Futures, Oil Dip On Stronger Dollar Ahead Of "Hawkish" Yellen Speech

With Europe back from Easter break, we are seeing a modest continuation of the dollar strength witnessed every day last week, which in turn is pressuring oil and the commodity complex, and leading to some selling in US equity futures (down 0.2% to 2024) ahead of today's main event which is Janet Yellen's speech as the Economic Club of New York at 12:20pm, an event which judging by risk assets so far is expected to be far more hawkish than dovish: after all the S&P 500 is north of 2,000 for now.

Crude slid below $39 a barrel in New York in a fourth day of losses while commodity currencies such as Russia’s ruble and the Norwegian krone weakened. Euro-area sovereign securities climbed as lower energy prices dimmed the outlook for inflation and the European Central Bank prepared to increase its asset-purchase plan by 20 billion euros ($22 billion) a month in April. Treasuries advanced and U.S. equity-index futures dropped before a speech from Federal Reserve Chair Janet Yellen and several key pieces of economic data this week culminating in payrolls figures.

The shaky sentiment was summarized by Pedro Ricardo Santos, a broker at X-Trade Brokers DM SA in Lisbon. who told Bloomberg that "the correction in oil prices is outweighing any optimism about the economy in the markets. Investors will also expect a little more hawkishness from Yellen’s speech today. Although the likelihood of a rate increase in April is practically zero, many are looking for two more hikes by the end of the year."

Market Snapshot:

  • S&P 500 futures down 0.2% to 2024
  • Stoxx 600 up 0.3% to 336
  • FTSE 100 up 0.3% to 6126
  • DAX up 0.7% to 9920
  • German 10Yr yield down 3bps to 0.15%
  • Italian 10Yr yield down 6bps to 1.24%
  • Spanish 10Yr yield down 7bps to 1.45%
  • S&P GSCI Index down 0.9% to 325
  • MSCI Asia Pacific down 0.5% to 127
  • Nikkei 225 down 0.2% to 17104
  • Hang Seng up 0.1% to 20366
  • Shanghai Composite down 1.3% to 2920
  • S&P/ASX 200 down 1.6% to 5005
  • US 10-yr yield down 1bp to 1.87%
  • Dollar Index up 0.13% to 96.07
  • WTI Crude futures down 1.4% to $38.83
  • Brent Futures down 1.8% to $39.70
  • Gold spot down 0.3% to $1,218
  • Silver spot down 0.8% to $15.12

Global Top News:

  • Most Passengers on Hijacked EgyptAir Flight Are Released
  • U.S. Drops Apple Case After Getting Into Terrorist’s IPhone
  • BlackRock Joins Pimco Warning Investors to Seek Inflation Hedge
  • Yahoo Said to Set April 11 Deadline for Preliminary Bids: WSJ
  • Marriott Faces Prospect of Losing Starwood After Months of Work
  • Biotech Trovagene Fires, Sues Its CEO, CFO; Shares Tumble
  • Macquarie’s Wins $3.4b Cleco Deal Approval With 2 Promises

Looking at regional markets, we start in Asia stocks traded mostly negative following a subdued lead from Wall St. where discouraging data and a lack of EU participants kept risk-sentiment in check. ASX 200 (-0.77%) returned from its prolonged weekend to extend on last week's financials weakness, while Nikkei 225 (-0.25%) was heavily pressured from the open following the largest decline in retail sales since 2014 and mass ex. dividends in Japan which totalled over 75% of Topix shares. Chinese markets (Shanghai Comp. -1.3%) conformed to the downbeat tone in the region and continued its recent declining trend with participants cautious ahead of several large named earnings reports and key PM! releases this week. 10yr JGBs traded lower with participants side-lined ahead of fiscal year-end, while the BoJ also refrained from entering the market with its bond purchase program.

Asia Top News

  • China Bull Who Beat 99% of All Bond Funds Says Yuan Drop Is Over: Seaman sees yuan rising on average 2-3% each year over decades
  • Offshore Yuan Gains as PBOC Raises Fixing, Fed Rate Bets Recede: Central bank boosts reference rate by most since March 18
  • RBA Rate Cut in Response to Stronger Aussie Seen by Bond Bull: Monetary easing more likely in 2H, Gor says
  • India Open to Importing U.S. Oil in Effort to Diversify Sources: India purchasing Iranian crude and engaging in other projects
  • Malaysia Building Society Becoming Islamic After Failed Mergers: Lender has stopped offering conventional loans, CEO says

European participants return from their long weekends today to see equities firmly in the green (Eurostoxx: +0.3%). Stocks have benefitted from upside in financials, with this the best performing sector in Europe. Material names underperform amid downside in the commodity complex, with a bid in USD weighing on the likes of WTI, which resides around the USD 39/bbl level, and base metals which are broadly in the red.

European Top News

  • ECB’s Gloomy Price Outlook to Be Confirmed Just as QE Grows
  • EasyJet Leads Britain’s Stock Advances After Week of Declines
  • Volkswagen May Suspend Dividend on Emissions Probe, DPA-AFX Says
  • Stocks Gain in Europe as Crude Extends Declines; Dollar Rebounds

In FX, markets are back to full strength today, but with USD sentiment hanging on the word(s) of Fed chair Yellen — due to speak in NY just after the London close - trading has been mixed, with very little sense of direction as yet. We saw some early selling in Cable and EUR/USD, but this proved short lived, though the highs seen in thin trade Monday have yet to be matched. That said, a softer tone in EUR/GBP is giving Cable better support than that seen last week.

The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 major peers, rose less than 0.1 percent. While it pared its monthly drop to 2.5 percent, that’s still biggest since April. "The dollar is really not your best bet right now,” Vassili Serebriakov, a foreign-exchange strategist at BNP Paribas SA in New York, said in an interview on Bloomberg Television. “Every time you have the dollar rising, concerns about China devaluation, concerns about emerging-market growth, concerns about commodity markets - those start to resurface."

Odds of the Fed raising rates at its June meeting have fallen to 38 percent, from 42 percent a week ago, according to Fed funds futures data compiled by Bloomberg. The Japanese yen weakened 0.1 percent at 113.56 per dollar, falling for an eighth day. Norway’s krone and Australia’s dollar were the worst performing major currencies.

In commodities, amid the continued appreciation in the USD-index, the energy complex has subsequently been pressured with WTI crude futures residing near session lows having broken below yesterday's low at USD 38.86 and is now eyeing last week's low at USD 38.33. West Texas Intermediate crude dropped further after sliding 5 percent over the past three sessions amid ongoing concern over a global glut in the commodity. Weekly U.S. government data is forecast to show another increase in crude stockpiles. Brent futures in London lost 2.1 percent to $39.42. Indonesia will attend a meeting of major oil exporters in Doha next month to consider an output freeze, according to Energy and Mineral Resources Minister Sudirman Said.

Spot gold fell 0.2 percent to $1,218.90 an ounce, pressured by the aforementioned recovery in the greenback, with the precious metal relatively range bound for much of the European morning.

In the base metals complex, copper and iron ore prices were also pressured amid the widespread cautious tone, with the latter falling by as much as 5% to a 3-week low alongside weakness in steel. Zinc and tin also declined, while aluminum rose as the London Metal Exchange reopened after two days of public holidays.

On today's calendar we get the January Case-Shiller, the latest Consumer Confidence print and the API weekly inventory number, but the key highlight will be Janet Yellen's speech at 12:20pm at the Economic Club of New York, while former Goldmanite and current Dallas Fed president Steven Kaplan will speak in Austun at 4pm.


Bulletin Headline Summary from RanSquawk and Bloomberg

  • European bourses kick off the week in positive fashion as participants return from their elongated break with notable outperformance in financials.
  • USD-index stages a slight recovery as investors look towards comments from Fed Chair Yellen to subsequently shed light on the path of the Fed's tightening cycle.
  • Looking ahead, highlights include US API Crude Oil Inventories, Fed's Yellen (Voter, Soft Dove), Williams (Non Voter, Neutral), Kaplan (Non-Voter, Soft Dove)
  • Treasuries rally in overnight trading, global equity markets mostly higher and oil drops; Fed’s Yellen will speak this morning and U.S. housing prices will be released.
  • U.S. auctions continue today with $34b 5Y notes, WI yield 1.355%, compares with 1.169% awarded in Feb., lowest 5Y auction stop since 1.045% in May 2013
  • Central bankers have managed to steer the world economy clear of a recession while leaving it stuck in the same rut that led to its troubles in the first place
  • The Bank of England said banks should begin building up capital earmarked to support lending when the economy turns down, as the outlook for U.K. financial stability worsens
  • BlackRock joined Pimco in recommending inflation-linked bonds and warning costs are poised to pick up. “Stabilizing oil prices and a tighter labor market could contribute to rising actual, and expected, U.S. inflation,” Richard Turnill, BlackRock’s global chief investment strategist, wrote Monday
  • Commodities including oil and copper are at risk of steep declines as recent advances aren’t fully grounded in improved fundamentals, according to Barclays Plc, which warned that prices may tumble as investors rush for the exits; With energy stocks enjoying the biggest rebound since the beginning of the oil rout, short sellers have shifted their sights to regional banks that do business with the industry
  • While Japan’s labor market is tight with a jobless rate of just 3.3%, almost 38% of workers are now part-timers who are generally on lower pay and have less job security.
  • $4.65 IG credit priced yesterday, MTD $149.455b, YTD $443.705b; $1.4b HY priced yesterday, MTD 24 deals for $15.365b, YTD 49 deals for $30.22b
  • Sovereign 10Y bond yields mixed; European and Asian equity markets mixed; U.S. equity-index futures drop. WTI crude oil, gold and copper fall


US Event Calendar

  • 8:55am: Redbook weekly sales
  • 9am: S&P/Case-Shiller Composite-20 y/y NSA, Jan., est. 5.75% (prior 5.74%)
  • 10am: Consumer Confidence Index, March, est. 94 (prior 92.2)
  • 12:20pm: Fed’s Yellen speaks at Economic Club of New York
  • 1pm: Fed’s Kaplan speaks in Austin; 4pm at University of Texas
  • 4:30pm: API weekly oil inventories


DB's Jim Reid completes the overnight wrap

So as we approach the final few days of what’s been one of the more volatile Q1’s in memory, the month of March has certainly been far kinder to risk assets relative to what we saw in January and February. A big rally across commodity markets and notably Oil has more than played its part, as has improving US economic data, a more dovish than expected Fed and of course the ECB bazooka. Over the holiday break newsflow has been fairly light and instead we’re looking ahead to a couple of events this week which will see the focus switch back once again to the Fed. The first of those will come this afternoon when we are due to hear from Fed Chair Yellen, speaking at the Economic Club of New York (scheduled for 4.20pm GMT). The speech looks set to take on slightly more importance than normal in light of what’s been a chorus of relatively hawkish Fedspeak over the past ten days or so. In that time we’ve heard Bullard, Lacker, Lockhart and Williams all hint at the possibility of a hike as soon as April or June, with Bullard the latest to suggest that ‘the Fed forecasts suggest that the next hike may not be far off’. This contrasts to the overall dovish view that we got from the Fed at the FOMC meeting earlier this month. Despite the comments in recent days, our US economists are still of the view that they doubt Yellen will sound overtly hawkish this afternoon and while she may reiterate that April remains a ‘live meeting’, they doubt that she will send a strong hike signal for next month. Markets are still yet to be convinced that the Fed will move next quarter, with the odds of an April hike a lowly 6% and a June hike just 38%, which is more or less where it has been since the FOMC meeting.

The other big event this week and another hurdle for the Fed is the March employment report which we’ll get this Friday. We’ll give a preview of this later in the week but the early market expectations are for a 210k print (after the 242k February number), a modest tick up in earnings and no change in the unemployment rate. As usual we’ve got the full run down of the week ahead at the end.

Taking a look at the latest in Asia this morning, it’s been a softer start on the whole with the bulk of bourses currently in the red. In China the Shanghai Comp is currently down -1.14%, while the tech-heavy Shenzhen is down a sharper -2.01%. The Nikkei (-0.49%) and Hang Seng (-0.26%) have seen more modest losses and are off their lows, although in Australia the ASX has tumbled -1.49% (with financials weighing the index down). Only the Kospi (+0.37%) is trading in positive territory as we go to print. Oil markets are reflecting the slightly damper tone this morning with WTI down close to half a percent, while credit markets are close to unchanged. Some mixed employment and retail sales data out of Japan this morning has seen the Yen trade in a fairly choppy manner meanwhile.

Moving on. In the period we’ve been off much of the newsflow has centered around a number of economic releases out of the US. Recapping the prints from yesterday firstly, on the inflation front we saw the core PCE print for February rise a less than expected +0.1% mom (vs. +0.2% expected) which has had the result of keeping the YoY rate unchanged at +1.7% (and a tenth above the Fed’s forecast for this year). The deflator was down -0.1% and in line with the consensus estimate. Away from this we saw personal spending rise +0.1% mom as expected last month, but more telling was the four-tenths of a percent downward revision to the January print. Personal income was a modest beat at +0.2% mom (vs. +0.1% expected). It’s worth noting that post yesterday’s PCE data the Atlanta Fed has now significantly downgraded their Q1 GDP forecast to 0.6% from 1.4% previously after revising down their real consumer spending growth forecasts.

Elsewhere yesterday, housing market data was reserved for the latest pending home sales data which revealed a bumper +3.5% mom rise for the month of February (vs. +1.2% expected) which was the biggest monthly gain in 12 months. Meanwhile the advance goods trade balance last month revealed a slightly wider than expected deficit ($62.9bn vs. $62.2bn expected) which is the widest in six months. The other notable release yesterday was further evidence of improvement in the manufacturing sector in the US. The Dallas Fed manufacturing survey bounced 18.2pts this month and although at a still lowly -13.6, is now at the highest level since November.

There was some notable data for us to highlight on Friday too, with an unexpected upward revision to the third estimate of Q4 GDP in the US to 1.4% qoq (from 1.0%). An upward revision to final sales boosted the number, as did a less negative contribution from inventories. Concerning in the details however was the first estimate of corporate profits in the quarter, with the data revealing a -7.8% qoq decline which is the biggest fall since Q1 2011. The -11.5% yoy decline for profits is now the worst since Q4 2008.

Quickly recapping the price action yesterday, with the bulk of markets shut in Europe for holidays it was an unsurprisingly quiet session in the US (with one eye on the events this week too) although both the S&P 500 (+0.05%) and Dow (+0.11%) did manage to eke out small gains with the former bringing to an end three consecutive days of (albeit modest) losses. The rally in the US Dollar, which had coincided with that run of hawkish rhetoric sputtered however with the Dollar index closing -0.34% for its first loss since the 17th of March.

Commodity markets were fairly subdued also with WTI closing out the day with a -0.18% loss and just below $40/bbl. Credit markets were near enough unchanged. Away from the US there was no negative reaction in Sterling (in fact closed up +0.86%) after Reuters ran a story on the weekend suggesting of some notable support for the pro-Brexit camp. According to the article, the report highlighted that 250 business leaders have backed the pro-Brexit campaign according to the Vote Leave group, although the Sunday Times did suggest that there were some notable omissions from the list which had some questioning the overall reliability of the headlines.

Over in the US this afternoon the notable release will be the March consumer confidence reading (where expectations are for a 1.8pt rise to 94.0), while the January S&P/Case-Shiller house price index for January is also due out. We’ll also hear from Fed Chair Yellen this afternoon when she is due to speak at the economic club of New York, while we’ll also hear from Williams and Kaplan today, Evans on Wednesday, Dudley on Thursday and finally Mester on Friday.