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

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.

Forex heatmap

At the Edge of a Cliff

At the Edge of a Cliff

Was it the mixed data, skewed positioning or merely a lack of confidence that has the USD dollar precariously perched at the edge of the cliff.

Everyone one to a tee went all in on a dollar buying frenzy after the CPI number, but the lack of follow-through was very telling, and the quick rebound stopped out all those newly minted positions and then some. The markets sold AUD, NZD heavily at the lows and then got summarily spanked when traders started to factor in the conflicting data prints.

While the Strong CPI reading does present a hawkish risk for the Feds dot plots in March, the miss in the US retail sales data has the street scrambling to revise GDP estimates lower.The divergent data stream has escalated the market debate of critical importance, specifically is it inflation or growth that will dictate the Fed pace of interest rate normalisation?

But the bottom line for the US  dollar in my view, amidst rising inflation the prospect of increasing deficits, both trade and budget, should weigh like an anvil around  the dollar bulls neck

Equity markets

In seemingly absurd fashion, US equity investors ignored the inflationary signals and focused on weaker-than-expected US retail sales report.  There is an increasing possibility that the Powell may blink and the Feds will be more hesitant to guide monetary policy given the waning growth narrative.
Gold Markets 

Higher US inflation combined with the USD exhibiting zero correlation to higher interest rates amidst burdening duel deficits should play out favourably for Gold markets. The weaker dollar narrative is playing out most favourably across, the broader commodity space and gold demand could surge and push above this year’s highs.  Also,  the sustainability of the frothy equity market given the weak retail sales print suggest increasing gold equity hedges is a practical move.

Oil Markets 

A weaker dollar and verbal intervention from Saudi Energy minister who suggested significant oil producers would prefer tighter markets than end supply cuts too early has seen oil prices do an about-face. The Suadi signal is reasonably convincing suggesting  OPEC and their partners are committed to maintaining an absolute floor on oil prices

As indicated earlier in the week, the battle lines are forming around this key WTI 60.00 bpd as the Shale oil gusher will continue to weigh heavily on OPEC effort to blow out the worldwide glut.

However physical demand remains weak globally so traders will continue to monitor the USD /Oil price correlation and at first sign of flutter, it could signal a downdraft.
Currency Markets

Japanese Yen

With the Interest rate to FX correlation is in “Neverland”, It could be open season on USDJPY after convincingly crossing the 107 USDJPY Rubicon. If the market focuses aggressively shift to the US’s duelling deficit amid higher inflation, the dollar days are numbered in the 107’s if we factor in an expected Exporter flow panic which could be exacerbated by push Japanese investors to raise their hedge ratios on US investments fearing a further fall in the greenback.

While we should expect the usual verbal lashing from Japan’s currency officials, I suspect we are still ways off from overt intervention

The Austrailian Dollar

It’s always good to go into critical economic data with a plan B even if it’s from outer space.  Expect the unexpected and today we see  Aussie is benefiting from resurgent Commodities and US dollar weakness as the greenback is showing no correlation to higher US rates.

Malaysian Ringgit

A weaker US dollar, rebounding commodity prices have the MYR sitting well supported by yesterday’s robust GDP print adding good measure

Dollar weakness is seeping in the USDJPY and USDCNH which will provide a positive backdrop for regional currency markets, and we should expect the MYR to be one of the keys go to currencies as positions remain under positioned post-January monetary policy meeting.  Higher US interest rates are showing little obstacle for regional currency appreciation so the MYR should benefit

Not to weave a cautionary tales but liquidy is a bit thin given in regional markets given the proximity of China Lunar New Year so best to be nimble in these conditions

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

    Will it be a Valentines Day Massacre for the Dollar?

    Wednesday February 14: Five things the markets are talking about

    Are financial markets justified going from a growth story to an inflation narrative?

    Today’s U.S consumer price index (08:30 am) is being touted as one of the most significant economic releases in a number of years as capital markets seek to understand the recent plunges in global equities and sovereign bonds.

    With investors already on edge, they are expected to renew this months convulsion on any sign that U.S inflation is exceeding expectations at a rate that may entice the Fed to quicken its plans for tightening monetary policy.

    Already this month, after a stronger U.S non-farm payroll (NFP) print and wage numbers, investors have sent U.S Treasury yields aggressively higher and instigated a rout in equities that pushed them into the first correction in 18-months.

    Note: Market expectations are looking for the core-CPI (ex-food and energy) to rise +1.7% in January y/y compared with the +1.8% increase in December. U.S retail sales are also out this morning and are expected to have increased for a fifth consecutive month.

    A higher CPI will give the USD strength, lead to higher yields and lower equity prices, but a tepid headline print could cause more of a problem, especially with record short U.S 10-year treasury position and a market focusing on President Trump’s proposed budget and the rise in U.S twin deficits.

    Note: Lunar New Year celebrations for the Year of the Dog begin, affecting China, Hong Kong, Taiwan, Singapore, Malaysia and Indonesia. Chinese mainland markets are closed Feb. 15-21.

    1. Stocks mixed reaction

    In Japan, the Nikkei share average dropped to a fresh four-month low overnight as investor sentiment was again sapped by worries about U.S inflation data due this morning. The Nikkei ended -0.4% lower, its lowest closing since early October. The broader Topix fell -0.8%.

    Down-under, the Aussie S&P/ASX 200 index fell -0.3%, following a +0.6% rise on Tuesday. In S. Korea the Kospi closed out the overnight session up +1.1%, helped by a +3% jump in Samsung.

    In Hong Kong, shares rebound sharply ahead of Lunar New Year holiday. Trading will resume on Feb 20. At close of trade, the Hang Seng index was up +2.27%, while the Hang Seng China Enterprises index rose +2.14%.

    In China, stocks rebounded overnight, but volumes were thin, as many traders had already left for the weeklong Lunar New Year holiday. Chinese markets will reopen on Feb. 22. At the close, the Shanghai Composite index was up + 0.46%, while the blue-chip CSI300 index was up +0.8%.

    In Europe, regional indices trade higher across the board following a rebound in Wall Street yesterday and strength in U.S futures this morning.

    U.S stocks are set to open in the black (+0.4%).

    Indices: Stoxx600 +0.7% at 373.2, FTSE +0.7% at 7216, DAX +0.7% at 12286, CAC-40 +0.6% at 5139, IBEX-35 +0.5% at 9693, FTSE MIB +0.2% at 22071, SMI +0.9% at 8832, S&P 500 Futures -+0.4%

    2. Oil dips on looming oversupply and weak U.S dollar, gold higher

    Oil prices have dipped overnight, pressured by lingering oversupply including rising U.S inventories. However, the prospect of Saudi output dropping next month, economic growth hopes and a weaker U.S dollar all combined to limit losses.

    Brent crude futures are at +$62.68 per barrel, down -4c. Brent was above +$70 a barrel earlier this month. U.S West Texas Intermediate crude futures are at +$59.06 a barrel, down -13c from yesterday’s close. WTI was trading above +$65 in early February.

    On Wednesday, the Saudi energy ministry said that Saudi Aramco’s crude output in March would be -100k bpd below this month’s level while exports would be kept below +7m bpd.

    Stateside, yesterday’s API report showed that U.S crude inventories rose by +3.9m barrels in the week to Feb. 9, to +422.4m.

    Note: That is due to soaring U.S crude production, which has jumped by over +20% since mid-2016 to more than +10m bpd, surpassing that of top exporter Saudi Arabia and coming within reach of Russia, the world’s biggest producer.

    Oil traders will take their cue from today’s EIA print (10:30 am EDT) and U.S inflation release.

    Ahead of the U.S open, gold prices have rallied for a third consecutive session overnight to hit a one-week high, buoyed by a weaker U.S dollar, while the market awaits U.S inflation data for clues on the pace of future Fed rate increases. Spot gold is up +0.3% at +$1,332 an ounce.

    3. Sovereign yields little changed

    Earlier this morning, Sweden’s Central Bank (Riksbank) kept their repo rate unchanged at -0.5%. Deputy governor Henry Ohlsson voted to raise rates, but the central bank’s signals on inflation were more downbeat. The inflation forecast for this year was downgraded to +1.8% from +2%. The statement indicated that policy makers would start raising the rate in H2 of 2018. Policy makers stressed that was important not to raise the rate too early and was committed to stimulus to prevent inflation setbacks.

    Elsewhere, fixed income seeks guidance from today’s U.S CPI release. The yield on U.S 10-year Treasuries fell less than -1 bps to +2.83%. In Germany, the 10-year Bund yield declined -2 bps to +0.74%, while in the U.K, the 10-year Gilt yield dipped -1 bps to +1.618%. In Japan, the 10-year JGB yield decreased -1 bps to +0.07%, the lowest in more than five weeks.

    4. Dollar on soft footing

    The USD remains on soft footing ahead of key Jan CPI data for the U.S.

    The EUR/USD is steady, trading atop of the €1.2350 area after various European GDP data highlighted better economic growth prospects (see below).

    USD/JPY tested ¥106.85 overnight for 15-month lows. The pair came off its worst level to approach 107.50 just ahead of the N.Y session after Japanese officials reiterated that they had no comments on forex levels.

    In S. Africa, political optimism that President Zuma would resign has sent the ZAR currency to its best level in nearly two-years outright. The South African Democratic Alliance (DA) leader Maimane (opposition) has stated that its motion to dissolve parliament was processed by Speaker. USD/ZAR is at $11.85 ahead of the open stateside.

    The Swedish krona has been volatile after the Riksbank interest rate decision. The krona briefly rose soon after the announcement, but has since pared those gains EUR/SEK last trades flat on the day at €9.9163, compared with €9.8952 before the decision.

    5. Euro-zone economy ends 2017 on a high note

    Note: There were a number of European GDP releases in the Euro session highlighting better economic growth prospects – Germany mixed; Netherlands beat and Italy a miss.

    Industry helped drive the euro-zone’s +0.6% expansion in Q4. This morning’s ‘flash’ estimate of Q4 GDP is the second release and confirms that quarterly growth slowed a tad from Q3’s +0.7% to +0.6%.

    There is no breakdown until the next release; however, expenditure evidence would suggest that weaker consumer spending growth was the main driver of the slowdown, while investment expanded after Q3’s contraction and net trade again made a positive contribution to growth.

    Digging deeper, industry appears to have made a stronger contribution to GDP growth than in Q3. Following the consensus-beating +0.4% monthly rise in IP in December.

    Forex heatmap

    USD Under Pressure as Traders eye U.S Inflation

    Tuesday February 13: Five things the markets are talking about

    Euro equities are trading steady despite a late down swing in Asia, as investors wrestle to find direction after this month’s early collapse.

    The dollar has weakened against G10 currency pairs while Treasuries have edged a tad higher along with gold. Crude is heading for its first advance in eight sessions.

    Investors are looking to tomorrow’s U.S. consumer-price data for some clues on direction, given that pressure on stocks have been stemming from the outlook for inflation.

    The market is expecting U.S consumer-price index to probably increase at a moderate pace last month along with U.S retail sales – both due out tomorrow.

    Note: Lunar New Year celebrations for the Year of the Dog begin, affecting China, Hong Kong, Taiwan, Singapore, Malaysia and Indonesia. Chinese mainland markets are closed Feb. 15-21.

    1. Stocks mixed review

    In Japan, the Nikkei share average closed at a four-month low overnight as investors turned somewhat risk averse as the yen rallies outright. The Nikkei ended -0.7% lower, its lowest closing level in four months.

    Down-under, Aussie shares tracked Wall St into positive territory. The S&P/ASX 200 index rose +0.6% at the close of trade, after a -0.3% yesterday. In S. Korea, the Kospi climbed +0.35%.

    In Hong Kong, stocks rose overnight, tracking a global rebound, on bargain hunting. At close of trade, the Hang Seng index was up +1.29%, while the Hang Seng China Enterprises index rallied +0.88%.

    In China, stocks rebounded, supported by investor sentiment aided by signs of government support and record bank lending last month. At the close, the Shanghai Composite index was up +1%, while the blue-chip CSI300 index was up +1.19%.

    In Europe, regional indices trade mostly lower taking the lead from weaker U.S futures. The FTSE trades little changed following a slightly hotter CPI reading, as Gilt yields pare declines.

    U.S stocks are set to open in the ‘red (-0.6%).

    Indices: Stoxx600 -0.1% at 372.7, FTSE flat at 7173, DAX -0.1% at 12266, CAC-40 -0.1% at 5133, IBEX-35 -0.6% at 9708, FTSE MIB -0.5% at 22215, SMI -0.3% at 8799, S&P 500 Futures -0.6%

    2. Oil prices firm on weaker dollar, gold higher

    Oil prices are better bid, supported by a rebound in global equities, as well as by a weaker dollar, which potentially supports more fuel consumption.

    Brent crude futures are at +$62.97 per barrel, up +38c, or +0.6% from Monday’s close. U.S West Texas Intermediate (WTI) crude futures are at +$59.60 a barrel, up +31c or +0.5% from yesterday’s settlement.

    The stronger prices came after crude registered its biggest loss in two years last week as global stock markets slumped.

    Nonetheless, rising U.S production continues to undermine the efforts led by the OPEC and Russia to tighten markets and prop up prices.

    Note: U.S oil production has rallied above +10m bpd, overtaking top exporter Saudi Arabia and coming within reach of top producer Russia.

    There are also strong signals the output will rally further. Data last Friday showed that U.S energy companies added 26 oilrigs looking for new production, boosting the count to +791, the highest since April 2015.

    Gold prices have hit a one-week high overnight, aided by a weaker dollar and as the market awaits for tomorrow’s U.S inflation data for clues on the pace of interest rate hikes. Spot gold is up +0.4% at +$1,327.81 an ounce.

    Note: Yesterday, the yellow metal rose +0.5%, its biggest single-day percentage gain in more than one week.

    4. Sovereign yields fall

    G7 sovereign bond yields look attractive across the curve after yields rallied on a recovering global economy and on expectations central banks will tighten policy faster than previously thought.

    With the lack of economic market news the fixed income market looks attractive and reason why yields fell in the overnight session.

    The yield on U.S 10-year Treasuries fell -3 bps to +2.83%, the biggest drop in more than a week. In Germany, the 10-year Bund yield declined -2 bps to +0.74%, the lowest in a week, while in the U.K the 10-year Gilt yield has dipped -1 bps to +1.601% despite the higher inflation print (see below).

    4. Sterling reaction muted

    The pound (£1.3896) has edged a tad higher after U.K January annual inflation unexpectedly remained at +3% (see below) as worries about the U.K. getting a transitional deal after breaking up from the E.U persist. EUR/GBP trades down -0.1% at €0.8868. Although the high inflation number will add to expectations for another BoE hike, futures prices would suggest that the market has priced in two rate increases for the next 12-months.

    Note: PM Theresa May’s government will aim to address the Brexit transition in a series of six speeches by the prime minister and other senior ministers in the next few weeks, which her office dubbed “The Road to Brexit.” May’s first speech is to be delivered at a conference in Munich next Saturday, while Foreign minister Boris Johnson will begin the series with a speech tomorrow.

    Elsewhere, the USD is modestly lower as President Trump’s proposed budget brings into focus the U.S twin deficits. The EUR/USD (€1.2337) is higher by +0.2%, while USD/JPY (¥107.55) is lower by -0.9% as fixed income dealers ponder the limits of an expansionary BoJ policy.

    5. U.K inflation above target in January

    Data this morning showed that U.K consumer prices rose +3% y/y in January. This headline print suggests that the Bank of England (BoE) case for higher borrowing costs is somewhat justified to bring borrowing costs back to its +2% annual goal.

    The ONS said that the price gains were driven by clothing, footwear and recreational goods and services, especially tickets for zoos and gardens.

    Note: Market consensus was expecting annual inflation in January to slow to +2.9%, from +3% m/m.

    U.K Inflation has been above the BoE’s +2% annual target for 12-consecutive months. Last week the BoE said that they expected to raise interest rates at a swifter pace than they anticipated last year to contain growth in prices.

    Note: The BoE raised its benchmark rate for the first time in a decade in November, to +0.5%. Futures prices suggest that the central bank will lift it again as soon as May.

    Forex heatmap

    FX and Equities Brace for a Bumpy Week

    Monday February 12: Five things the markets are talking about

    Investors are bracing for another bumpy ride this week after market volatility has returned with a vengeance, delivering the biggest rout in global stocks in a number of years.

    Despite stocks getting a reprieve overnight, investor fears of interest rate hikes that started the market correction continues to persist.

    Last week, the CBOE volatility index ended almost three times higher than its Jan. 26 level. The ten-year Treasury yield finished last week atop of where they started at +2.85%.

    Stateside, this week’s inflation report – U.S consumer-price data on Wednesday – could be the catalyst for a major struggle between equities and bonds that triggered the initial market turbulence.

    Elsewhere, while the coming week is absent of G10 central bank meetings, there are a number of important economic indicators to be released. In the U.K, consumer and producer price indexes and retail sales for last month should be a challenge for the pound (£1.3560). While in Japan, its first estimate of Q4 growth along with last month’s producer price index and December’s machinery orders (a proxy for capital spending) should be capable of moving the yen (¥108.70).

    Later today, President Trump will deliver his 2019 budget blueprint.

    1. Stocks breath a ‘sigh of relief’

    Global equities overnight have found some temporary support while volatility remains elevated.

    Note: In Japan, equity markets were closed due to a bank holiday Feb. 12, while Chinese New-Year celebrations for the ‘Year of the Dog’ begin (Feb 15-21) and follow across much of Asia, including Hong Kong, Taiwan, Singapore, Malaysia and Indonesia.

    Down-under, the Aussie S&P/ASX 200 was down -0.6%, weighed down by a fresh -1.6% drop in the energy sector, while in S. Korea, the Kospi rallied +0.4%.

    China and Hong Kong stocks rebounded after last week’s aggressive sell-off. In China, the Shanghai Composite index was up +0.8%, while China’s blue-chip CSI300 index was up +1.3%. In Hong Kong, the Hang Seng Index was up +0.71%.

    In Europe, regional indices are trading sharply higher across the board following on from a sharp rebound on Wall Street Friday and positive Asian markets.

    U.S stocks are set to open deep in the ‘black (+1.2%).

    Indices: Stoxx600 +1.5% at 374.1, FTSE +1.2% at 7181, DAX +1.9% at 12336, CAC-40 +1.5% at 5153, IBEX-35 +1.5% at 9785, FTSE MIB +1.1% at 22404, SMI +1.8% at 8831, S&P 500 Futures +1.2%

    2. Oil prices rally +1%, gold higher

    Oil prices start the week better bid, recovering some of this month’s steep losses as global equities find some firm footing after last week sea of red.

    Brent crude futures are at +$63.54 per barrel, up +75c, or +1.2% from Friday’s close. U.S West Texas Intermediate (WTI) crude futures are at +$60.04 a barrel – that’s up +84c, or +1.4% from the close.

    The stronger prices came after crude registered its biggest loss in two years last week as global stock markets slumped.

    Nonetheless, rising U.S production continues to undermine the efforts led by the OPEC and Russia to tighten markets and prop up prices.

    Note: U.S oil production has rallied above +10m bpd, overtaking top exporter Saudi Arabia and coming within reach of top producer Russia.

    There are also strong signals the output will rally further. Data on Friday showed that U.S energy companies added 26 oilrigs looking for new production, boosting the count to +791, the highest since April 2015.

    Ahead of the U.S open, gold prices have edged a tad higher as the dollar eased against G7 currency pairs after last week’s rally. Expect investors to take their cues from this weeks U.S inflation data. Spot gold is up +0.3% percent at +$1,320.19 an ounce.

    Note: Prices touched their lowest since Jan. 4 at +$1,306.81 last week.

    3. Sovereign yields creep higher

    U.S and eurozone government bond yields have edged higher overnight, heading back towards multi-year highs on unease that a pick up in inflationary pressures globally and a strong domestic economy will encourage the ECB and the Fed to signal to be more aggressive than originally priced in at the beginning of the year.

    In Europe, bond yields across the bloc were +1-2 bps higher in early trade, while in the U.S the 10-year note trades atop of its four-year highs.

    In Germany, the 10-year Bund yield is up almost +2 bps at +0.77% and within sight of its nearly three-year high hit last week at around +0.81%. The yield on the U.S 10-year note has rallied +4 bps to +2.90%, the highest in more than four years, while in the U.K, the 10-year Gilt yield has gained +4 bps to +1.605%.

    4. The U.S dollar’s quiet trading session

    A broad-based flight to safe haven, such as U.S treasuries or the Japanese yen (¥108.70), has not happened to date despite the recent turmoil on equity markets.

    The dollar ‘bulls’ are looking for the USD to rally this week, despite financial market volatility to remain high near-term as looser U.S fiscal policy and upside risk to U.S. inflation raises concerns.

    Overnight, FX saw a quiet session ahead of some key inflation data this week (U.K Jan CPI Feb 13 and U.S Jan CPI on Feb 14).

    Note: The recent pick up in global bond yields has been led stateside, while capital market wait for more details from President Trump’s budget and his infrastructure plan.

    EUR/USD (€1.2272) is little changed, but holding below the psychological €1.23 handle. On the weekend, ECB’s Nowotny (Austria) reiterated the concerns about attempts by the U.S to politically influence the exchange rate.

    GBP/USD (£1.3860) trades atop of Friday’s close despite the BoE having turned more rates ‘bullish’ last week. Dealers are now putting more weight on Brexit concerns as the U.K previously admitted that the growth potential of the economy had declined.

    USD/JPY (¥108.70) is steady as Japanese markets were closed for a bank holiday.

    5. Swiss inflation still super low

    Data this morning showed that Swiss consumer prices slid -0.1% in January from December leaving the annual inflation rate at +0.7% and slightly below expectations.

    Digging deeper, the decrease compared with the previous month is due in particular to the decrease in prices for outpatient hospital medical services. Prices for air transport also declined, along with prices for clothing and footwear, in particular because of sales. In contrast, prices for overnight stays in hotels, heating oil and electricity increased.

    Inflation is still low despite the Swiss National Bank’s (SNB) efforts to raise it through negative interest rates and a willingness to intervene in currency markets.

    Forex heatmap

    This too shall pass.

    This too shall pass

    It seems anytime I left my desk last week the market was sure to fall apart but after witnessing 25 years + of market corrections, I know storms don’t last forever, and as far as the recent bout of market mayhem is concerned, this too shall pass.

    Traders quickly conjectured that the ‘crash’ was mainly due to over-crowded positioning in short equity volatility trades and, therefore, was a relatively isolated event. But this does not mean equity markets are out of the weeds just yet.

    With US cash flow models factoring in higher US bond yields, equity markets repricing was always on the cards, but unequivocally the rapidity of the move higher in yields was stifling and stop losses were combatively triggered. And when factored with the unbridled use of leverage in equity positions it likely caused everyone to head for the exits due to cash and margin requirements. The great unknown in the debate is just how much equity froth is based on leverage and to what extent will higher US bond yields squeeze these positions either from a cash position or through asset rotation perspectives.

    It was a crazy week for US rate markets, but with powerful US economic signals and interest rates most certainly to rise quicker than expected,  last week tumult could be little more than the start of the equity rollercoaster. If cumulative boost from tax reform and fiscal stimulus nudges GDP outline 1.5% higher over the next six to 9 months how does the Fed possibly stick to their three dot plot projections for 2018?

    Bond markets are only in the early stages of buying into the global reflation theme, and increasing inflation expectations are driving nominal yields higher. Last week there was a significant topside move in US yields which suggest we could easily tack on another 30-35 basis points 2’s through 10’s given the US fiscal stimulus backdrop. But even without inflation, global central banks will move rates higher, and this will add to higher yield environment, higher inflation or not.

    The Feds seem undeterred from the path of gradual normalisation by the recent market turmoil, and we should not expect a Powell ” Put.” given the economic indicators remain strong. And with FED Dudley chiming in, the recent Stock market volatility is ” no big potatoes.” , just imagine a big potato !!
    Oil Markets

    U.S. crude oil fell below $59 a barrel for the first time in 2018.Rising US production and a resurgent dollar have stacked pressure on oil prices amid a broad financial market sell-off. And on Friday WTI nosedived after the U.S. rig count rose by 26 rigs in the week through Feb. 9 to a total of 791, supporting the EIA revised production forecast that the US would reach the lofty 11 million bpd by the end of 2018

    Also, the possible demise of the OPEC agreement has traders on pins and needles after The head of Russian energy giant Gazprom Neft on Friday said producers could adjust their commitments under the deal as soon as next quarter.

    Gold Markets
    Without question last week was a stressful week in the Gold markets which saw a little appeal for traditional haven assets as Wall streets sinkhole expanded.

    At the moment higher US yields continue to weigh negatively on gold’s appeal over the short term, but the recent market tumult likely has overleveraged equity positions scrambling for margin top-ups, and to a degree, there was cause for some cross-asset unwinds including gold allocations which were probably used to fund margins.

    In the more extended run with inflation expectations increasing on the back of US stimulus, this should be a consideration for growing one’s gold portfolio.
    At the retail levels, Mainland Gold consumption is rising in preparation for Chinese Lunar New Year holidays, not to mention a last-minute splurge for Valentine’s day should keep retailers busy.

    Currency Markets

    Currency markets were more or less a mixed bag last week, a potpourri of events but not one convincing driver. And with little to glean from Friday close, currency traders could remain sidelined watching equities markets swings in wonderment at least until this week’s US CPI. Given all this rukus started with an uptick in the wage growth component from this months NFP release; this weeks US inflation data will be a monster of a print.
    Japanese Yen

    Funding positions continue to unwind which at least in the case of JPY, is having a more significant influence over USDJPY than higher US yields. The reappointment of Kuroda could retrace some speculations on the policy adjustments; the Yen will remain the puppet whose strings are manipulated by equities and fixed income price movements.

    Australian Dollar

    RBA and SOMP behind us and signalling nor rush to hike for a considerable period given the slight dovish lean in the inflation outlook. The AUD should, therefore, be back trading off risk sentiment, commodity prices and ultimately the underlying USD movements. While the Aussie bounced higher above 78 on positive US equity close on Friday, we should expect commodity currencies trade poor amid the recent volatile market. Rallies will likely remain subdued near-term, so the Aussie should remain vulnerable.

    Long Euro short Aussie trade set up should return in vogue over the short term given divergent central bank policy expectations.

    Malaysian Ringgit

    The market continues to grapple with growth versus the inflation narrative, and as this volatility irons itself out, Asian markets tend to exhibit a higher sensitivity to global fluctuations.

    And while the Ringgit is better positioned than regional peers to withstand the recent uptick in Global volatility due to strong Marco foundations and the BNM on the path to interest rate normalisation, The domestic economic landscape will come under intense glare when Q4 GDP is released on Wednesday.

    While March a rate hike expectations are low due to the dovish inflation overtones expressed by BNM in January,  but a notable above consensus print on this weeks GDP  will increase the odds of a rate hike later in 2018 and strengthen the Ringgit. ( Consensus is 5.8 )

    While oil prices continue to move lower due to US supply concerns, I believe this is more technical driven as dollar index is holding above 90 cents, putting pressure on all commodities. Once this period of excess volatility decreases, the global growth narrative should reassert and commodity prices should rise.

    Equities Lose $5 Trillion as Bulls Slay Bulls

    Friday February 9: Five things the markets are talking about

    **Stateside, the House of Representatives has approved the bill to fund the U.S government and has raised spending limits over two-years, it is now sending the measure to President Trump.**

    Investors should expect market turbulence to continue this year as pullbacks and volatility become more common in the wake of rising central bank interest rates and sovereign bond yields.

    The growing consensus is that increasing market volatility should not be capable of derailing the underlying economic expansion or fundamentally dent risk assets, it does however make many things less predictable.

    Ahead of the U.S open, European stocks have pared their decline and U.S stock futures have gained despite an Asian session seeing red, with China’s bourses tumbling the most in 24-months.

    Elsewhere, Treasury yields have backed up to trade atop of their four-year highs as the ‘buck’ edged lower. Crude oil is heading towards its worst week in 12-months on concerns of over growing U.S supply and gold prices have temporarily stopped the bleeding.

    On Tap: Canadian employment numbers are out at 08:30 am EDT. Is the market about to see a deep revision to the last two-months of massive job gain headlines?

    1. Stocks Sea of red

    In Japan, the Nikkei share average tumbled again overnight, mirroring Wall Street’s losses, with oil-related equities leading the broad declines as crude prices slumped. The Nikkei finished down -2.3%, bringing its weekly loss to -8.1%. The broader Topix was -1.9%, down -7.1% for the week.

    Down-under, Aussie shares slumped to a near four-month low overnight hammered by renewed selling on worries of higher inflation and interest rates. The S&P/ASX 200 index fell -0.9%. The benchmark has declined -4.6% on the week, its biggest loss in over 24-months. In S. Korea, the Kospi index fell -1.8%.

    In Hong Kong, stocks crumble and cap the biggest weekly fall since the global financial crisis. At close of trade, the Hang Seng index was down -3.1%, the Hang Seng China Enterprises index fell -3.87%. For the week, the Hang Seng tumbled -9.5%, the biggest weekly loss since October 2008, while the HSCE posted a weekly loss of -12.01%.

    In China, stocks were crushed and suffered their worst day in almost two-years, with blue-chip led carnage dragging the markets into correction territory. The benchmark Shanghai Composite Index tumbled -4.0% and the blue-chip CSI300 ended the day down -4.3%.

    In Europe, regional indices trade mostly lower, but are off their session lows after a rebound in U.S futures ahead of the open stateside. Increased outlook for higher rates from the Bank of England (BoE) is weighing on the FTSE.

    Indices: Stoxx600 -0.5% at 372.1, FTSE -0.4% at 7144, DAX -0.3% at 12221, CAC-40 -0.4% at 5129, IBEX-35 -0.7% at 9689, FTSE MIB -0.3% at 22407, SMI +0.1% at 8768, S&P 500 Futures +0.7%

    2. Oil slides towards steep weekly loss as supply fears mount, gold higher

    Oil prices are on track for their biggest weekly loss in 10-months after hitting new lows overnight after data this week showed U.S crude output had reached record highs and the North Sea’s largest crude pipeline reopened following an outage.

    Brent futures are down -30c at +$64.51 a barrel. Yesterday, Brent fell -1.1% to its lowest close since Dec. 20. U.S West Texas Intermediate (WTI) crude is down -42c at +$60.73 a barrel, having settled down -1% Thursday, its lowest close since Jan. 2.

    Note: Brent futures have lost around -9% from their four-year January high print of +$71. Futures positions suggest that investors are sitting on the largest ‘bullish position in history.

    Earlier this week, the U.S. Energy Information Administration (EIA) upped its 2018 average output forecast to +10.59m bpd, up +320k bpd from its last forecast 10-days ago.

    Note: The output is now higher than the previous bpd record from 1970 and above that of top exporter Saudi Arabia.

    Ahead of the U.S open, gold prices have edged a tad higher after hitting more than one-month lows yesterday, as the correction in equities drove investors towards safe-haven assets like gold. However, gold ‘bulls’ should expect a stronger U.S dollar and concerns over rising global interest rates to keep gains somewhat capped. Spot gold is up +0.1% at +$1,320.72 an ounce.

    Note: On Thursday, gold prices touched their lowest since Jan. 4 at +$1,306.81 an ounce.

    3. Equity pain brings relief to bonds

    The Eurozone and U.S bond yields have edged a tad lower as renewed global stock selling has managed to lend some support to safe-haven debt markets.

    Bond yields have been backing up aggressively all week as investors brace for an end to easy-monetary policies by G7 central banks.

    Note: Yesterday’s more hawkish than expected Bank of England (BoE) was the latest catalyst to cause fixed income to steepen sovereign yield curves.

    The yield on U.S 10-year Treasuries has decreased less than -1 bps to +2.84%. In Germany, the 10-year Bund yield fell -1 bps to +0.76%, while in the U.K the 10-year Gilt yield declined -2 bps to +1.617%.

    4. Dollar jives and dips

    Market risk aversion sentiment remains to the fore, but the G10 forex pairs continue to stay locked within their recent ranges. The U.S dollar bull, and they are dwindling; maintain that it’s the Fed who may be caught behind the curve on rates. Next week’s U.S CPI may very well put the ‘cat amongst the pigeons.’

    Note: The greenback has caught a bid now that the House of Representatives has approved the bill to fund the U.S government.

    Elsewhere, the EUR/USD (€1.2254) is little changed, the pound continues to benefit, albeit struggling after the U.S funding announcement, from the Bank of England saying on Thursday that it expected to “increase interest rates earlier and faster” than previously projected, seen by many to mean a likely May rate rise.

    The Chinese currency is on track for its first weekly loss in nine-weeks as the yuan (¥6.3400) has weakened against the dollar in thin volume.

    5. U.K industrial output falls on North Sea pipeline shutdown

    Data this morning showed that U.K. manufacturing continued to grow in the final month of 2017, but overall industrial production fell by more than anticipated due to an emergency shutdown of a North Sea pipeline.

    In monthly terms, U.K. factory output grew by +0.3%, in line with market expectations, the eighth consecutive month of growth.

    However, overall industrial production, meanwhile, declined by -1.3%, +0.4% more than forecast.

    Separately, the ONS said that the U.K.’s trade deficit widened in December, driven by increased oil imports and rising prices. The December goods trade deficit stood at -£13.6B – significantly wider than expected (-£11.8B e)

    Forex heatmap