Yellen Helps the Dollar Extend Streak

The Dollar Index’s ten-day rally was at risk yesterday, but
Yellen’s reiteration of the commitment to continue to lift rates gradually helped extend the streak to eleven
sessions. 
This surpassed the streak around the
election (November 7-November 18).  With today’s gains, it may draw closer
to what appears to be the long streak, 14 sessions between April 30, 2012 and
May 17. To put it slightly differently, the Dollar Index has not had a losing
session this month.   
Although
Yellen’s comments were seen as dollar-positive, the impact on the outlook for
Fed policy did not change very much. 
 Consider that implied yield of the
March Fed funds futures slipped half a basis point to 0.69%.  The average
effective Fed funds rate is steady at 66 bp presently.  The implied yield of the June Fed funds futures contract rose to
0.84% from 0.825% while the implied yield of
the December contract rose three basis
points to 1.13%.
Turning the yields into odds of a hike, the Bloomberg’s calculations suggest a
34% chance of a March hike (was 30%) and 73.5% chance of a June move (was 71%).
 
The odds that by
the end of the year the Fed would have delivered three hikes this year (lifting
the target range to 1.25%-1.50%) is 26.4%, up from 24.4%.  The CME’s
calculation is less sanguine about the near-term
but converges with the Bloomberg calculation of the odds of three hikes before
the end of the year.  
Yellen did not
seem to break fresh ground yesterday. 
She stuck close to the FOMC statement in
her economic assessment.  All meetings are live, including March.  If
there was something new, it might have
been that the Chair did not see using the unwinding of the balance sheet as a
policy tool, such as to remove accommodation.  We thought that it could be used
like that.  The time frame is not clear, but it appears discussion will
begin shortly, and many look for an announcement toward the end of the year,
with implementation beginning sometime
year.  
There are two
things to note here.  
First,
the initial steps will likely involve not reinvesting the maturing issues.
 This has been the basic message for
some time.  Second, managing of this process will likely not be under
Yellen’s watch and has we have discussed,
the composition of the Board of Governors
will change dramatically over the next eighteen months.  President Trump
will appoint at least three of the seven governors this year and two next year.
 During the campaign, Trump was
critical of the low interest rates and accused Yellen (sic) of doing so for
political purposes.  Many think that as President, Trump will favor easy
money, but the institutional mandate of the central bank will not change
(unless Congress does so and it would take quite some time).  
We note too the
bipartisan nature of the Fed.  Consider Volcker was appointed initially by
Carter and reappointed by Reagan. 
 Greenspan was appointed by Reagan
and continued through Clinton. Bernanke was appointed by Bush and reappointed
by Obama.  This does not mean that
Trump will renominate Yellen, but the point is the institutional requirements
tend to dampen ideological fervor.  
After a quiet
few days for key US economic data, the calendar is full today. 
 The US reports January CPI, retail sales and
industrial output, and the February Empire survey.  The Bloomberg median
forecast is for a 0.3% rise in January CPI for a 2.4% year-over-year pace, but
for the core rate to slip to 2.1% from 2.2%.  We suspect the risk is on
the upside.  Retail sales will also be in focus. The 0.6% rise in January
will not be repeated, but the GDP
component was up 0.2% in December and could improve on that in January. Here we suspect that the markets may be more sensitive to disappointment with
consumption than inflation.  
The 0.8% rise
in December industrial production also most likely was not repeated in January, and a flat report is expected. 
 Here we suspect the risk is on the
upside, perhaps stemming from the energy sector and increasing rig count.
 The manufacturing ix expected to expand by 0.2% matching the December
gain.  Note that the average monthly change in manufacturing last year was
nil.  The Empire survey for February is expected to improve slightly (from
6.5 to 7.0), which would be the fourth month with a positive reading.
 That would be the longest streak since late 2014.   
Yellen is
delivering the second part of her
Congressional testimony. 
 The text is the same; the question
will change (though not the answers).  Also, after the markets close, the
latest Treasury International Capital report (TIC) will be released.
 Given the talk of that central banks are reducing their holdings, the
data may be scrutinized.  Note that
the Fed’s custody holdings (for foreign central banks) of Treasuries increased
by about $55 bln in December (which will be covered by the TIC report later
today).  
Elsewhere, the
most important economic report came from the UK. 
 Although the labor market had appeared to lose some
momentum recently, today’s jobs report was a bit better than expected.
 Jobless fell 7k in Q4 and employment rose by 37k.  The claimant rate eased from 2.3% to 2.1%.  The
claimant count fell a whopping 42.4k in January, following a revised 20.5k fall
in December (from an initial estimate of a 10.1k decline).  The claimant
count has become more volatile due to changes in the Universal Credit benefits
that is impacting the seasonal adjustments.  
Disappointment
comes from average earnings. 
 Despite what appears to be near full
employment, UK wage growth remains lackluster and at risk of being offset in
full by rising price pressures. Average wage growth in the three months through
December rose 2.6%, unexpectedly weakening from 2.8% overall and 2.7% excluding
bonuses.  
Sweden’s
Riksbank met, and although the policy was
unchanged, the central bank expressed concern about the krona’s strength, which
it feared could derail progress toward its inflation target.
  It not only warned that it
maintained an easing bias, but it also threatened to intervene in the foreign
exchange market.  The market took the comments as a green light to sell
the currency, and the krona is the
weakest of the majors today, off 0.5% against the US dollar and about 0.2%
lower against the euro.  The euro needs to resurface above SEK9.50 to be
important from a technical perspective.  It is the upper end of this
month’s range.  Above there, near-term potential extends toward SEK9.60.
 
In terms of the
markets, the equity advance in the US yesterday, despite the firmer rates, has carried
over into Asia and Europe.  
The MSCI Asia Pacific Index rose about 0.8%, led by a 1% rally in
the Nikkei and a 1.25% rally in Hong Kong.  Mainland shares that trade in
Hong Kong continue to drive higher.
 The 1.7% rally today overcomes yesterday’s minor loss (-0.3%) which ended
the six-day advance.  This year the Hong Kong Enterprise Index is up 11%,
with a little less than half being recorded
in the last five sessions.  
In Europe, the
Dow Jones Stoxx 600 overcome initial weakness, perhaps helped by the rally in
US shares, and close higher yesterday. 
 It is adding another 0.4% today to extend the streak
to the seventh session.  Today’s advance is
being led by financials and real estate.  It is at its best level
since early December 2015.  
The US 10-year
yield is firm near 2.48%.
  Most
European yields are lower, but Germany is steady. The premiums over
Germany continue to drift lower.  A notable
exception is Greece, where the country report that the harmonized measure of
CPI jumped from 0.3% in December to 1.5% in January.  Greece and the
official creditors do not appear to be moving closer ahead of next week finance
ministers meeting, which is thought to be the last opportunity to strike an
agreement before the Dutch parliament is
dissolved ahead of next month’s election.  Greece does not need to
funds until July.  

In the foreign
exchange market, the dollar’s gains are against Europe and the yen, while the
dollar-bloc is firm. 
 The Australian and New Zealand
dollars are the only majors up against the greenback while the Canadian
dollar’s 0.03% loss (at ~CAD1.3080) puts it in third place.  The
Australian dollar continues to be pinned
in a $0.76-$0.77 range.  

The euro’s
losses have been extended.  
After being sold through $1.06 yesterday,
it has been unable to push back above, and instead was sold to almost $1.0540
in the European morning and extended its decline to the fifth consecutive
session.  The $1.0525 area corresponds to the 61.8% retracement of this
year’s short-covering bounce in the euro.  A break could spur a move to
$1.0450 ahead of the cyclical low near $1.0340.  

The dollar is
advancing against the yen for the third consecutive session. 
 It is approaching the JPY115 area, which may off the
first test for the dollar bulls.  Above there, a band of resistance
extends toward JPY115.50.  

Sterling is
heavy and is near $1.2420 having peaked last week near $1.2580.
  A trend line from the flash crash
low last month and the February 7 low (~$1.2350) held yesterday but yielded today. Look for another test on that $1.2350
area which corresponds to a 50% retracement of the rally from the flash crash.  

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