Asian equity markets followed their US counterparts lower after hawkish comments from Federal Reserve Chair Jerome Powell spurred speculation of faster US rate hikes. Weaker-than-expected data from China and Japan added to the negative sentiment, as China’s official manufacturing gauge fell the most in five years in February, and Japanese factory output and retail sales declined.
In FX, JPY strengthened after the Bank of Japan reduced longer-dated bond purchases whilst the USD held gains and 10y UST yields climbed 4bp on Powell’s hawkish tone.
Markets interpreted Federal Reserve Chair Powell’s testimony to Congress as hawkish as he opened the door to four Fed rate hikes this year. He commented that “the FOMC will continue to strike a balance between an overheated economy and bringing PCE price inflation to 2 percent on a sustained basis”, highlighting the difficultly in balancing stimulus to an economy with an increasingly bullish outlook with a stationary median fed path. As opposed to this tension being resolved with the Fed tolerating higher than target inflation, Barclays Research thinks the Fed will adjust towards four hikes this year whereas markets are currently pricing three.
Powell’s hawkish rhetoric drove EURUSD lower through 1.2260 support yesterday as the USD traded bid across the board, aided by potential month-end USD demand. GBP traded heavily yesterday, with GBPUSD trading lower on the broader USD sentiment, whilst EURGBP bounced back from below 0.8800 towards short term resistance at 0.8850.
In UK data, February GfK Consumer Confidence declined to -10 in February (after -9 in January) driven by general and personal expectations as well as lower major purchasing intentions.
Focus on the European Union today who will publish a draft Brexit treaty ahead of UK Prime Minister Theresa May’s speech (Friday) on Britain’s relationship with the European Union.