Sunday 18 February 2018

Daily Market Update: Dollar continues to push higher on hawkish Fed‐speak


Simon Barry

Another relatively quiet day in terms of top tier‐economic news has meant that moves in most areas of the markets have been limited over the past 24 hours.

Building on the modest gains we noted yesterday, the greenback has gained a bit more ground following hawkish comments from a couple of Fed speakers. Lockhart and Williams (Presidents of the Atlanta and San Francisco Feds respectively) were on the wires separately yesterday expressing their views that the Fed may raise policy rates as soon as next month. The comments of Williams in particular have gotten the market’s attention given that he has generally been regarded as one of the more dovish policy makers at the Fed and that he is regarded as someone whose views have tended to be close enough to those of Fed Chair Yellen (Williams was a key adviser to Yellen for many years prior to her taking the top job). Williams said that if the economy continues to improve as he generally expects, then “April of June would definitely be potential times to have an increase in interest rates”.

Neither Williams nor Lockhart will be voting on policy this year so their views are not necessarily going to impact actual Fed policy outcomes. However, this bout of Fed‐speak from Williams in particular has served to remind markets of the upside risks to the US interest rate outlook relative to the very benign set of expectations embodied in current market pricing which barely has a single hike priced for the entirety of this year.

On the currency markets, this has seen the dollar continue to move higher over the past 24 hours or so, and is up 0.5‐0.9% against both the euro and sterling to open at $1.1210 and $1.4290 respectively. As well as reacting to the Fed‐speak, the dollar also looks to be finding a safe‐haven bid in early trading this morning in Europe as newswires are reporting several fatalities following explosions in Brussels, including at the airport. Details are still emerging but this shocking and concerning development (which is foremost a major tragedy for those affected) is likely to inject a cautious tone into the day’s trading.

Looking to the day ahead, the flash Eurozone PMIs are published for March. Expectations are for a slight pickup in the manufacturing PMI, from 51.2 to 51.4, but the services and composite PMI are expected to remain at 53.3 and 53.0 respectively (both about a point below their respective Q4 2015 averages). The Bundesbank in Germany released a report yesterday expressing that they expect that the German economy will open 2016 advancing at a solid pace, at least as fast as the 0.3% q/q seen at the end of last year. However, they noted that recent declines in leading indicators might suggest that a slowdown in the pace of growth may be coming in Q2.

One such indicator has been the expectations component of the IFO survey, which has fallen off a 2015 peak of 104.8 in November to 98.8 in February. The March release of the survey is published this morning and IFO expectations are expected to increase to 99.5. The current situation component of the IFO is expected to edge down from 112.9 to 112.7 while business conditions (the headline index) is expected to tick up from 105.7 to 106.0. The German ZEW (which unlike the PMI and the IFO surveys investors rather than real economy agents) is expected to show an advance in both measures in March, expectations are for the current situation component to increase from 52.3 to 53.0 and the expectations element is expected to increase from 1.0 to 5.4.

In the UK, CPI will see some attention, especially the core measure as the Bank of England continue to monitor underlying inflation (MPC members have emphasised that cumulative acceleration in this is one of the things they will need to see before rate hike discussions get back on firmer footing). Core (ex. energy, food, alcohol, & tobacco) inflation is expected to remain at 1.2% y/y in February. Expectations are for headline inflation to edge up from 0.3% to 0.4% y/y. February public sector (ex. banking groups) finance data will also be announced and is expected to release at a £5.9bn deficit (compared to £7.5bn for the same period in 2015).

The flash Markit manufacturing PMI is announced in the US for March and is expected to edge up from 51.3 to 51.9. This will give a lead in to the manufacturing ISM next week as investors look for clues regarding whether the manufacturing sector is continuing to stabilise.

ECB governing council member Nouy, Bank of England MPC member, and senior Fed officials Evans and Harker all have speaking engagements today. Chicago Fed President Evans is known for being a relatively dovish member of the FOMC, so it will be interesting to see if any comments from him inject some dovishness into the US rate debate following yesterday’s hawkish comments from Williams and Lockhart. Finally, it is worth keeping an eye on the potential for heightened market volatility in Europe in light of the tragic news being reported from Brussels morning and frightening reports that other attacks may be planned.

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