Asian equity markets reversed earlier gains overnight and 10y UST yields ticked lower but remain close to the highs since April 2014. NAFTA talks concluded in Montreal, the US did not withdraw from negotiations - the seventh round is now scheduled for the end of February. US equities and the USD extended declines after President Donald Trump delivered his first State of the Union speech in Washington.
President Trump’s speech provided little details on his economic plans such as infrastructure and workforce developments, but enforcement of immigration and trade rules were emphasized. Elsewhere the US Treasury decided not to impose new sanctions to Russia. Market reaction was positive, but uncertainty over the outlook for sanctions remains as Congress could pressure for further action.
In data yesterday, US consumer confidence inched higher in January and UK GfK consumer confidence rebounded four points to -9 (previously -13) after months of steady declines. However, UK consumer sentiment is still much weaker than a year ago (-5) and remains in negative territory. Elsewhere, euro area flash Q4 17 GDP grew by 0.6% q/q (previously 0.7% q/q in Q3 and Q2 17).
Bank of England Governor Carney spoke yesterday afternoon and portrayed a relatively hawkish tone. He acknowledged that Brexit uncertainty remains, but commented that that the BoE “move[s] into a more conventional area for monetary policy, where the focus is increasingly on returning inflation sustainably to target over an appropriate horizon”.
GBP experienced a volatile session yesterday as domestic political headlines saw GBPUSD break below 1.4000 resistance (key psychological level) before the pair recovered on a soft USD. GBPUSD support is now at 1.4080, 1.4000 and 1.3980 with resistance at 1.4350.
Focus turns to the FOMC today, in what is Chair Janet Yellen’s final meeting before her term ends. We expect no policy changes from the FOMC. Instead we expect that the January FOMC meeting will largely be a non-event for markets, as the committee continues to assess the degree to which disinflationary trends are persistent. We continue to expect the Fed to hike by 25bp in March, June, September and December.