- FOMC minutes showed signs of confidence on inflation and the growth outlook; weighed on stocks, supported USD
- Senior ministers stated that the cabinet had not agreed to PM May’s negotiating strategy before it was sent to the EU
- Looking ahead, highlights German IFO, UK GDP, ECB minutes, US weekly jobs, DoEs and a slew of speakers
FOMC MEETING MINUTES: Confident on inflation and the growth outlook
- The FOMC’s meeting minutes noted that the recent strengthening of US economy has increased the likelihood of further gradual rate hikes, with most voters saying that recent data supported view that inflation will rise in 2018, and stabilise around the 2% target in the mediumterm
- A couple, however, were concerned about the inflation outlook, and saw an appreciable risk that inflation will lag target (which many traders were attributing to the immediate dovish market response).
- With that said, most were of the opinion that recent data points to a modestly stronger economic outlook than was forecast in December, and voting members generally judged risks as roughly balanced; in fact, several saw the potential for increased upside risks to the nearterm economic outlook.
- The market was pricing a March hike with nearcertainty (93.5% implied probability); implied probability of three FOMC hikes in 2018 is up to 66.6% vs 60.6% on Tuesday, while the probability of four hikes rose to 29.6% vs 25% on Tuesday.
NOTE: These meeting minutes are from the FOMC meeting in January that preceded the stronger NFP wage data, firm inflation data, and the volatility in financial markets
Asian markets trading broadly in the red with exception of the Shanghai Comp (+2.1%) which outperforms are participants plays catch up from their elongated break. The prospect of ‘further’ gradual rate hikes as noted in the most recent FOMC minutes boosted speculation that 4 rate hikes could be on the table particularly that these minutes were before the strong wage data in the most recent NFP and inflation data last week, which had subsequently pushed bond yields higher with the US 10yr yield hitting 2.95%, while equities slumped late in the US session. This transpired in Asia, with the Nikkei (-1.2%) and Hang Seng (-1%) seeing losses of over 1%, while ASX 200 (+0.1%) saw initial 0.4% gains trimmed, with price action in Australia largely dictated by the slew of earnings. In credit markets, the belly of the curve underperformed, with JGB 10yr yields tracking UST yields higher, while a firm 20yr JGB auction supported longer dated debt.
Japan PM Abe Adviser Hamada says the BoJ should consider buying foreign bonds. (Newswires)
PBoC sets CNY mid-point at 6.3530 (Prev. 6.3428). (Newswires)
North Korea to have official visit to the South on February 25th with President Moon meeting delegation. (Yonhap)
According to a report in Telegraph, senior ministers stated that the cabinet had not agreed to PM May’s negotiating strategy for the transition period after Brexit before it was sent to the EU. (Telegraph)
Across FX markets, the USD index hovers back 90.00 following the hawkish FOMC meeting minutes, while throughout the Asian session JPY is notably firmer against its counterpart amid the risk off tone, which has seen the JPY trading at session highs. Elsewhere, antipodeans are on the back foot with the AUD weakening through the 0.78 handle vs the greenback. AU 10yr yield now trading at a 6bps discount to US 10yr yields, while the currency has also been pressured from the softness in commodity markets.
WTI crude futures failed to be supported by the surprise drawdown in last nights API crude report, with WTI trading with losses of around 1%. Additionally, moves to the downside had been exacerbated after stops had been tripped at USD 61.05, which saw WTI hit a low of USD 60.75 and as such now remains below the USD 61.00/bbl mark. Precious metals had a relatively quiet session as gold prices languished around yesterday’s lows.
US API weekly crude stocks (16 Feb, w/e) -0.907M vs. Exp. 1.800M (Prev. 3.947M)
– API weekly dist. stocks (16 Feb, w/e) -3.563mln (Exp. -1.500mln, Prev. 1.095mln)
– API weekly gasoline stk (16 Feb, w/e) 1.468mln (Exp. -0.300mln, Prev. 4.634mln)
– API Cushing number (16 Feb, w/e) -2.644mln (Prev. -3.319mln)
TREASURIES: US T-Note Futures settle 9 ticks lower at 120-06+
The US Treasury auctioned $35bln in new 5-year notes, which came in on the screws, with the yield highest since December 2009, while cover was slightly below recent averages. Analysts have pointed out that there were similarities to Tuesday’s auction of 2s (which stopped-through by 0.1bps), in that dealer participation was higher than recent averages, while indirect participation was lower. The sale came ahead of the FOMC’s January meeting minutes, and as such, there was limited price action in wake of the auction (again, similar to yesterday’s auction).
The immediate reaction to the FOMC’s meeting minutes was dovish, albeit very muted. However, as the details were digested, the tplex saw selling pressure, with T-Note futures finding fresh session lows and yields for 10s and 30s rising to YTD highs. At settlement, the curve had bear steepened, and major curve spreads had widened (5s30s was particularly noticeable rising c.3bps).
Fed’s Quarles states that gradual interest rate increases are appropriate, adding that soft inflation likely transitory and is not a cause for great concern. (Newswires)
Fed’s Kashkari stress the need to wait & see on inflation, adds that US economy is doing very well and is surprised at confidence due to tax cut. (Newswires)