A Look Back At The Day That Was

For those who might have missed any of Thursday’s action or for anyone who just wants a convenient refresher, here’s a look back at the day that was courtesy of Deutsche Bank:

Markets: Equity markets rebound in US/Europe, European bond weaker, US dollar rally continues, little change in credit markets. USA: CPI up 0.2%mom/1.7%yoy in November, at mkt. Core up 0.2% mom/2.1% yoy. USA: Phil Fed manufacturing index up 13.9pts to 21.5 in December, above mkt. USA: NY Fed manufacturing index up 7.5pts to 9 in December, above mkt. USA: Markit manufacturing PMI up 0.1pts to 54.2 in December, below mkt. USA: NAHB housing market index up 7pts to 70 in December, above mkt. USA: Initial jobless claims down 4k to 254k, below mkt. USA: Bloomberg consumer comfort up 0.4pts to 45.5 last week. CAN: Manufacturing sales down 0.8%mom in October, below mkt. CAN: Existing home sales down 5.3%mom in November. EMU: Manufacturing PMI up 1.2pts to 54.9 in December, above mkt. EMU: Services PMI down 0.7pts to 53.1 in December, below mkt. DEU: Manufacturing PMI up 1.2pts to 55.5 in December, above mkt. DEU: Services PMI down 1.3pts to 53.8 in December, below mkt. FRA: Manufacturing PMI up 1.8pts to 53.5 in December, above mkt. FRA: Services PMI up 1pts to 52.6 in December, above mkt. UK: BoE leaves policy rate unchanged at 0.25%, stance remains neutral. UK: Retail sales up 0.2%mom/5.9%yoy in November, above mkt. CHE: SNB leaves policy rate unchanged at -0.75%. NOR: Norges bank leaves policy rate unchanged at 0.5%. SWE: Unemployment rate down 0.2pp to 6.2% in November, at mkt. JPN: Nikkei manufacturing PMI up 0.6pts to 51.9 in December. AUS: Employment rises 39.1k in November, above mkt, unemployment up 0.1pp to 5.7%. NZL: Business NZ manufacturing PMI down 0.7pts to 54.4 in November. NZL: Construction work up 1.4% qoq/16.1 yoy in Q3.

THE DAY AHEAD… USA: Fed’s Lacker speaks, Housing starts (Nov), TICS data (Oct), Building permits (Nov); EMU: ECB’s Weidmann speaks, CPI (Nov), Trade balance (Oct); UK:CBI Industrial Trends Survey (Dec); FRA: INSEE business confidence (Dec); ITA:Trade balance (Oct); ESP: Labour costs (Q3); NZL: ANZ-Roy Morgan consumer confidence (Dec)

Equities rebound, US economy shrugging off high rates/dollar for now…

Over the past 24 hours the market has continued to digest the outcome of the final FOMC meeting of the year. After we went to print yesterday US equity and bond markets sold off further into the New York close. However, on Thursday – perhaps helped by some better data out of the US and European manufacturing sectors – equity markets have staged a comeback. The US Treasury market has traded off its yield highs with the core CPI for November a smidgen below market expectations. Earlier the Stoxx600 closed up 0.9%, led by gains in the financials. European bonds had some catching up to do with the post-FOMC price action in the Treasury market, so are weaker across the board. As we enter the last hour of trade, the S&P500 is up 0.4% (also led by financials) and 10-year Treasuries are yielding 2.58%. Federal funds pricing for the end of December 2017 now stands at 1.18% (compared to 1.06% on Tuesday) whilst federal funds pricing for the end of December 2018 now stands at 1.69% (compared to 1.51% on Tuesday). In currency markets the US dollar continues to rally – much to the delight of a number of central banks outside of the US – and against the euro has now reached levels last seen in 2003. Turning to the US data flow, a very busy diary was highlighted by the November CPI report. The headline index rose 0.2% mom, matching market expectations, lifting the annual inflation rate to a 25-month high of 1.7% yoy. The core index also rose 0.2% mom, as the market had expected, but only just (0.151% mom to be more precise). As a result, annual core inflation remained at 2.1% yoy, rather than nudging higher as the market had expected (see Figure 2). Over the past six months headline and core inflation has annualized at 2.5% saar and 1.9% saar respectively. Goods price deflation eased to 0.4% yoy whilst services prices rose 3.0% yoy (broadly steady in recent months). Whilst the inflation report more-or-less met expectations, the US activity/sentiment data was notably stronger than expected. Turning to the industrial sector, the Philadelphia and New York Fed manufacturing surveys pointed to significant uplift in sentiment in December The headline index from the former rose 13.9pts to 21.5 – a two year high – even though the new orders index fell 4.7pts to 13.9. The shipments and employment indices rose, but the inventories index fell so that our ISM-like composite index was in fact little changed in December after improving significantly last month (see Figure 3). Of note was a 23.3pt lift in the 6-month ahead business conditions index – the biggest jump in 25 years – suggesting that the industrial sector has high expectations that the impending Trump Presidency will lift fortunes. The New York Fed’s survey provided a similar picture, with the headline business conditions index rising 7.5pts to 9.0 – its highest reading since April – and the six-month business conditions index surging 20.3pts to 50.2 – the highest reading since January 2012. The flash Markit manufacturing PMI edged up 0.1pts to 54.2 in December for its best reading since March last year. Meanwhile the NAHB homebuilder index leapt 7pts to 70 in December, recording its best reading since July 2005. In contrast to the industrial data, both measures of current sales (up 7pts to 76) and futures sales (up 9pts to 78) enjoyed a similar-sized lift in fortunes (see Figure 4). Finally, initial jobless claims fell 4k to a lowly 254k last week and the Bloomberg consumer comfort index rose 0.4pts to 45.5, which is the highest reading since April last year. So all up, for now that makes for an encouraging set of data. That said, one has to expect that a combination of higher interest rates and a stronger US dollar will have some dampening impact over coming months, especially if recent moves run significantly further as our strategy teams expect. Moving to euro area, the flash composite Markit PMIs for December remained at last month’s reading 53.9, thus meeting expectations and continuing to signal GDP growth running at about its recent pace of 1.7% yoy (see Figure 5). However, the detail held some surprises with the manufacturing index rising 1.2pts to 54.9 – the highest level since April 2011 – and the services index falling 0.7pts to 53.1 (thus giving back much of the improvement seen last month). The country detail reported both manufacturing and service sector improvement in France, whilst Germany’s service sector pulled against improvement in the manufacturing sector. Our European team noted that rise in the PMI price indices to post-2011 highs should be welcome news for the ECB following its decision to slow the pace of QE last week. In other European news, the SNB and Norges Bank announced no change in their respective policy settings. SNB President Thomas Jordan welcomed the Fed’s policy tightening as a reflection of improved US economic prospects whilst worried about the “multitude of political uncertainties” facing Europe. In the UK the November retail sales report revealed a little more resilience than expected following the sharp upswing in spending reported in October. Excluding fuel, the volume of sales rose 0.5% mom in November to be up 6.6% yoy. As widely expected the BoE MPC announced no change in its policy settings. The Bank also maintained the neutral policy stance adopted at the last meeting, with the press release again noting that “Monetary policy can respond, in either direction, to changes to the economic outlook as they unfold to ensure a sustainable return of inflation to the 2% target.” The statement noted the recent rise in longer-term interest rates that in part reflects an expected loosening of US fiscal policy, which “, if it materialises, will help to underpin the slightly greater momentum in the global economy evident in a range of data since the summer.” At the same time the Bank fretted about perceived risks in China, the euro area and some emerging markets. On inflation it was noted that since the November meeting the net impact of a 6% rally in trade-weighted sterling and higher oil prices would be for a slightly lower than projected path of inflation, albeit one that would likely still overshoot the Bank’s target later next year and through 2018.

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