The hawkish tone and global bond tantrum unleashed by central bankers at the Sintra ECB forum two weeks ago is now a distant memory, and after Janet Yellen surprised markets with an unexpectedly dovish (in the market's interpretation) testimony yesterday, overnight global shares hit their fourth all-time high in less than a month as concerns about the tightening Fed were laid to rest, sending September and December rate hike odds sliding.
One of the Fed chief's comments that markets latched on to was her view that bank would not need to raise U.S. rates "all that much further" to reach current low estimates of the "neutral" funds rate. Yellen's dovish relent lifted Wall Street to a new all time high, while lowering bond yields virtually everywhere and sending the MSCI All-Country World Index to a fresh record while European shares headed for their biggest two-day gain in almost three months. 
Yellen’s testimony had the added impact of diverting attention from Trump Jr.’s emails about his meeting with a Russian lawyer, which sent stocks sliding on Tuesday, though concern remains that the latest saga in Washington will likely delay, perhaps permanently, Trump's fiscal reform efforts. The dovish Fed also sent the Bloomberg Dollar Spot Index to the lowest since September while gold climbed.
"Dollar positioning is short and yesterday's testimony just confirmed what the market believed: that the Fed is not going to be able to be as hawkish as they are suggesting," BofA's Athanasios Vamvakidis said in a note.
"It mostly seems to be down to Yellen," Rabobank quantitative analyst Bas Van Geffen told Reuters. "The fact that it seems like the Fed is going to take it slowly is being seen as a good sign by the equity markets and by the currency markets."
So with much of the debate in the market surrounding Yellen’s comments around inflation, its timely that today we’ll get the June PPI report followed then by the June CPI report tomorrow. With regards to the former, the market consensus is for a 0.0% mom headline reading and a +0.2% mom increase in the core reading. What will be worth keeping an eye on is the health care services component of the PPI which will provide clues on the near-term direction of the core PCE deflator which as we know is the Fed’s preferred inflation metric. Something to look forward to.
Like equities, Treasuries rallied in reaction to Yellen, with yields on two-year notes falling to three-week lows, as did bonds in Europe and Asia. Germany's benchmark 10-year Bund yield was flat on the day at 0.51 percent. They have now given back a quarter of the rise triggered by last month's hint from ECB head Mario Draghi that it was readying to scale back stimulus. Treasuries meanwhile have clawed back a third of their selloff.
"The market did perceive a greater degree of anxiety over inflation – at the margin," said Westpac's U.S. economist, Elliot Clarke. "To our mind, this is unlikely to get in the way of another hike this year."
"Two further hikes in 2018 will likely be justified by conditions. However, the case for additional hikes thereafter is nowhere near being made."
It wasn't just Yellen. Bullish sentiment got another boost when China reported upbeat data on exports and imports for June, in what was seen as a sign that global trade is finding some real traction again, helping push Asian shares up more than 1 percent. As shown below, every single indicator not only rebounded from May, but also beat expectations, while the Chinese trade balance rose to $294.3bn in June, above the $275.1bn expected.
- Imports (CNY)(Jun) Y/Y 23:1% vs. Exp. 22.3% (Prey. 22.1%)
- Exports (CNY)(Jun) Y/Y 17.3% vs. Exp. 14.6% (Prey. 15.5%) Chinese Trade Balance (USD)(Jun) 42.8B vs. Exp. 42.6B (Prey. 40.79B)
- Imports (USD)(Jun) Y/Y 17.2% vs. Exp. 14.5% (Prey. 14.8%)
- Exports (USD)(Jun) Y/Y 11.3% vs. Exp. 8.9% (Prey. 8.7%)
A quick macro recap of the overnight trading sessions via Bloomberg:
- ASIA: USD/JPY steady after touching a high of 113.53, with Japan’s govt bond yields down after strong 20-year bond auction results. Asia’s emerging-market currencies rose, led by the won, as Yellen stuck to gradual approach to tightening. CAD strengthened after Bank of Canada’s first interest-rate increase in almost seven years contributing to dollar weakness.
- EUROPE: EUR/USD initially higher on expectations ECB could send hawkish signals at its meeting next week, with bund futures volumes picking up, as benchmark 10y bund falls below 0.50% -- a breach above that level was earlier widely seen as sell-off catalyst. However the Euro has dropped to session lows following the European open.
It has been a mostly green European session across asset classes, with the Stoxx Europe 600 Index climbed 0.5% adding to Wednesday’s 1.5 percent gain. Telecoms and retailers led gains. Bloomberg writes with EUR/GBP pushing to weekly low with focus on hawkish commentary from BOE’s McCafferty, EUR/USD hits session lows in tandem at 1.14. AUD outperforms with most citing overnight USD weakness as main driver, AUD/USD within range of YTD high. Gilts initially open lower in response to McCafferty before quickly reversing, led by the long end as the market impact of index extensions from coupon-paying gilts going ex-dividend provides support; bunds also lifted by old 10Y benchmark yield moving back below 50bps. Equity markets rally from the open led by miners; ArcelorMittal (+2.7%) after upgrade from Deutsche Bank, mining index above 50 and 200 DMAs. Crude futures edge lower after supply warning from IEA. Asia's gains also lifted Indian stocks to an all-time high. South Korea and Australia's main indexes both climbed 1.1 percent too, the former helped as its central bank kept interest rates at a record low. Japan's Nikkei was restrained by a firmer yen and ended flat.
Futures on the S&P 500 and Nasdaq 100 also signaled further gains. S&P 500 Sept contracts rose 0.2% at 6:15 a.m. in New York as the benchmark on Wednesday advanced to within 0.5% of its record close reached in June. Nasdaq 100 futures added 0.4% after the benchmark climbed for a fourth day yesterday.
There was less euphoria in commodities, where oil prices flatlined as producer club OPEC said it expected demand to decline next year as rivals pump more, though the Chinese trade data showed it remained a heavy buyer. Brent crude futures were off 4 cents at $47.70 a barrel, while U.S. crude eased 5 cents to $45.44. Spring wheat for September delivery fell as much as 1.6 percent to $7.8175 a bushel, down a third day. The U.S. Department of Agriculture said domestic production will be greater than analysts expected. Gold added 0.2 percent to $1,222.42 an ounce, a fourth day of gains on expectations rates will stay low.
Market Snapshot
- S&P 500 futures up 0.2% to 2,444.25
- STOXX Europe 600 up 0.5% to 386.97
- US 10Y yield down 1bps to 0.31%
- German 10Y yield down 3bps to 0.55%
- Euro down 0.03% to 1.1409 per US$
- Italian 10Y yield down 3bps to 2.23%
- Spanish 10Y yield fell 4 bps to 1.60%
- MXAP up 0.7% to 156.42
- MXAPJ up 1.2% to 515.21
- Nikkei up 0.01% to 20,099.81
- Topix little changed at 1,619.11
- Hang Seng Index up 1.2% to 26,346.17
- Shanghai Composite up 0.6% to 3,218.16
- Sensex up 0.8% to 32,046.55
- Australia S&P/ASX 200 up 1.1% to 5,736.77
- Kospi up 0.7% to 2,409.49
- Brent futures down 0.7% to $47.41/bbl
- Gold spot up 0.1% to $1,222.12
- U.S. Dollar Index little changed at 95.78
Top Overnight News from BBG
- Fed Chair Janet Yellen’s Senate hearing Thursday moved to 9:30 am ET
- Fed’s George supports balance sheet reduction in ’near future’, says U.S. economic fundamentals look positive
- China June trade surplus 294.3b yuan vs 275.1b est; exports 17.3% vs 14.6% est; imports 17.2% vs 14.5% est
- PBOC offers 360b yuan liquidity via MLF operations
- Bank of Japan to raise growth outlook for FY2017/2018 by 0.1%-0.2%; mulls downgrading CPI forecasts: Nikkei
- Bank of Korea holds rate steady; raises 2017 GDP forecast
- House Republicans are throwing up new roadblocks to a Russia and Iran sanctions bill
- OPEC wants "orderly recovery” in oil production from Libya, Nigeria and Iran, can accommodate more crude from the three member nations
- GLP Is Said to Choose Chinese Bidder for $10 Billion Buyout
- Yanlord Group Is Said to Near $1.2 Billion United Engineers Bid
- Daimler Drops After Report Probe May Involve 1 Million Vehicles
- Astra Drops on Report Soriot Will Quit to Become Teva’s Chief
- Soriot at Teva May Signal Shift From Generics: Credit Suisse
- Roche Says It’s Focusing on New Drugs as U.S. Biosimilars Loom
- Bond Trader Bets $10 Million That Volatility Revival Is Imminent
- Oil Bosses See More Pain as Price Recovery Slips Back to 2020
- Clariant’s Anglo-Saxon Investors Oppose Huntsman Deal: HZ
- Qatar Airways Still Plans American Airlines Share Purchase: CEO
- Trump Administration Approves Eni’s Arctic Drilling Plan
- Eisendrath-Led Group Set to Buy Chicago Sun-Times: Sun-Times
Asia stocks were higher across the board as the region maintained the momentum from its global counterparts, in which the DJIA posted record highs after a dovish testimony from Fed Chair Yellen, while participants also mulled over key Chinese data. ASX 200 (+1.1 %) and Nikkei 225 (unch) were lifted from the open, although gains in the latter were pared as JPY firmed. China conformed to the upbeat tone with the Hang Seng (+1.2%) and Shanghai Comp. (+0.6%) traded in the green after better than expected Aggregate Financing, New Yuan Loans and Trade data. 10yr JGBs track upside seen in T-notes as Yellen's comments eased yields, while outperformance was seen in 20yr JGBs despite mixed 20yr auction results. PBoC adviser states that China should consider a government backed fund to deal with employment-related issues arising from clean-up of zombie firms
Top Asian News
- Cheap Currency Spurs Malaysia Exports as Central Bank Stays Put
- China June Trade Data Buoyed by Robust Demand at Home and Abroad
- Citigroup Names Dhawan as Asia Commercial Bank SME Business Head
- Japan Stocks to Watch: Fast Retailing, Fujitsu General, Totenko
- MSCI Move Sees Pakistan Go From Best to Worst as Flows Ease
- China Plans Targeting Pipeline Expansion Boosts Energy Stocks
- Asia’s Central Banks Steer Clear of Hawkish Peers, For Now
- Taiwan Chip Giant Creates New Billionaire on iPhone Outlook
- One Billion Tons of Iron Ore Are Headed to China’s Mills in 2017
EU Equity markets trade mixed on the day, as futures were bullish following Yellen's dovish tone yesterday, with markets seemingly taking a breather from a busy day's trade yesterday. Sector specific is also mixed, as oil lags the energy sector. Materials are the noticeable out performer, as metal markets trade the vast majority in the green amid the risk tone and dampening dollar sentiment. Fixed Income markets benefited from Yellen's pre-release yesterday, with bids clear across the major bonds, however, the German Bund continues to trade above the 0.50% yield level. OATs have followed the trend this morning, as they begin to tighten their lOy bund spread, now at 1bps.
Top European News
- May Faces Battle Over Brexit Laws as Clock Ticks on EU Talks
- U.K. Housing Cools as Political Uncertainty Undercuts Demand
- Spain’s Liberbank Short-Sale Ban Extended for Two Months
- Mike Ashley’s Sports Direct Buys 26% Stake in Game Digital
- Altice Is Said to Plan Creation of Banking Unit: Parisien
- Stops Run in Bund Futures as Old Benchmark Falls Below 0.50%
- Commerzbank Closes Bund Shorts After Dovish Yellen Comments
- Ofcom to Release BT From Undertakings After Pension Changes
In currencies, the BoC made more waves after its head Poloz sees modest overshoot in inflation in 2019; says policy not on a predetermined path, further stating, Central bank must target future inflation. FX markets have taken a back-foot this morning, as many slow down following the volatility seen in the majors yesterday. GBP has been the most interesting mover on the day, following an overnight article from BoE's McCafferty, cementing his hawkish tone, and his vote for a hike in August. USD/JPY continued its bearish pressure into Asian trade; not looking back since rejecting 114.50, taking another spike below 113.00 in Asian trade, the pair has consolidated around this level throughout European trade, with any clear break possibly set to result in a test of the 109.50 range.
In commodities, OPEC crude output rose by 340 kb/d in June to 32.6 mb/d after Saudi flows increased and Libya and Nigeria, spared from cuts, pumped at stronger rates, according to the !EA report Global oil supply rose by 720 kb/d in June to 97.46 mb/d as producers opened the taps. For global demand, after lacklustre 1.0 mb/d growth in 1Q17, there was a dramatic acceleration in 2Q17 to 1.5 mb/d. The key oil risk event today came from the !EA monthly oil report, where the global oil supply rose by 720 kb/d in June to 97.46m1n BPD as producers opened the taps, however, this did coincide with an increase in demand. For global demand, after lacklustre 1.0mln BPD growth in 1Q17, there was a dramatic acceleration in 2Q17 to 1.5mln BPD, expecting 2017 global demand to grow 1.5% to 98m1n BPD. OPEC crude output rose by 340 kb/d in June to 32.6 mb/d after Saudi flows increased and Libya and Nigeria, spared from cuts, pumped at stronger rates. As this news was digested, oil saw selling pressure, with WTI trading through USD 45.00. Precious metals benefitted from Yellen's tone yesterday, as Gold rose for the fourth successive day. Asian trade was slow, with the other metals gaining amid the dovish tone; Silver +0.2%, Platinum +0.2% and Palladium +0.1%. However, as Europe came to market, Silver and Palladium began to lag, not able to keep up with the yellow gold.
Looking at the day ahead, the June PPI report should be the main release of note while the other data includes initial jobless claims and the monthly budget statement for June. Away from the data, Yellen will again deliver her testimony, this time in front of the Senate Banking Committee. The Fed’s Brainard is also due to speak again, at 1pm. The other potentially interesting event today is the CBO’s analysis of President Trump’s fiscal year 2018 budget.
US Event Calendar
- 8:30am: Initial Jobless Claims, est. 245,000, prior 248,000; Continuing Claims, est. 1.95m, prior 1.96m
- 8:30am: PPI Final Demand MoM, est. 0.0%, prior 0.0%; Ex Food and Energy MoM, est. 0.2%, prior 0.3%
- PPI Ex Food, Energy, Trade MoM, est. 0.2%, prior -0.1%
- PPI Final Demand YoY, est. 1.9%, prior 2.4%; Ex Food and Energy YoY, est. 2.0%, prior 2.1%
- 9:45am: Bloomberg Consumer Comfort, prior 48.5
- 2pm: Monthly Budget Statement, est. $38.0b deficit
DB's Jim Reid concludes the overnight wrap
Mrs Yellen failed to send an Iceberg on a collision course with investors yesterday as her speech was interpreted as fairly dovish. So much for the globally coordinated Sintra pact. Indeed a look at the intra-day charts show that risk assets climbed and yields fell the moment the statement was pre-released at 8.30am local time (1.30pm BST). The S&P 500 eventually finished up +0.73% with all sectors ending higher and the index now back to within just half a percent of its all-time record high. Europe had already been trading a little firmer but the comments also helped European indices rally into the close. The Stoxx 600 ended +1.52%. In rates 10y Treasuries finished 4.3bps lower in yield at 2.319% which was the strongest day in a month. 2y yields were 3.2bps lower and 30y yields were 4.0bps lower. Bunds (-4.7bps), OATs (-5.6bps) and BTPs (-6.8bps) also rallied in tune. Gold (+0.23%) nudged higher for the third session in a row while the US Dollar bucked the rest of the market a little by ending the day unchanged.
In terms of Yellen’s comments, the dovish interpretation appeared to be twofold in nature. The first was Yellen’s rubber stamping of Brainard’s comment from the day prior in which the Fed Chair said that “because the neutral rate is currently quite low by historical standards, the federal funds rate would not have to rise all that much further to get a neutral policy stance”. The second concerned inflation with Yellen’s broad narrative around the topic a little bit more dovish relative to recent communications. The Fed Chair said that “I do believe part of the weakness in inflation reflects transitory factors, but well recognise that inflation has been running under our 2% objective, that there could be more going on there”. She also said that there is “uncertainty about when – and how much – inflation will respond to tightening resource utilization” and that this will remain a key focus for the Fed in the near term. On the balance sheet Yellen indicated that she expects the Fed to start reducing its balance sheet “this year” without any further guidance as to when exactly that might be. Our US economists are sticking to their call for a pause in the rate hiking cycle in September to announce the beginning of its balance sheet normalization program, and then resume increasing the fed funds rate at the December meeting.
So with much of the debate in the market surrounding Yellen’s comments around inflation, its timely that today we’ll get the June PPI report followed then by the June CPI report tomorrow. With regards to the former, the market consensus is for a 0.0% mom headline reading and a +0.2% mom increase in the core reading. What will be worth keeping an eye on is the health care services component of the PPI which, as our economists note, will provide clues on the near-term direction of the core PCE deflator which as we know is the Fed’s preferred inflation metric. So all that to look forward to.
This morning in Asia the positive sentiment has continued for the most part. The Hang Seng (+1.01%), Shanghai Comp (+0.44%), Kospi (+1.22%) and ASX (+1.09%) have all firmed, while sovereign bond markets are also stronger and following the lead from Treasuries yesterday. The Nikkei (-0.11%) is underperforming slightly on the back of a slightly stronger session for the Yen. Meanwhile trade data in China released this morning revealed that exports – in USD terms - rose to +11.3% yoy in June (vs. +8.9% expected) from +8.7% in May. That is the fastest pace of growth since March. Import growth also edged higher but China’s trade surplus still widened last month.
Moving on. The other notable story from yesterday concerned another central bank – namely the Bank of Canada - following a largely expected 25bp rate hike in the benchmark rate to 0.75%. That is the first rate hike for the BoC since 2010 and it also means that the BoC becomes the first G7 central bank to join the Fed in raising rates in the current cycle. The overall message was fairly hawkish too. Inflation was downplayed as being temporary while the BoC highlighted that the “output gap is now projected to close around the end of 2017, earlier than the Bank anticipated in its April Monetary Policy Report”. Guidance for future policy tightening appears to be firmly data dependent which was something also noted by Governor Poloz in his press conference. In an otherwise strong day for sovereign bonds, Canadian govies were the notable underperformer yesterday with 10y yields edging up 1.9bps to 1.873% and closing the gap a bit on Treasuries. The Canadian Dollar also rallied 1.27% and the most since March.
Closer to home, it was a much more mixed picture in the UK with early dovish comments from the BoE’s Broadbent later countered by an overall decent set of UK employment figures. Starting with the former, Broadbent spoke shortly after we went to print yesterday and notably said that the bank is “not yet ready to support a rate hike”. Remember that Broadbent’s exact position on the BoE was a bit on an unknown with the suggestion now that he is sitting slightly towards the dovish side of centre. Later in the morning we then got the latest employment figures where it was revealed that the ILO unemployment rate dropped to a 42-year low of 4.5% (from 4.6%) after employment rose 175k in the three months to May. On the wages front, while average earnings including bonuses rose just +1.8% yoy (down from +2.1% in April), ex-bonus earnings did nudge up twotenths and a bit more than expected to +2.0% yoy. Sterling finished up +0.29% yesterday and just shy of $1.290 after touching as low as $1.281 shortly after Broadbent’s comments.
Away from central banks, it was a fairly volatile session for Oil yesterday with WTI trading in a 3% range around $46/bbl. The latest EIA data revealed that US crude stockpiles dropped by over 7.5m barrels last week which was the sharpest decline since the week ending September 2nd. A rally was also temporarily aided by headlines concerning an extraordinary OPEC meeting scheduled for July 17th however this was later downplayed in terms of its significance.
Before we wrap up, it’s been a busy last 24 hours over in Brazil too with the news that former President Lula was convicted of graft and money laundering following his role in the corruption scandal which swept through the country. The helped Brazil’s Ibovespa to rally +1.57% yesterday while the Brazilian Real (+1.42%) also had its strongest day in two months.
Looking at the day ahead, this morning in Europe we are due to receive the final revisions to the June CPI prints in both Germany and France. The consensus is no for no change to the initial flash estimates of +0.2% mom and 0.0% mom respectively. The other release to note this morning is the BoE’s credit conditions and bank liabilities survey. Over in the US this afternoon, the aforementioned June PPI report should be the main release of note while the other data includes initial jobless claims and the monthly budget statement for June. Away from the data, Yellen will again deliver her testimony, this time in front of the Senate Banking Committee. The Fed’s Brainard is also due to speak again, at 6pm BST. The other potentially interesting event today is the CBO’s analysis of President Trump’s fiscal year 2018 budget.
