Scoreboard: Hiking trip

Wall Street slipped after the Fed suggested rate hikes could be on the cards and the IMF warned on European deflation.

Another lacklustre session overnight, with the major global indices little different to zero. I get the sense that with poor weather distorting US data and the International Monetary Fund doing its utmost to drum up fear (talking about the possibility for an emerging market crisis or deflation to derail global growth), investors are just sitting on the sidelines for now.

Weather is certainly hitting the US dataflow. Housing starts out last night slumped 16 per cent (January data) after a near 5 per cent fall the month prior. As yet though the Fed doesn’t appear to be too concerned and the FOMC minutes out last night even showed “a few participants raised the possibility that it might be appropriate to increase the federal funds rate relatively soon". There was a flurry of activity across most markets on those comments, but in truth rate hikes sometime soon is not the consensus view. Some Fed members are still worried by low inflation and the IMF helped them out some, noting the risk of deflation in Europe.

The main message from the minutes is that the Fed regards the US economic expansion as being fairly robust and that the taper will continue in measured steps. Indeed it had “strengthened more in the second half of 2013 than they had expected at the time of the December meeting”. Atlanta Fed President Dennis Lockhart suggested the taper would be completed by the end of the year. So strong growth and still ultra-low rates for a long time yet.

Global equities were mixed on both sides of the Atlantic. Wall Street underperformed, following the release of the minutes and all this talk of rate hikes. With an hour to trade, the S&P500 is currently off 0.3 per cent (1835). The Dow is then off 17 points (16,113) and the Nasdaq is 0.4 per cent lower (4255). Over in Europe, the Dax was flat, the CaC was up 0.2 per cent and the FTSE100 rose 0.3 per cent.

Rates didn’t do a lot until the Fed minutes were released and in fact yields traded lower initially, the yield on the US 10-year Treasury note down 3 bps to 2.67 per cent at the low. As the minutes were digested and punters spotted the rate hike talk, the US 10-year yield then spiked 4-5 bps – currently at 2.74 per cent as I write or 4 bps higher than at 1630 AEDT yesterday. Aussie futures rose about 3 ticks a piece – 3.5 for the 10s (95.910) and the threes at 96.99.

Forex action too picked up after the Fed’s minutes, the US dollar generally bid which of course weakened most of the majors. The Australian dollar was off a bit at 0.9005 (down 20 pips or so), although at the high it was up to 0.9044. The euro was down 30 pips to 1.3038, the British pound then was little changed at 1.6691 but had a wider range than most – 133 pips – and finally the yen is a little weaker at 102.38.

Commodities reversed some of the gains of the previous session in most cases although crude was mixed. It spiked on WTI again (almost 1 per cent to $103.6) given the severe weather in the US, although Brent fell 0.1 per cent (to $110.54). Silver was then off 0.9 per cent, gold fell $8 to $1316 while copper was off 0.1 per cent.

Elsewhere St Louis Fed president James Bullard noted that the decline in the US unemployment rate was a signal of an improving economy, and downplayed concerns over falling participation. He suggested the US economy was much closer to “normal” than most thought (Lockhart). US producer prices rose 0.2 per cent in January to be 1.2 per cent higher annually. In Europe, construction output rose 0.9 per cent in December – a 0.2 per cent decline the month prior. Over in the UK, 193,000 jobs were created in the three months to December and jobless claims fell 26,000. Despite this, the unemployment rate rose to 7.2 per cent from 7.1 per cent.

In markets today, the SPI suggests Aussie stocks will be flat (down 5 points). In terms of the macro dataflow there isn’t a lot for the local market, besides average weekly earnings at 1130 AEDT. Elsewhere for our region a ‘flash’ estimate of China’s manufacturing PMI is out at 1245 AEDT. Tonight the key releases include the European PMIs, US consumer inflation, initial jobless claims and the Philly Fed index.

Have a great day…

Adam Carr is a leading market economist.

Follow @AdamCarrEcon on Twitter.