US MARKET WRAP: EUR jumps above 1.18 on strong data, weak USD

SPEAKERS:

We had a slate full of central bank speakers today, with Fed Chair Yellen, ECB President Draghi, BOJ Governor Kuroda, and BOE Governor Carney all on the same panel; however, there were few comments on monetary policy and the economic outlook, and the panel chose to stick to the subject of central bank communications.

We also had comments from the Fed’s Bostic, who votes on the FOMC in 2018. Bostic called for gradual rate hikes, and said he was watching inflation closely. He forecasts growth at a bit above 2% going forward, believes that inflation will be flat, and there will be modest wage growth.

Later in the session, BOE’s Cunliffe explained why he dissented to hiking rates at the BOE’s latest meeting; essentially, the Deputy Governor was of the view that the BOE can afford to wait until there is 'clear evidence' that wage growth is picking up before hiking rates.

In other Fed news, it was also reported that Allianz’ Mohamed El-Erian is in contention for the Fed Vice Chair job.

Elsewhere, the Fed’s Bullard (non-voter) reiterated his dovish credential, saying that current level of rates is appropriate, and hiking could jeopardise the progress on inflation. 

EQUITIES: S&P 500 -0.23% at 2,579, Dow Jones -0.13% at 23,409, Nasdaq-100 -0.35% at 6,294; Top sectors: Utilities +1.21%, Cons Stap +0.31%, Cons Disc +0.05%; Bottom sectors: Energy -1.62%, Telecoms -1.42%, Materials -1.22%

With a distinct risk-off tone through the session – some say due to weak China data overnight, others suggest that the continuing difficulties in progressing on tax reform in the US, and others cite the tier-one data and other central bank speakers on the slate for the rest of the week – US stocks were on the back foot.

The energy sector sagged, following a torrid session for crude, in which it finished negative; ConocoPhillips and Exxon were the laggards.

GE endured another tough session, putting in the worst two day fall since 2009 after Monday’s cut to its dividend, as well as the new focus.

There was attention on retail; Home Depot struggled to carve out gains despite an earnings beat and positive guidance; TJX’s earnings were unimpressive, and its comp sales disappointed.

TREASURIES: US 10-Year T-Note Future settles 3+ ticks higher at 124-23+

The curve was once again mixed today; yields on 2-year notes again touched the highest in nine years, though yields were lower along the rest of the curve, leaving the curve to flatten once again (much attention was on 5s30s, which narrowed to just below 77bps, while 2s10s also narrowed to 69bps)

Fed's Bostic mentioned the shape of the yield curve in his speech today, and said an inverted yield curve wouldn't necessary signal a recession ahead; it may be in part due to safe haven buying. He added that a flattening yield curve might be a sign of confidence in US economy.

Many have attributed the flattening yield curve to the Fed hiking rates, pushing short term yields higher; but with little signs of inflation and sustainable long-term growth, yields in the belly and on the long end have been more stubborn.

Treasuries did see some selling pressure following PPI data which surprised to the upside, offering some hopes of inflationary pressures in the pipeline. Tomorrow’s CPI data will confirm whether this trend has anything to it; analysts expect some slippage to the headline figures, though the core MM is seen ticking up slightly. 

Treasuries were more resilient to news regarding fiscal reform; the House floor is still expected to vote on Thursday; the Senate Finance Committee will vote by the weeks end, leaving a full Senate vote to come the week after Thanksgiving (it was expected to happen before Congress breaks for the Holiday at the end of the week).

There were also a number of mixed reports suggesting that the GOP may try to add an amendment to gut Affordable Care Act in tax bill, per an amendment by Rand Paul. However, some Senators have denied this, and other senior republicans, like Orin Hatch, have suggested that it would not be helpful. Either way, it once again highlights the disunity among the GOP, which some believe will hinder the progress of fiscal reform.

FOREX: The euro stole the limelight in Tuesday trade, rising above 1.18 against the dollar  – the latter soft more-or-less across the board. The single currency was buoyed by a decent Eurozone GDP report, a decent German GDP report, as well as solid survey data from German, and rose by the most in a month. Traders also noted that the EUR 5y5y inflation forward swap rose to 1.7% today, giving traders confidence that the ECB’s largesse may be showing signs of guiding inflation expectations higher.  

The yen and Swissy also took advantage of a weaker buck and risk0-off sentiment, while gold rose to test the top end of its recent range at ~$1,282 area.

Cable was given some reprieve from a weak dollar, though succumbed to the euro strength; the weakness was driven by October’s CPI data, which came in at 3.0% - short of the consensus view as well as the BOE’s own forecasts, meaning Governor Carney will not need to write a letter to the UK Chancellor this month explaining the situation.

While commodity FX took its cue from weak crude and weakening industrials prices, following the soft data out of China overnight, the Aussie remained firm after data from NAB overnight showed business conditions were firm, as was confidence.

EMFX is also worth a mention, with the BRL and MXN losing out the greenback in risk-off trade.

CRUDE: WTI futures settle $1.06 lower at $55.70 per barrel; Brent settles 95 cents lower at $62.21 per barrel.

Positive news from OPEC and the EIA, as well as tensions in the Middle East this week were offset by continued signs that US output was ticking up. In its report today, the IEA warned that global oil balances were likely to show oversupplied crude markets into Q2 2018, and cut its demand growth forecast for 2017 and 2018.

Regarding OPEC, some press outlets reported that Russia was said to hesitate on the length of extending the OPEC-led oil output cuts deal; the world’s largest energy producer believes it is too soon to announce anything in November, and is said to be evaluating different proposals, like a three-month extension. Russian energy minister Novak is meeting with energy companies tomorrow, and is expected to canvas their opinions on the deal.

After the bell today, the API will report its inventory estimates for the week. The Street looks for crude stocks to show a draw of 2.2mln barrels, distillates to draw by 1.3mln barrels, gasoline to draw by 0.9mln barrels, and Genscape was said to estimate that stocks at Cushing will draw by 1.9mln barrels this week.

 

14 Nov 2017 - 21:00- Research Sheet- Source: RANsquawk

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