Markets Tread Water as Powell is Awaited

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  • The capital markets seem unusually subdued
  • The market has responded as expected to the disappointing New Zealand trade figures
  • Ahead of tomorrow’s preliminary eurozone CPI estimate for February, Spain and Germany have reported data today
  • The US has a slew of economic data before Powell’s Congressional appearance
  • Bank of Korea kept rates steady at 1.5%, as expected; National Bank of Hungary is expected to keep rates steady at 0.90%

The dollar is mixed against the majors as markets await Powell testimony. Swissie and euro are outperforming, while the Antipodeans and Stockie are underperforming. EM currencies are mostly softer. KRW and MXN are outperforming, while PHP and ZAR are underperforming. MSCI Asia Pacific was up 0.3%, with the Nikkei rising 1.1%. MSCI EM is down 0.2% on the day, with the Shanghai Composite falling 1.1%. Euro Stoxx 600 is down 0.2% near midday, while futures are pointing to a higher open for US markets. The 10-year US yield is up 1 bp at 2.87%. Commodity prices are mostly lower, with oil down 0.2%, copper down 0.7%, and gold down 0.1%.

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 well.

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 decline.

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 y/y 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 y/y rate of 1.2%, up from 0.7% in January.

The US has a slew of economic data before Powell’s Congressional appearance. 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 Board’s 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 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 discounted a third hike fully, let alone push for a fourth.

One area that Powell may stand out is in his assessment of the state of “too-big-to-fail.” 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 begins. 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.

Bank of Korea kept rates steady at 1.5%, as expected. CPI rose only 1.0% y/y in January, well below the 2% target. The bank said that it expects inflation to move toward the target in H2. This is the last meeting under outgoing Governor Lee, and a replacement has not been chosen yet. Lee noted that the BOK does not have to match the Fed’s moves, and doesn’t expect large capital outflows if the interest rate differentials move in favor of the US.

National Bank of Hungary is expected to keep rates steady at 0.90%. CPI rose only 2.1% y/y in January, right near the bottom of the 2-4% target range. As such, there is some risk that the bank adds more stimulus via unconventional measures.