Saturday 16 December 2017

Daily Market Update: Yellen’s dovish tones continue to weigh on the dollar

Janet Yellen
Janet Yellen

Simon Barry

The dollar continued to find the going tough on the exchanges yesterday as Tuesday’s dovish update from Fed Chair Yellen continued to weigh on the greenback’s performance.

Eur/USD traded as high as $1.1365 as the pair built further on the gains we noted in yesterday’s comment.

In truth, the economic news from yesterday was not, of itself, supportive of further euro gains against the buck. The ADP jobs report showed a continuation of solidly healthy private sector employment growth in the US, with March job gains of 200k coming in ahead of Wall Street forecasts for 195k, and broadly in line with the average monthly increase recorded through 2015. While the relationship between this measure and the measure which is released as part of the much more important official payrolls series is far from watertight, it does point to the likelihood of a solid official report, due tomorrow. In contrast, the latest survey indicator from the euro zone economy pointed to weakening activity momentum. The European Commission’s Economic Sentiment Indicator (ESI) fell for the third month running in March. This took this closely-followed barometer of confidence in the zone to its lowest level in over a year, casting some doubt over the signal given by a slight uptick in last week’s March Composite PMI.

Ordinarily, one might have expected that such slightly favourable US news (both in absolute terms and relative to that from the euro zone) to have provided some modest support for the dollar. However, markets are continuing to trade off what they consider to be a decidedly dovish update from Yellen whose cautious tone on the US rate outlook was in contrast to the more hawkish soundings from other (but much less influential) Fed officials of late. Having said that, one interesting feature of the latest price action is that Eur/USD has not managed to break through some important levels on the charts. In particular, as yesterday’s move was taking hold we wondered whether the pair would establish a new high for the year by breaching the $1.1377 mark set back in mid-February. The fact that it had a look at that level and pulled back perhaps casts some doubt about the strength the move’s upside momentum. But it also likely reflects a lack of willingness on the part of traders to add further to their positions ahead of the ever-important official jobs data out tomorrow – a report that will, as always, play a very important role in shaping expectations about the outlook for the US economy and Fed policy.

Irish consumer spending remains strong

At home, the latest retail sales figures confirm that Irish consumer spending trends remain very strong. Overall sales volumes rose by 0.3% m/m in February resulting in an acceleration in y/y growth to a stellar 11% from 10.9% in January. Exceptionally rapid growth in Motor Trade sales (up 22% y/y in February) is part of the story reflecting a very strong start to the year for car sales. But trends in underlying (i.e. ex motors) sales also continue to impress, with y/y growth at a very robust 7.1% in February, up from 6.6% in January. In other news, the latest reading of the CSO’s Residential Property Price Index (RPPI) showed prices were flat across the country in February. However, because of the easy comparison brought about by a drop in prices a year earlier, the annual growth rate picked up from 7.6% to 8% - a five-month high. Dublin underperformance remains a prominent theme in the latest figures, with price growth in the capital at 4% (up from 3.4%) continuing to lag considerably behind the 11.5% recorded in the ex-Dublin figures.

Finally, if one thinks that it is remarkable that, a little over two years after leaving its bailout, the Irish government can borrow 10- year money on the sovereign debt markets at yields below 0.75%, then is astonishing the appropriate word to describe its ability to raise 100-year money at a cost below 2.5%?! That’s what it did yesterday, as the NTMA issued its first ever 100-year note, raising a small amount of Eur100m at a yield of 2.35%, declaring that its ability to do so “represents a big vote of confidence in Ireland as a sovereign issuer”. There is little doubt that Ireland has done an extremely impressive job in transforming her credit worthiness in recent years, but the extraordinarily low levels of yield also reflect exceptionally (unsustainably?) benign market conditions across much of the bond world in general at present.


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