Gold is up, 10Y yields are slightly lower, the dollar is marginally weaker against the euro, and oil is lower in a modest reversal of recent key themes on Friday morning. European and Asian markets are largely mixed.
“Today’s move is a minor correction,” Bloomberg quotes Lutz Karpowitz, a senior currency strategist at Commerzbank as saying. “We could easily head a bit lower until the end of the year, but all the arguments are on the dollar’s side. Interest rate expectations in the U.S. show the Fed has regained most of its credibility and the market is now convinced there will be an aggressive rate-hiking cycle.” As BBG goes on to note,
…the moves mark a step back after a dramatic week in which the U.S. central bank unveiled its outlook for an accelerated series of rate increases in 2017. That steeper path comes as President-elect Donald Trump prepares a spending agenda that may fuel fast growth and inflation in the world’s biggest economy. Volumes are expected to thin in coming weeks as traders close positions before the December holiday season and end of the year.
WSJ tells a similar story this morning:
Some investors have questioned whether the moves are overdone, noting the Fed’s projections for future rate increases have often differed from eventual decisions and that recent signs point to improvements in the eurozone economy.
“As the dollar appreciation has been very intense and rapid, we cannot rule out that softer housing data today in the U.S. may trigger some profit-taking and position paring,” said Vasileios Gkionakis, currency strategist at UniCredit.
In government bond markets, the yield on the 10-year U.S. Treasury note inched down to 2.559% from 2.580% on Thursday, its highest in over two years, while its German counterpart fell to 0.316% from 0.367%.
German 2s on the other hand, fell to -0.8% at one point, the lowest level on record as the European collateral shortage continued unabated. “Pressures in the repo market have continued to support the front end of core EGB curves this week despite the ECB’s recent changes to securities lending,” BBG notes.
“While the probability is high for the dollar bull run to continue as the focus shifts to next year’s interest rate hikes, we need to be cautious about volatile price actions as trade is thinning before the year-end,” Takuya Kanda, a senior researcher at Gaitame.com Research Institute in Tokyo said of the greenback’s run. “The trend is up, but it’s difficult to trust the trend unconditionally.”
Here’s Deutsche Bank’s Jim Reid with the overnight wrap:
Well this has all crept up on me. Today is my last EMR of 2016 as on Sunday I drive to the French Alps with Trudi, Maisie and Bronte and a boot full of baby and dog food and lots of toys. I’ve been told by Trudi that I’m only allowed a small hand luggage case as the car is full. For revenge I may not find room for deodorant. Craig will be carrying on the EMR for a couple of days next week before he too goes on holidays. Thanks for reading this year and for all the interaction. Thanks to Craig as well as without him none of this would have been possible. As it’s my last of the year and as my readers are only too happy to give a strong view on box sets, films, books and music I thought I’d list my favourite ones of 2016. Ask where 10 year Treasuries are going then 10 might reply. Ask whether Game of Thrones is as good as it used to be and I’d expect a thousand replies. So with that I’m going where the demand is. My list is at the end today so enjoy. Given the volumes of replies I’d expect arguing the merits of these choices please forgive me if I don’t reply immediately!!! Anyway seasonal greetings to you and your families and after the next 5-10 minutes of your time see you in 2017. As a parting comment from us, the last 48 hours having given us more confidence in our core view for 2017 of higher rates volatility with some large spikes up in yield likely ahead. While risk assets to a large degree reversed the post-FOMC weakness (S&P 500 +0.39%), 10y Treasury yields traded in an intraday high to low range of nearly 8bps, touching a high of 2.639% and a low of 2.564% before closing more or less in the middle at 2.597% and +2.6bps higher on the day. That takes the post-FOMC move to nearly +17bps higher in yield while there was a similar level of volatility at the short-end of the curve before 2y yields eventually settled little changed by the end of play at 1.275%. Meanwhile, some focus has also turned back to emerging markets after another huge surge for the Greenback which saw the USD index close up +1.33% yesterday (and +2.20% post FOMC now). The MSCI EM index closed – 1.62% following a -0.51% decline on Wednesday while the MSCI EM Currencies index was down -0.89% in yesterday’s session. It’s one market certainly worth keeping an eye on into year end. Aside from that the other focus yesterday was the BoE policy meeting and US inflation data. Both ended up being a fairly non-event though. The BoE left current policy measures on hold although the interesting take away from the statement was the acknowledgement from the MPC that ‘the sterling exchange rate had appreciated and this would by itself point to less of an overshoot in inflation relative to the target in the medium term, though monthto-month volatility was to be expected as market participants’ view on the UK’s future relationship with the EU continued to evolve’. Meanwhile, headline CPI in the US printed bang on the money at +0.2% mom which helped to nudge up the YoY rate to +1.7% from +1.6%. The core also came in at +0.2% mom although the 2.1% yoy rate was left unchanged. This morning in Asia it’s been a fairly quiet end to the week for markets. Bourses are generally flat to slightly firmer. The Nikkei (+0.56%), Hang Seng (+0.09%) and Kospi (+0.24%) are amongst those higher while markets in China and Australia are relatively unchanged. Sovereign bond markets are also fairly flat although 10y JGB yields did at one stage touch 0.10% which is the highest since January. One of the other big themes for 2017 is whether the BoJ’s yield cap will be tested by the market. Meanwhile credit indices, at the margin, are slightly tighter in the region. As you might expect given these moves, it’s been a quiet morning for newsflow. Moving on. With regards to the remainder of the data in the US yesterday, the latest manufacturing indicators were all generally supportive. The Philly Fed manufacturing index revealed a bumper 13.9pt rise to 21.5 (vs. 9.1 expected) in December which puts it at the highest level since 2014 while the Empire manufacturing reading rose 7.5pts to 9.0 (vs. 4.0 expected). The flash manufacturing PMI also printed at 54.2 which was a bit lower than expected but still up from the 54.1 reading last month. Elsewhere, initial jobless claims were reported as declining 4k to 254k last week while the latest NAHB housing market index print revealed a bumper 7pt rise to 70 (vs. 63 expected) which is the highest since July 2005. The prospect of the Trump presidency then clearly sending building sentiment through the roof. Elsewhere we also got the December flash PMI’s in Europe. The composite reading for the Euro area came in unchanged at 53.9 for the month although the details were a bit more interesting with a decline in the services component (-0.7pts to 53.1) offset by an increase in the manufacturing reading (+1.2pts to 54.9). Regionally we saw a mild dip in Germany’s composite to 54.8 (from 55.0) although France did rise to 52.8 (from 51.4). Our European economists noted that the data implied an average decline of 0.6pts in the composite PMI’s of the periphery and that the data also point to GDP growth for the Euro area of just over +0.4% qoq in Q4. Before we move onto today’s calendar, it’s worth noting that last night we got the announcement that Fed Chair Yellen will speak next Monday on the “state of the job market”. So that’s one final date for your diaries before the holiday season really rolls in. Looking at the day ahead, in what is otherwise a very quiet end to the week for data the highlight will likely be the final November CPI revisions for the Euro area this morning. Aside from that we’ve also got trade data for the Euro area due along with the latest confidence indicators in France and CBI trends orders data in the UK. This afternoon in the US the November housing starts and building permits data will be out where starts in particular are expected to decline following the surge in October. Away from the data the Fed’s Lacker is scheduled to speak this evening while the ECB’s Weidmann and Constancio speak this morning.
