U.S. Monetary Tightening Fever Lifts Dollar, Stocks and Sovereign Debt Yields

March 1, 2017

Last night’s speech by President Trump did no harm but lacked the details that investors were hoping to learn. No more is known about what will replace the Affordable Care Act, or how increased government spending will be financed. Trump was less contentious, but any relief could quickly dissipate today after the new immigration policy is rolled out.

Markets are in a risk-on mood because the perceived likelihood is climbing that the fed funds rate will be raised this month. Such speculation has been fed by comments from Fed officials and supportive U.S. price and labor market data. One counter-factual, however, has been a slowdown in bank lending.

Equities rose 1.4% in Japan, 0.8% in Singapore and India and 0.2% in China. South Korea’s market was closed today for the Independence Movement holiday. Share prices in Europe currently show gains of 2.2% in Italy, 1.9% in Spain, 1.5% in Greece, 1.6% in France, 1.4% in Germany and 1.1% in Britain.

Ten-year sovereign debt yields advanced overnight by six basis points in Germany, for bps in Italy, Britain, and U.S. futures, 3 bps in Spain and Switzerland and 2 bps in France and Japan.

Gold retreated 0.9% to $1,242.30 per ounce. WTI oil is 0.3% higher at $54.17 per barrel, and copper leaped more than 1.0%.

The dollar has appreciated 0.9% against the yen and kiwi, 0.7% relative to sterling, 0.5% versus the Swiss franc, 0.4% against the euro and 0.2% vis-a-vis the yuan. The greenback fell back 0.3% against the peso despite Trump reaffirming plans to build a border wall. The Aussie dollar edged 0.1% higher, on strong economic data.

Australian real GDP in the final quarter of 2016 beat expectations, jumping 1.1% on quarter and 2.4% on year. The Australian Performance of Manufacturing index leaped 8.1 points to a reading of 59.3 in February, most since May of 2002.

A slew of other purchasing manager surveys for February were also reported. The gestalt of these measures is that global growth and inflation are each rising.

Euroland’s manufacturing PMI of 55.4 was just 0.2 points above January’s score but constitutes a 70-month high. Evidence of inflation continues to revive. Demand, production, and employment all grew faster except in Greece, which had a PMI of 47.7. The Dutch reading of 58.3 led the pack and was at a 70-month high. Germany’s 56.8 was at a 69-month high. The Spanish, Irish and French readings were 3-month lows, but Italy’s 55.0 was a 14-month high.

Britain’s manufacturing PMI fell for a second straight time to a 3-month low but still robust 54.6 that suggests quarterly growth of 1% or more.

The Swiss PMI jumped 3.2 points to a 70-month high of 57.8.

In Eastern Europe, PMIs for Poland of 54.2 was a 3-month low. The Czech 57.6 reading was at a 70-month high, and Hungary’s 59.5 represents a record peak for this data series.

Among other European economies for which PMIs in manufacturing were released, Sweden’s fell 1.1 points to 60.9, a 2-month low. Norway’s 52.6 was a 5-month high. Russia’s index fell 2.2 points below January’s 70-month high to a 4-month low of 52.5.

Japan’s manufacturing PMI climbed 0.6 points to 53.3, a 33-month high.

Three PMIs were reported for China. The government-authorized manufacturing index rose 0.3 to a 3-month high of 51.6, while its privately-compiled factory index hit a 2-month high of 51.7. Both results beat streat expectations. The government’s non-manufacturing PMI dropped 3.4 points, however, to a 4-month low of 54.2.

India’s manufacturing PMI scored a 3-month high of 50.7 but reflected continuing mounting inflation. Indonesia’s PMI dipped under 50 to a 2-month low of 49.3. Thailand’s PMI was 50.6 for a third straight month. Taiwan’s index fell 1.1 points to a 4-month low of 54.5. Vietnam’s 54.2 reading was the best in 21 months. Malaysia’s reading of 49.4 was also at a 21-month high. Turkey’s 49.7 reached a 4-month high, and the Filipino reading of 53.6 was the best in two months.

On-year growth in Japanese motor vehicle sales accelerated to 13.4% in February from 8.6%. The bigger news out of Japan was a much higher advance in business investment last quarter, now estimated at 3.8% (nearly five times greater than predicted and enough to likely cause GDP growth to be revised upward). Corporate profits shot up 16.9%, and sales were 2.0% higher.

Indonesian CPI inflation picked up in February to 3.8% overall and 3.4% on core. Thai PPI inflation climbed to 3.9% in February from 3.1% in January.

Five German states reported higher CPI inflation in February than the month before, ranging from 2.0% in Brandenburg to 2.5% in Hesse. The ECB has cautioned that the recent significant rise in total inflation to above-target territory reflects energy and is unlikely to be sustained. Policy there is being guided by core inflation to an unprecedented extent.

German unemployment stayed at 5.9% as expected in February. The number of unemployed workers fell 14K, which was a little more than forecast, and employment posted on-year growth in January of 1.4%.

British M4 money growth accelerated to 7.0% in January from 6.2% in December, and mortgage applications totaling 69,928 in January was at an 11-month peak.  U.K. shop prices contracted 1.0% between February 2016 and last month.

Last quarter saw GDP in Finland stagnate, which reduced its year-on-year rise to 1.3%. Portuguese GDP went up 0.6% on quarter and 2.0% on year.

U.S. releases today include construction spending, personal income and spending, the manufacturing PMI, the PCE price deflator and the Fed Beige Book of regional conditions.

Copyright 2017, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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