USD/CAD – Loonie Rallies on Inflation Data

Statistics Canada data this morning showed that headline inflation in Canada slowed last month, while measures of underlying prices strengthened to their highest level in 18-months.

Canada’s consumer-price index rose +1.7% y/y in January, following a +1.9% advance in December.

Market expectations were for a +1.5% lift. On a month-over-month basis, prices rose +0.7% in January versus an expected print of +0.4%.

Digging deeper, today’s report indicated underlying, or core, inflation strengthened in the month. Underlying prices rose in a range from +1.8% to +1.9%, for an average of +1.83% – the highest level since mid-2016. The average in the previous month was +1.76%.

The ‘loonie’ is up +0.51% against the U.S dollar, trading atop of C$1.2659. The CAD was trading north of C$1.2712 just before this morning’s release.

Fed Rhetoric to Dictate Dollar Direction

Friday February 23: Five things the markets are talking about

Ahead of the U.S open, Euro equities are struggling for direction after a positive Asian session as the market debates the outlook for central banks ‘normalizing’ their policies.

Euro bonds have gained along with Treasuries, while the dollar steadies after yesterday’s drop.

With no U.S data on the docket today, the market will shift its attention towards a plethora of Fed speakers doing the rounds.

First up will be New York Fed Chief, William Dudley, who kicks off proceedings at 10:00 am EDT as he addresses the “Monetary Policy Forum” in Chicago.

Note: Dudley is making his final rounds of appearances before his retirement.

Appearing at the same conference shall be Boston Fed President Rosengren, who is one of the Fed’s more “dovish” members, but who is not a “voter” this year.

Ms. Mester, the President of the Cleveland Fed, will be speaking at the same conference this afternoon at 1:00 PM EDT. She is a “voter” this year and a “hawk.”

Finally, Mr. Williams, the President of the San Francisco Fed, a “voter” on the FOMC this year and generally considered a “moderate,” will be speaking to a group on the west coast on the economy and monetary policy at 03:40 pm EDT.

1. Stocks gain in thin trading

In Japan, stocks rallied in light trade as receding fears of more aggressive U.S interest rate hikes boosted sentiment. The benchmark Nikkei ended +0.7% higher. For the week, it was up +0.8%.The broader Topix gained +0.8%.

Down-under, Australia’s S&P/ASX 200 closed +0.8% higher to cap its best week since Oct. In S. Korea, the Kospi had its best day since Oct. 10 rising +1.5%.

In Hong Kong, stocks rose overnight, capping a holiday-shortened trading week, as main indexes managed to recover much of the damage done during the recent rout. The Hang Seng index rose +1.0%, while the China Enterprises Index gained +1.7%.

In China, shares extended their rebound overnight, on sign’s that the Chinese government is once again supporting the stock market. The blue-chip CSI300 index ended up +0.5%, while the Shanghai Composite Index gained +0.6% in a holiday-shortened week. Both indexes have rebounded over +7% from a low print on Feb. 9.

Note: One of China’s largest insurance companies, Anbang Insurance Group, was seized as it violated laws and regulations that could seriously endanger the solvency of the company.

In Europe, regional indices trade mixed this morning with strength in the Italian MIB offset by weakness in the Spanish Ibex and FTSE.

U.S stocks are set to open in the ‘black’ (+0.3%).

Indices: Stoxx600 flat at 380.4, FTSE -0.2% at 7238, DAX +0.1% at 12470, CAC-40 flat at 5310, IBEX-35 -0.2% at 9858, FTSE MIB +0.4% at 22541, SMI -0.6% at 8917, S&P 500 Futures +0.3%

2. Crude oil prices rally, gold little changed

Crude oil prices remain better bid and range bound following the release of this week’s EIA inventory report, which showed a somewhat surprising decline in crude oil inventories on the order of -2.3m barrels compared to the average increase of +3.4m barrels in the previous five-years.

U.S oil production last week was steady at +10.27m bpd, a record level, while crude exports jumped to more than +2m bpd, close to a record +2.1m hit in October.

Crude bulls are beginning to ask if the “bull” rally could fade away as the U.S. oil production undermines the OPEC production cut commitments.

Note: The decline in crude inventories was particularly acute in Cushing. U.S oil refineries averaged approximately +15.8m bpd during the week ending February 16 or about -330k fewer bpd than last week previous.

Ahead of the U.S open, gold prices are little changed, but the ‘yellow metal’ remains on track for its sharpest weekly drop in nearly three-months. Spot gold is down -0.1% at +$1,329.16 an ounce.

Note: Prices gained +0.6% Thursday, their biggest one-day percentage rise since Feb. 14. The precious metal remains on track for its biggest weekly fall since the week ended Dec. 8, 2017.

3. Sovereign yields fall

Capital markets remains somewhat sceptical that the recent streak of data on wage growth, consumer prices and producer prices points to a rapid acceleration in inflation on either side of the Atlantic.

Data this morning from the Eurozone showed that consumer price growth slowed slightly last month (see below), but the core-measure edged a tad higher for the first time in months.

The ten-year U.S yield has eased, but remains atop of their 2014 high print, while those on German bunds dropped to the lowest since early January.

The yield on 10-year Treasuries decreased -2 bps to +2.90%. In Germany, the 10-year Bund yield has fallen -2 bps to +0.70%, the lowest in four weeks. In the U.K, the 10-year Gilt yield has declined -2 bps to +1.546%. In Japan, 10-year JGB’s yield has dipped less than -1 bps to +0.05%, the lowest in more than seven-weeks.

4. Dollar on the back foot

The U.S dollar is modestly weaker as the market is apparently ready to accept as a given that the Fed shall move at least three times this year to tighten monetary policy and to raise the overnight fed funds rate. The only question is whether the Fed shall move for a fourth time and by how much?

For the ‘single’ unit, it’s not only next weekend’s Italian general election (Mar 4) that poses a risk to the EUR (€1.2313), but also Sunday week is the same date that Germany’s SPD party members will vote on the proposed CDU/SPD coalition. The market is currently pricing in a +40-50% chance of a rejection, a result that could see Chancellor Angela Merkel step down.

Elsewhere, the pound (£1.3950) has edged a tad higher after U.K’s PM Theresa May won the backing of her divided Brexit “war cabinet” to ask for an ambitious trade deal with the E.U.

The SEK (€10.0388) is a tad softer outright as the market felt that the Riksbank Feb minutes this morning were on the softer side with concerns lingering over inflation and the exchange rate given the recent negative surprise with Jan CPI data.

5. Eurozone Jan CPI unrevised, but still a distance from target

Eurostat said consumer prices in the 19 countries sharing the ‘single unit’ fell -0.9% m/m in January for a +1.3% y/y increase.

Ex-food and energy, or core-inflation, fell -1.3% m/m and rallied +1.2% y/y, accelerating from +1.1% in the previous three months.

An even broader measure of core inflation, which in addition excludes alcohol and tobacco prices, also increased to +1.0% y/y in January from +0.9% in the previous three-months.

Forex heatmap

Higher Yields Pushing Dollar Up

Tuesday February 20: Five-things the markets are talking about

Overnight, global stock indexes have declined along with U.S futures, while the ‘big’ dollar has rallied a tad as U.S Treasury yields back up towards their four-year highs.

No central bank meetings are scheduled for this week although minutes from the latest FOMC (Wed) and the ECB meetings (Thurs.) will be published.

Note: Given the forthcoming March FOMC meeting (March 20 -21) when markets expect another +25 bps increase, dealers will be looking for signs that the majority of the committee is aligned for the increase. They also will be looking to see how the FOMC’s views on inflation have evolved.

In the U.K, there will be two major releases – the labor market report (Wed) and the second estimate of Q4 GDP (Thurs.) Elsewhere, Canada will post December retail sales (Thurs.) and consumer prices for January (Fri).

With little to no economic U.S data on tap, the markets focus now turns to the U.S Treasury department, which opens its auction floodgates beginning with today’s record supply of +$151B of three- and six- month bills (Total new debt supply is +$258B this week).

The U.S debt sales should provide a better market understanding of how steep yields can back up in the short-term.

Note: Fed policy makers speaking this week include NY Fed President Dudley and Atlanta Fed President Bostic and Cleveland Fed President Mester is among speakers at the U.S Monetary Policy Forum in NY.

1. Global stocks see ‘red’

Asian equities took their cue from Monday’s European bourse direction as U.S stocks and Treasuries took a break for the Presidents’ Day holiday.

In Japan, the Nikkei fell -1%, surrendering some of its early-week rise thanks to weakness in its electronics and banking sectors. Selling came despite a slip in the yen outright (¥107.10). The Topix fell -0.7%.

Down-under, the Aussie’s S&P/ASX 200 ended flat. In S. Korea, the Kospi fell -1.1%, dragged lower by index heavyweight Samsung Electronics, which dropped another -2% after falling -1.3% on Monday.

In Hong Kong, the Hang Seng Index pared an early slide, down -0.2%, on its first full day of trading in nearly a week. The main benchmark in Singapore fell -0.2%; while Indian’s Sensex was last up +0.4%.

Note: With Chinese and Taiwanese markets still closed for the Lunar New Year holiday, investors should be cautioned against reading too much into recent price action due to thin volumes.

In Europe, indices trade mostly higher across the board following the weakness seen yesterday, with the FTSE under performing being weighed on by HSBC and BHP Billiton following results.

U.S stocks are set to open in the ‘red’ (-0.8%).

Indices: Stoxx600 flat at 378.3, FTSE -0.5% at 7213, DAX -0.1% at 12373, CAC-40 flat at 5257, IBEX-35 +0.2% at 9829, FTSE MIB +0.1% at 22582 , SMI flat at 8907, S&P 500 Futures -0.8%

2. Oil markets mixed, Brent and WTI move in opposite directions

U.S crude prices are still carrying momentum from Friday’s gains due to yesterday’s President Day’s holiday while international Brent prices have eased.

U.S West Texas Intermediate (WTI) crude futures are at +$62.31 a barrel, up +63c, or +1% from Friday’s close. Ongoing supply reductions from Canada to the U.S due to pipeline reductions are supporting WTI prices.

Brent crude has eased on the back of a dip in Asian stocks and a stronger dollar. Brent crude futures are at +$65.54 per barrel, down -13c, or -0.2% from yesterday’s close.

Note: Oil markets remain well supported due to supply restraint by the OPEC. Yesterday, OPEC Secretary-General Barkindo said the organization registered a +133% compliance with agreed output reduction targets in January.

However, soaring U.S production is threatening to erode OPEC’s efforts. Last week, the amount of U.S oilrigs drilling for new production rose for a fourth consecutive week to +798.

Ahead of the U.S open, gold prices have slid for a third consecutive session as the ‘mighty’ buck rebounds from its three-year lows, while the market waits Wednesday’s Fed minutes for clues on the outlook for U.S interest rates. Spot gold is down -0.2% at +$1,343.22 an ounce.

3. Sovereign yields trade atop record highs

This is a huge week for bond investors, as the U.S Treasury prepares to sell +$258B worth of new debt, starting with today’s record sale of +$151B of three- and six- month bills. These debt sales should provide a better understanding of how steep U.S yields could back up in the short-term.

After building up a record “short” position in U.S 2-year futures and historically large short positions across other maturities, higher volatility this month has seen a sharp reduction in these record shorts over the past week.

The biggest reversal was in two-year product – net short positions were slashed by +76,772 contracts to -133,986.

The U.S 10-year is now at +2.92% ahead of the first trading day this week after yesterday’s holiday.

In Japan, BoJ Governor Kuroda did not discuss monetary policy during an appearance in parliament. Speculation has been swirling about the possibility the BoJ might scale back its stimulus since they reduced their purchases of JGB’s last month.

Down-under, the Reserve Bank of Australia (RBA) reiterated in its minutes of this month’s policy meeting that inflation is expected to “only gradually” accelerate as the economy strengthens and wage pressures increase.

4. Dollar gains against most G7 pairs

Ahead of the U.S open, the U.S dollar has seen some steady gains outright versus G7 currency pairs, aside from sterling. The gains are reflective of U.S yields pushing a tad higher.

Sterling has jumped from its overnight low of £1.3934, to again trade north of the psychological £1.4000 handle on news that the European Parliament is putting a document together outlining its desire for an “association agreement” with post-Brexit Britain. This is a break from the position of the chief E.U negotiator Barnier and could allow Britain to retain “privileged” access to the single market.

5. German ZEW Survey moves off from record highs

Germany’s ZEW Indicator of Economic Sentiment recorded a decrease of 2.6 points this month and currently stands at 17.8 points.

The indicator remains slightly below the long-term average of 23.7 points. The assessment of the current economic situation in Germany decreased by 2.9 points, with the corresponding indicator currently standing at 92.3 points.

Comments from ZEW President Wambach: “The latest survey results continue to show a positive outlook for the German economy. The assessment of the current economic situation is still on a very high level and the economy is expected to improve in the coming six months. Economic growth in Germany is substantially driven by the very good development of both the global economy and private consumption. Inflation expectations for Germany and the Eurozone have also started to increase.”

Forex heatmap

Dollar Regains Ground Ahead of Fed Minutes

Higher US inflation fails to spark dollar revival

The US dollar depreciated across the board versus major pairs despite consumer prices rising more than expected. Inflation anxiety had triggered a sell-off in global stock markets with the Fed expected to ramp up their interest rate hike path yet the dollar did not benefit as higher rates have already been priced in by the market. Fiscal uncertainty driven by political factors continue to confound investors with stock indices rebounding this week and the dollar hitting a 2014 low. The paradox in consumer spending and retail sales continues as Americans remain confident in the economic outlook yet core retail sales remain flat and taking into consideration auto sales they actually dropped by 0.5 percent. The dollar showed some signs of life on Friday as it gained against a basket of major pairs, but not enough to offset the losses earlier in the week.

  • Fed to release minutes of January meeting
  • Kuroda renominated as Governor of Bank of Japan (BOJ)
  • Lower trading activity with start of Chinese New Year celebrations and 3 day weekend in NA

Dollar Recovers on Friday But Still Underwater this Week



The EUR/USD gained 1.62 percent in the last five days. The single currency is trading at 1.2448 with the EUR recovering against the earlier losses versus the USD suffered earlier in the month. US inflation rose more than expected and US treasuries dropped in prices as investors sold them anticipating higher rates this year. Bond yields rose with the 10 year at four year highs (2.93 percent). The correlation between higher yields and a stronger currency is broken at the moment for the USD as the confidence in the stability of the US economy is up for debate. Fundamentals are strong and would point to a higher dollar, but political uncertainty around fiscal stimulus has made it hard to quantify the effects of actual and proposed legislation on the currency. The U.S. Federal Reserve will publish the minutes from its January Federal Open Market Committee (FOMC) meeting on Wednesday, February 21 at 2:00 pm EST. The meeting was the last presided by Chair Janet Yellen and is not expected to bring any surprises, but could prepare the market on what to expect in March when Chair Jerome Powell heads his first FOMC.

The USD went through a topsy-turvy week, with Wednesday’s release of consumer price index data providing the most volatility. The market forecasts were slightly improved with a 0.3 percent monthly gain. The employment report in February 2 was the first data point that suggested a stronger inflationary pressure. Stock markets had already suffered two difficult weeks and the dollar rose as the inflation data was released only to quickly give back all gains and end up in the red.

President’s day in the US will give some investors a much needed rest from a high octane trading week. The Lunar New Year celebrations will also affect trading volumes as Hong Kong and China markets will remain closed until Thursday. Stock markets had a positive week after stronger corporate results erased earlier losses.



The USD/JPY lost 2.38 percent during the week. The currency pair is trading at 106.19 as the JPY keeps gaining. The government issued a statement where it was clear there is no need for intervention and the market took it as a sign to keep buying the yen. The tone changed slightly on Friday as the currency kept appreciating and there were some warning that the trade is one sided. The softness of the USD and uncertainty about how the American government will deal with growing twin deficits and political drama has boosted the JPY due to some safe haven flows.

The reappointment of BOJ Governor Haruhiko Kuroda along with other nominations of economist who favour further easing did not factor into Yen pricing in the short term, but should impact the growing gap between rates in Japan and the United States. In the short term, lack of stability in politics and fiscal uncertainty are overriding higher growth and interest rate expectations in the US.



Oil prices advanced during the week. The price of West Texas Intermediate is trading at $61.21 with most of the gains in energy coming from dollar softness. Oil prices suffered losses earlier in the month as higher production in Canada, Brazil and the United States is anticipated given the high prices and producers in those nations not bound to the Organization of the Petroleum Exporting Countries (OPEC) production cut agreement. Lack of traction of the US currency is keeping prices above $60.

A small rise in oil rigs in Baker Hughes was not enough to derail energy prices specially with an underlying weak US dollar. The OPEC agreement with other major producers has stabilized oil prices after the freewill caused by overproduction. The question remains if demand for energy has recovered to the point that even after the agreement timeline runs out supply will not once again outweigh demand causing another drop in prices.

Market events to watch this week:

Monday, February 19
7:30pm AUD Monetary Policy Meeting Minutes
Wednesday, February 21
4:30am GBP Average Earnings Index 3m/y
9:15am GBP Inflation Report Hearings
2:00pm USD FOMC Meeting Minutes
Thursday, February 22
4:30am GBP Second Estimate GDP q/q
8:30am CAD Core Retail Sales m/m
11:00am USD Crude Oil Inventories
4:45pm NZD Retail Sales q/q
Friday, February 23
8:30am CAD CPI m/m

*All times EST
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

US/German Bond Yield Gap Hits 10-month high

The gap between German and U.S. 10-year borrowing costs reached its widest point since April 2017 on Thursday after a higher-than-expected inflation print in the United States led to a sharp sell-off in U.S. Treasuries.

While investors also shed European government bonds on the data – bond markets in the world’s major developed economies tend to track each other as many investors switch between them – political risks kept a cap on yields.

The yield on 10-year U.S. Treasuries, which moves inversely to price, touched a fresh four-year high of 2.94 percent in European trade, after data on Wednesday showed consumer prices rose more than expected in the world’s largest economy in January.

This raises the pressure on new Federal Reserve chief Jerome Powell to prevent a possible overheating of the economy.

“The inflation data weighed on the U.S. Treasury market, and now you will have fiscal stimulus when the economy is running at full employment,” said Commerzbank strategist Michael Leister, referring to U.S. President Donald Trump’s $200 billion infrastructure spending plan.

“But in Europe the risks have become a bit more balanced and there’s still some demand for Bunds,” he said.

Though European bond yields have risen sharply since the start of December, this move has lost some steam as concerns around German coalition talks and an upcoming Italian election renewed the bid for “safe haven” bonds.

In addition, while most expect the European Central Bank to reduce extraordinary stimulus sooner rather than later, rate hikes are still a good distance away with a booming European economy yet to leave a lasting mark on inflation.

But while German 10-year government bond yields also rose after the release of the U.S. consumer price data – they were 3 basis points higher at 0.78 percent on Thursday – this was still below the recent 2-1/2 year high of 0.81 percent.

The “transatlantic spread” between U.S. and German 10-year government bond yields opened Thursday at 216 basis points, a level last seen ten months ago.

Most other euro zone government bond yields were also higher by 3-4 bps, partly driven upwards by large bond sales by Spain and France on the day.

AUCTION STATIONS

The move towards higher yields across the euro zone has certainly boosted demand in some quarters, and this was on display on the French and Spanish auctions on Thursday.

France in particular was swamped with demand as investors put in enough orders to cover an 8 billion euro sale of bonds twice over, while Spain also generated strong demand, particularly for its shorter-dated debt.

“I have been watching to see at what point these positive yields on semi-core bonds start attracting international investors, and so for me this France result looks pretty interesting,” said Mizuho strategist Antoine Bouvet.

Spain’s bond auction result was also positive, especially given that Italy and Portugal have already conducted sales this week, he added.

Reuters

U.S Producer Prices Rise in January

U.S. producer prices accelerated in January, boosted by strong gains in the cost of gasoline and healthcare, offering more evidence that inflation pressures were building up.

The report came on the heels of data on Wednesday showing a broad increase in consumer prices in January. The Labor Department said on Thursday its producer price index for final demand rose 0.4 percent last month after being unchanged in December.

In the 12 months through January, the PPI rose 2.7 percent after advancing 2.6 percent in December. A key gauge of underlying producer price pressures that excludes food, energy and trade services jumped 0.4 percent last month. The so-called core PPI edged up 0.1 percent in December.

It rose 2.5 percent in the 12 months through January, the largest increase since August 2014. The core PPI increased 2.3 percent in the 12 months through December.

The PPI report bolsters expectations that inflation will gain steam this year even though its correlation with consumer prices has weakened.

Economists believe that a tightening labor market, weak dollar and fiscal stimulus in the form of a $1.5 trillion tax cut package and increased government spending will lift inflation toward the Federal Reserve’s 2 percent target this year.

The U.S. central bank’s preferred inflation measure, the personal consumption expenditures (PCE) price index excluding food and energy, has undershot its target since May 2012.

U.S. financial markets were little moved by the data.

The Fed has forecast three interest rate increases this year, with the first hike expected in March. Most economists are, however, forecasting four rate increases this year because of rising inflation pressures.

FOOD PRICES FALL

Last month, the cost of hospital outpatient care surged 1.0 percent, the largest increase since August 2014, after gaining 0.1 percent in December.

Hospital inpatient care rose 0.3 percent. Overall, the cost of healthcare services shot up 0.7 percent in January. Those costs feed into the core PCE price index.

Wholesale goods prices increased 0.7 percent last month, after nudging up 0.1 percent in December. Gasoline prices, which rose 7.1 percent, accounted for nearly half of the increase in the cost of goods last month.

Wholesale food prices fell for a second straight month, with prices for prepared poultry posting their biggest drop in 14 years and chicken eggs declining by the most since December 2015. Core goods prices rose 0.2 percent for the second consecutive month.

Reuters

US weekly jobless claims rebound from near 45-year lows

The number of Americans filing for unemployment benefits rebounded from a nearly 45-year low last week, but remained below a level that is associated with a tightening labor market.

Initial claims for state unemployment benefits increased 7,000 to a seasonally adjusted 230,000 for the week ended Feb. 10, the Labor Department said on Thursday. Claims for the prior week were revised to show 2,000 more applications received than previously reported.

Claims fell to 216,000 in mid-January, which was the lowest level since January 1973. Economists polled by Reuters had forecast claims rising to 230,000 in the latest week.

Last week marked the 154th straight week that claims remained below the 300,000 threshold, which is associated with a strong labor market. That is the longest such stretch since 1970, when the labor market was much smaller.

The labor market is near full employment, with the jobless rate at a 17-year low of 4.1 percent. The tighter labor market is starting to exert upward pressure on wage growth, which will over time add to inflation pressures.

The Labor Department said claims for Maine were estimated last week. It also said claims-taking procedures in Puerto Rico and the Virgin Islands had still not returned to normal, months after the territories were slammed by Hurricanes Irma and Maria.

Last week, the four-week moving average of initial claims, considered a better measure of labor market trends as it irons out week-to-week volatility, rose 3,500 to 228,500.

The claims report also showed the number of people receiving benefits after an initial week of aid increased 15,000 to 1.94 million in the week ended Feb. 3. The four-week moving average of the so-called continuing claims fell 5,750 to 1.94 million.

CNBC.com

Ramaphosa elected president of South Africa

Cyril Ramaphosa was elected as South Africa’s president in a parliamentary vote on Thursday after scandal-ridden Jacob Zuma reluctantly resigned on orders from the ruling African National Congress.

South Africa’s main stock market index jumped nearly 4 percent, putting it on track for its biggest one-day gain in more than two years as investors welcomed Zuma’s resignation after nine years in office plagued by corruption allegations.

Reuters

Dollar Dives on Confidence, No Support from Fundamentals

Thursday February 15: Five things the markets are talking about

U.S bond yields have backed after an unexpected rise in U.S consumer inflation to its fastest pace in a year – the core’s +1.8% y/y print yesterday was higher than expected, but still below the Fed’s +2% target – making it more likely the Fed will raise interest rates three or more times this year. But, higher U.S rates have not been able to make the U.S dollar more attractive.

The dollar remains under pressure, building on yesterday’s slide in the Euro session, as the market seems to be losing confidence in the long-run state of the U.S economy.

The Dollar Index is down -0.5% and poised to log another three-year low if the decline persists as we head to U.S session open.

Without any new positive U.S demand or supply shocks that could change the landscape for the country’s economy, it’s easy to see the weak dollar story persisting.

For the dollar to rise with Treasury yields, which it has not been doing this year, there needs to be a return in relative confidence over the medium-term U.S.

Also yesterday, January retail sales fell unexpectedly in their biggest drop in 11- months, declining -0.3%, raising new concerns about the U.S economy as a weaker sale print will lead to lower expectations for Q1 GDP growth.

1. Stocks edge higher

The global stock rally is marching ahead as investors take in stride a jump in sovereign yields.

In Japan, the Nikkei posted a solid rise despite a stronger yen (¥106.31). The index ended up +1.5% overnight, after tumbling to a four-month low on Wednesday. The broader Topix advanced +1.0%.

Down-under, Australia’s S&P/ASX 200 rebounded +1.2% as the stock index’s energy component rallied +2.4% to reverse some of this month’s decline.

In a shortened session ahead of the Lunar New Year holiday, Hong Kong’s Hang Seng Index jumped +2%. Its rise of +5.4% this week has erased +50% of last week’s decline, its biggest fall in a decade.

Note: China, South Korea, Taiwan, Vietnam markets were all closed.

In Europe, regional indices continue their ascent higher, tracking another positive session in Asia and on Wall Street yesterday. The French CAC is +1% higher following earnings from a host of Index components. The Swiss SMI is underperforming after Nestle reported mixed results.

U.S stocks are set to open in the ‘black’ (+0.8%).

Indices: Stoxx600 +0.9% at 378.0, FTSE +0.7% at 7264, DAX +0.9% at 12455, CAC-40 +1.6% at 5248, IBEX-35 +1.3% at 9808, FTSE MIB +1.1% at 22687, SMI +0.2% at 8924, S&P 500 Futures +0.8%

2. Oil rises on Saudi commitment to withhold output, gold higher

Oil prices have rallied +1% overnight to extend their gains from yesterday’s session, lifted by a weak dollar and Saudi comments that it would rather see an undersupplied market than end a deal with OPEC.

Brent crude futures are at +$64.99 a barrel, up +63c, or +1%, extending Wednesday’s +2.6% climb. U.S West Texas Intermediate (WTI) crude futures are up +83c, or +1.4%, from Wednesday’s close at +$61.43 a barrel, adding to its +2.4% gain.

Oil markets have got a push from comments by Saudi Arabia, voicing support for output cuts backed by OPEC and other producers including Russia since 2017 in an effort to tighten the market and prop up prices.

OPEC Secretary General Barkindo said that preliminary data for January points to high compliance of cuts by producers.

Ahead of the U.S open, gold prices have edged a tad higher as the dollar weakens and investors’ bank on the precious metal as a hedge against inflation. Spot gold is up +0.3% at +$1,354.34 an ounce and is heading for a fourth consecutive session of gains.

3. Sovereign yields rise

The yield on U.S 10-year Treasuries is nudging closer to +3%, continuing its steady advance from last year’s low of +2.01% in September.

Following this weeks U.S inflation data, and the potential implications that it has for the pace of Fed rate increases this year, the market will be closely scrutinize speeches later today by ECB policy makers to see whether the recent market turmoil will convince them to ease off plans to taper their bond purchases.

Note: Fed-fund futures show a +21% chance of at least four interest-rate increases by year-end, compared with +17% earlier this week.

In Germany, the 10-year Bund yield has gained +1 bps to +0.77%, the highest in more than two years on the biggest gain in a week.

4. Dollar dives again

The USD remains on the defensive despite higher U.S yields –the currency is usually highly correlated to short-term rates. Market seems to be reacting to concerns over weak U.S policies and/or diverging central bank policies as both the BoJ and ECB could begin tightening monetary policy.

The EUR/USD (€1.2467) probed the upper end this week’s and year range as the pair re-tested the €1.25 handle. Sterling (£1.4042) is a tad higher initially aided by reports that the E.U Commission was looking to ease the Brexit transition conditions. However, the E.U later refuted the reports. The pound is also finding support not only from the dollar’s weakness, but also a perceived higher probability that the current U.K government will serve its full five-year term.

USD/JPY (¥106.69) continues to trade atop of its 15-month lows as the pair probed below ¥106.20 overnight. Japan’s Finance Minister Aso comments that the yen’s strength is not abrupt enough to require intervention supported the yen’s rally.

In cryptocurrencies, bitcoin (BTC) is moving back toward $10,000, up +6% on the day at +$9,840 – the price had slumped some -70% in the past six weeks.

5. Crisis in the Northern Ireland

U.K PM Theresa May is facing a political crisis in Northern Ireland as the DUP, who are part of the government’s coalition, have stated there was “no prospect” of a power sharing deal and suggested a return to direct rule.

This crisis threatens to throw the Good Friday agreement into jeopardy and would be a significant blow to P.M May’s authority as she attempts to agree to a crucial Brexit deal over the Irish border.

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U.S. CPI Rises More Than Forecast on Apparel Costs

U.S. consumer prices rose by more than projected in January as apparel costs jumped the most in nearly three decades, adding to signs of an inflation pickup that have roiled financial markets this month.

The consumer price index rose 0.5 percent from the previous month, above the median estimate of economists for a 0.3 percent increase, a Labor Department report showed Wednesday. Excluding volatile food and energy costs, the so-called core gauge increased 0.3 percent, also above forecasts for 0.2 percent. It was up 1.8 percent from a year earlier, higher than the 1.7 percent estimate.

The figures may renew investor concerns that the Federal Reserve will raise interest rates at a faster pace than anticipated, after wage figures earlier this month sent Treasury yields spiking and started a rout in equities that pushed them into the first correction in two years. The 1.7 percent monthly gain in apparel prices, which account for about 3 percent of the CPI, was the biggest since 1990.

Other items contributing to the gain in CPI included rents and owners’ equivalent rent, which both rose 0.3 percent from December; medical care, up 0.4 percent; and motor vehicle insurance, which advanced 1.3 percent, the most since 2001.

The increase in the core CPI brought the three-month annualized gain to 2.9 percent, the fastest since 2011, according to data compiled by Bloomberg.

Retail Sales

A separate report showed U.S. retail sales unexpectedly fell in January and December figures were revised downward, suggesting consumer spending is on a slower track in the first quarter.

Including all items, the main CPI gauge rose 2.1 percent from a year earlier, the same pace as in December and exceeding forecasts for a 1.9 percent increase.

The report follows the Labor Department’s annual revisions to CPI last week that took the December monthly increase in the core index down to 0.2 percent, from an initially reported 0.3 percent. The December gain in the main index was revised upward to 0.2 percent from 0.1 percent.

Policy makers look at the core index to better gauge underlying inflation because food and energy prices tend to be volatile. The latest report showed energy prices rose 3 percent from the previous month and food costs advanced 0.2 percent.

The two main U.S. stock indexes endured wild swings last week on concerns that inflation would spur higher interest rates more quickly, boosting borrowing costs for companies. Even so, equities have recovered some ground, advancing for three trading sessions in a row through Tuesday.

Fed Outlook

While economists and investors have seen a Fed interest-rate hike in March as a near-certainty, the details of the latest CPI report could play a role in the timing and number of rate increases throughout 2018.

The central bank’s preferred gauge of inflation — a separate figure based on consumer purchases and issued by the Commerce Department — has mostly missed its 2 percent goal in the past five years. The measure excluding food and energy is also below the Fed’s target. January data are due for release on March 1.

Fed policy makers will also have February CPI data in hand before they next meet March 20-21 in Jerome Powell’s first gathering as chairman. Powell, speaking Tuesday at his ceremonial swearing-in, suggested that the central bank would push ahead with gradual interest-rate increases, and that officials “remain alert to any developing risks to financial stability.”

Retail sales fell 0.3 percent in January from the previous month, the most since February 2017, according to the Commerce Department, compared with the median estimate of economists for a 0.2 percent increase. December’s figures were revised to show little change, after an initially reported gain of 0.4 percent.

Other Details

  • Wireless-phone service prices fell 0.2 percent
  • Used-vehicle prices posted a 0.4 percent increase last month; the index for new vehicle costs fell 0.1 percent
  • The price of airfares fell 0.6 percent, the third straight drop
  • Cost of lodging away from home fell 2 percent
  • Average hourly earnings, adjusted for inflation, rose 0.8 percent from a year earlier, according to separate report Wednesday from Labor Department
  • The CPI is the broadest of three price gauges from the Labor Department because it includes all goods and services; about 60 percent of the index covers the prices that consumers pay for services ranging from medical visits to airline fares, movie tickets and rents

    Bloomberg