All eyes on Yellen
(Peter Rosenstreich, head of market strategy)
Given the sudden repricing of the Fed March meeting markets will be closely scrutinising Fed Chair Yellen’s speech this afternoon. Expectations for a 25bp rate hikes have increased from 20% two weeks ago to over 80% currently (such as Brainard). Yellen's comments are coming on the back of a string of hawkish Fed comments and solid economic data. Fed NY President Dudley stated that raising rates in March has become “more compelling.” In addition, Trump's uncontroversial congressional address has allowed markets to focus on fundamentals and monetary policy rather than becoming distracted with irrelevant chatter. Gold has further corrected by nearly $40 this week to $1234 on expectations that Yellen will signal an imminent rate hike and short-term yields shifting higher. Commodity-linked currencies have marginally weakened but have been supported by risk appetite. We anticipate that Yellen will remain optimistic but will avoid fully endorsing a March rate hike (as clearly as other FOMC colleagues). We would anticipate a further short-term correction in USD as March is now fully priced in. On the data front, markets are scheduled to hear Markit PMI’s and ISM non-manufacturing composite. The employment component of the ISM non-manufacturing will be critical as a weak US job report next week could quickly derail expectations for March. Given the stretched valuations in equites the pace of fed hikes will increasingly come into focus, three 25bp in 2017 is manageable, there is evidence of stronger fundamentals, yet additional tightening will clearly become an issue for higher stock prices.
Energy prices boost Japan's inflation
(Yann Quelenn, market analyst)
For the first time in a year, Japanese inflation has become positive. This may be seen a positive for Shinzo Abe and the Bank of Japan but the print is only of 0.1% y/y. The inflation target of 2% still seems far off. Of course, the most likely cause are petrol prices which have jumped since last year.
Since Trump’s election there are hopes that Japan’s inflation will eventually start picking up. The yen has weakened in the last few months. Japan has battled with inflation for the past two decades and the ultra-loose monetary policy has not worked yet. The BoJ’s strategy to control Japan’s yield curve may be a more sustainable strategy in the medium-term.
Other fundamental data is positive, unemployment is very low, 3% and the number of jobs per applicant is lying at an amazing 26-year high. Yet, companies are still reluctant to increase wages, which would support the economic recovery. Household spending is on its way down, 1.2% in January.
Rising Turkish inflation passes 10% mark
(Arnaud Masset, market analyst)
Turkish inflation surprised substantially to the upside in February as the headline printed at 10.13% versus 9.74% median forecast, up from 9.22% in January. The core index, which excludes the most volatile components, surged to 8.56%y/y compared to 7.95% expected and 7.74% in the previous month. As a quick reminder the Turkish central bank (CBRT) has an annual target of around 5%. There are therefore reasons to doubt the willingness of the institutions to commit to reaching its objective as it only undertook some minor action to curb inflationary pressure. The fact is that the CBRT finds itself in a very delicate situation as the government made clear it wants relatively low interest rates in order to avoid strangling the economy, while the weakening lira, together with rising commodity prices are lifting prices level further. On the bright side, the central bank started to use unconventional measures last month such as lifting sharply the overnight lending rate to protect the lira and keep speculators back. This strategy may work in the short term but the institution will have to clarify its monetary policy as foreign investors will likely stay away from Turkey as long as they do not have better clarity on the investment outlook.
This morning the lira took a hit amid the release of the inflation data. USD/TRY rose to 3.7463, up 0.80%, but quickly reversed gains. Despite the solid performance of the lira during February (+3% against the greenback), we are having a hard time betting on further gains as the political situation remains highly uncertain and the central bank’s intentions are still unclear.