Markets Tread Water; Powell is Awaited

The capital markets seem unusually subdued.  The US dollar is mostly
slightly firmer, except against the euro and Swiss franc among the
majors.  The MSCI Asia Pacific Index managed to eke out a small gain
(0.2%), for a third advancing session, without the help of China, Taiwan, Korea
or India.  

It was really a Japanese story.  The Nikkei rallied 1.1%, while
excluding Japan the MSCI benchmark was off 0.25%.  This is also borne out
by the heavier tone in the MSCI Emerging Market Index (-0.2%).  European
bourses are nursing small losses, and the Dow Jones Stoxx 600 is off 0.12% in
late morning turnover.  Telecom, real estate and health care are drags,
but being offset by consumer discretionary, financials and information
technology.  US shares are trading with a heavier bias as

Bond market are quiet, with 10-year benchmark yields edging higher. 
Italy is unexpectedly resilient ahead of this weekend’s election.  Over
the past week, the yield has slipped 5.5 bp compared with a three-basis point
increase in Spain.   The US 10-year yield slipped below 2.83% yesterday
for the first time in nearly two weeks and is consolidating the pullback after
approaching 2.96% a week ago. 

The market has responded as expected to the disappointing New Zealand
trade figures.
The December surplus was revised lower (NZD596 mln vs NZD640
mln), but the real disappointment was in the January figures.  Rather than
reporting an actual balance as expected, New Zealand reports a NZD566 mln
deficit.  The New Zealand dollar is testing the small shelf near $0.7270
carved in recent days. A break could open the door to another cent

The euro has shown little reaction to the economic data.  Money
supply growth was steady at 4.6%, and the series of confidence surveys were
either as good or better than expected.  Of note, bank lending to
non-financial businesses was strong but uneven (strong showing in Germany, weak
in Italy).  Loan growth to households was flat, mostly due to slightly
weaker house-related activity.  

Ahead of tomorrow’s preliminary CPI estimate for February, Spain and
Germany have reported data today. 
The German states all reported
slower inflation on a year-over-year basis than in January.  The national
figure that will be out shortly was expected to have slowed to 1.3% from
1.4%.  Most of the states don’t report much detail, but Saxony’s figures
may be suggestive.  Core inflation there ticked up to 1.6% from
1.5%.  The headline was kept in check by slower food prices (1.2% vs.
3.0%), led by a sharp drop in vegetables.   This suggests the
underlying pressure may be greater than the headline suggests.  

Meanwhile, Spain’s CPI was firmer than expected.  The headline
rose 0.1%, rather than slip 0.2% as the Bloomberg survey would have it. 
This translates into a year-over-year rate of 1.2%, up from 0.7% in

The US has a slew of economic data before Powell’s Congressional
  The January advanced goods balance and the inventory
figures are probably the most important for GDP purposes, but there will be
some relevant information in the durable goods report as well.  On
balance, forecasts for Q1 GDP have been pared back by the Atlanta and New York
Fed trackers recently.  Both are looking for a little more than 3% pace,
and the risk seems to be on the downside from today’s data. S&P/Caseshiller
house prices, Richmond Fed manufacturing survey and Conference Boards’ consumer
confidence survey will also be released, but typically don’t have much market
impact even in the best of times.  

Fed Chair Powell is not an unknown figure to investors, and it would be
surprising if he surprised today. 
His confirmation hearings and the
Fed’s monetary report, released at the end of last week, leave little doubt of
continuity of policy.  It is not with the same degree of confidence say
that Abe was able to achieve in Japan with the reappointment of Kuroda.
However, despite disrupting in other ways, President Trump went with a
candidate that was arguably the most likely to continue the present
course.   The advisers Powell has chosen also confirm this, as they
too are well-entrenched in the Fed and its modus operandi.   Both the
CME and Bloomberg models show an 86.0-87.4% chance of a Fed hike next month is
already discounted.  

We argue that there is a compelling case for the Fed not to signal
four hikes this year…yet. 
There is no reason to make that call now
(or in the March forecasts).  It could prematurely tie the Fed’s hands, or
risk again over-promising and under-delivering.  Powell is
fortunate that circumstances will allow him to raise rates at the first FOMC
meeting he chairs.  Recall, in contrast, Draghi cut rates at his first two
meetings, unwinding Trichet’s moves.  Powell and the Fed are under no
pressure from the market to signal a fourth hike.  It still has not
discount a third hike fully, let along pushing for a fourth.  

One area that Powell may stand out is in his assessment of the state of
He seemed to suggest that the problem
has been addressed or minimized.  In his confirmation hearings, this view
did not draw much attention.  It may be going forward.   We
suppose that Powell may judge his testimony today as successful if there is not
much of a market reaction.  

There are many options that expire around the time Powell’s testimony
will begin. 
There are 1.2 bln euros struck at $1.2350 that will be
cut.  There is an option for $560 mln struck at JPY107.35 and GBP649 mln
struck at $1.40 that will go.  There are around A$650 mln options at
$0.7850 -$0.7875 that expire today. 

The euro and yen are inside yesterday’s ranges.  The euro is in
the upper end of its five-day range, capped below the 20-day moving average
(~$1.2360).  The dollar continues to straddle the JPY107 level with little
impetus in either direction.   Sterling is flat just below $1.40. 
The dollar-bloc currencies are little changed, but slightly lower, also within
yesterday’s ranges. After Powell’s testimony, attention may turn to the
Canadian budget, which Finance Minister Morneau will deliver.  Fiscal
consolidation is expected. 


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