Market Watch

The economic battle across the Atlantic ramps up again this week – Europe is releasing CPI data and a raft of PMI pieces, while the US releases its January CPI and final quarter GDP.  

However, the biggest macro point of the week is the first major testimony by new Fed Chair Jerome Powell.  

What is his view on US growth, how will he interpret the growth in wages and the state of US employment, and what is his view on rate increases over the coming quarters (or even months)?  

These three questions are likely to be asked, and should be asked by the committee to give clarity and a framework for his tenure as Chair. He will need to navigate his testimony with great skill, as each question has the ability to severely impact money markets and currency markets – with the biggest focus on the US 10-year.

The US bond market is entering a very interesting ‘twilight zone’ – the US 10-year is itching to hit 3 per cent for the first time since December 2013 (on a closing basis). Crossing the magical 3 per cent threshold will test the mantle of investors and the attraction of the risk-free rate. It also tests investors’ belief on the ability of corporations to fund, and the impact it will have on valuations and total returns.

(Source: Bloomberg)

What makes the 3 per cent level even more interesting is the new issuance that Capitol Hill voted on two weeks ago. Approximately $US300 billion in additional funding will flood the market at a time when the Fed is methodically reducing its balance sheet and nations such as China and Japan reassess their foreign reserves.

In short, it’s a ‘buyer’s market in the primary market space, as the new issuances could enter the market with a 3 per cent handle ready to attract investors to fill the full issuance.

The flow-on effect is also likely to be in focus – how will equity markets view the risk-free rate at or above 3 per cent?

The volatility seen three weeks ago was partly triggered by the US 10-year breaking through 2.85 per cent to 2.89 per cent. Volatility in equity markets has since calmed as the US earnings season just produced its best quarter in over 10 years on the EPS and revenue lines. This allowed stock fundamentals to drown out the macro noise.