however, continue to underperform, highlighting that Eurozone breakup fears have not gone away and will continue to haunt Draghi. Today’s economic calendar is pretty quiet, but includes French consumer confidence, Italian business confidence as well as BBA loans for house purchases from the U.K.
Fedspeak: Dallas Fed’s Kaplan reiterated the Fed should move sooner rather than later, suggesting he might support a tightening next month if the jobs data cooperates. He’s on the hawkish end of the voting spectrum so it may not take much for him to call for a hike. But, he also said that accommodation can be removed gradually and patiently. That indicates he might be able to go along with no change next month too, especially if the data aren’t terribly strong. He also wants to study shrinking the balance sheet as rate normalization progresses. He projects 2017 growth in the 2% region and sees the economy near full employment. Additionally, Fed’s Lockhart, said the data supported 2-3 hikes this year. He favors a natural run off of the balance sheet, in further comments. He sees the Fed’s portfolio shrinking to about $1.5 tln to $2 tln over a multi-year time frame, from the current $4.5 tln. Based on the Fed’s dots, the neutral rate has declined and hence the stopping point for rate hikes is likely lower than it was in the past. But much will depend on the inflation trends. On regulations, he expects Dodd-Frank to be softened, not scraped.
US reports: an increase of 6k in U.S. initial claims to 244k in the BLS survey week, which extended the prior 4k increase to 238k to leave claims still just above the 43-year low of 233k last November. There was as extremely tight claims path over the six weeks since the period of holiday volatility came to a close. Claims are well below the 263k average in 2016, and certainly well below the 6-month high of 275k as recently as mid-December. Claims are averaging 239k in February, versus higher prior averages of 247k in January, 258k in December, 252k in November, 258k in October, and 254k in September. The 244k February BLS survey week reading sits at the low end of recent BLS readings of 237k in January, 275k in December, and 233k in November. U.S. FHFA home price index rose 0.4% to 242.6 in December after rising 0.7% to 241.6 in November. Home prices are up 6.2% y/y. Seven of the nine regions surveyed posted gains on the month.
Crude Oil and Canadian dollar: Crude Oil fell to $54.44 from $54.89 following the EIA inventory data which showed a 564k bbl rise in crude stocks. The street had been expecting a 3.0 mln bbl increase, though API reported a 900k bbl decrease after the close on Wednesday. Meanwhile, gasoline supplies, seen down 1.0 mln bbls actually fell 2.6 mln bbls, while distillate stocks were down 4.9 mln bbls, versus expectations for a 0.5 mln bbl fall. Refinery usage fell to 84.3% from 85.4%. The pull-back in crude oil following the EIA data lifted USDCAD to 1.3113 from 1.3094.
Main Macro Events Today
- CA CPI – Canadian CPI is expected to accelerate to a 1.7% y/y pace in January from 1.5% y/y in December. The CPI is expected to expand 0.4% in January versus December, as gasoline prices continued to track higher. Also, prices in general tend to turn higher beginning in January. The Bank of Canada has expressed guarded optimism that CPI will gradually move back towards the 2% target. However, Poloz said rate hikes are still on the table as long as downside risks to the inflation target still exist. The December CPI report did not lessen the downside risk, but did not exacerbate it either.
- US New Home Sales – January new home sales data expected to be 6.3% headline increase that brings the pace up to 570k for the month after a 10.4% dip in December to a 536k pace. The NAHB composite dipped to 67 in January from 69 in December but the MBA purchase index managed to notch an increase for the month with a 2.5% increase.
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