While many Wall Street traders expecting Trump to unveil details of his economic plan went to bed empty handed last night, that was not enough to halt the market rally with the narrative shifting to Trump's "measured", "presidential" tone in which he offered an olive branch to both Democrats and Republicans in Congress while promising to make concessions and providing another round of grand visions for the US. Trump urged Americans to abandon conflict and help him remake the fabric of the country, a moment he hopes will turn the page on his administration’s chaotic beginning and bring clarity to his policy agenda. He offered few new proposals and made no suggestions on how he would pay for his plans, including a replacement of Obamacare, a tax overhaul including cuts for the middle class, $1 trillion in infrastructure investment and a large increase in defense spending.
"The market has been looking for reassurance that Trump intends to follow through on his campaign promises for fiscal spending, tax cuts and deregulation," said James Woods, global investment analyst at Rivkin in Sydney. "He mentioned these policies but did not provide any actual details or time lines, which is what investors are looking for."
For markets, the speech - either positive or negative - was overshadowed by comments from a handful of Federal Reserve policymakers, who suggested a March rate hike is live, contrary to market expectations. As a result, have tumbled, and global stocks surged following yesterday's barrage of hawkish Fed speakers, especially Bill Dudley, who in the span of an hour managed to reprice March rate hike odds from just over 50% to 80%, meaning a March rate hike is now in play.
For those who missed it, here is a summary of Tuesday's Fed talking heads, and what they said:
- Fed's Dudley (Voter, Dove) said the case for rate hikes is more compelling.
- Fed's Kaplan (Voter, Neutral) said the rate path is more important than timing of the next hike.
- Fed's Williams (Non-Voter, Hawk) sees a March hike getting serious consideration. Williams also added he still is comfortable with 3 hikes this year and does not see need to delay rate hike.
- Fed's Bullard (Non-Voter, Dove) stated that the Fed has essentially reached its dual mandate and should allow the balance sheet to normalize naturally. Bullard also added that the policy rate can stay relatively low over the horizon and that he still expects 2% growth, thus no reason to be aggressive on rate hikes
The most hawkish comments were out of both Dudley and Williams. In an interview with CNN, the usually dovish NY Fed President Dudley said that the case for tightening has become “a lot more compelling in recent months” and that “risks to the outlook are now starting to tilt to the upside”. Dudley was also quoted as saying that “animal spirits have been unleashed a bit post the election” and that “there’s no question sentiment has improved quite markedly”. He also said that 3-4% GDP growth in the medium term is possible should we see further improvement in productivity. Shortly before that San Francisco Fed President Williams said that a March hike is getting “serious consideration” given that the Fed is “very close” to achieving its dual mandate goals.
As expected, March hikes odds soared, rising as much as 80% after the barrage of hawks:
With March odds soaring to approximately 80% percent, they pushed the dollar higher and sent Treasuries lower.
Additionally, strong data out of China, where most PMIs came in better than expected, has eased concerns about China's economy. The rundown:
- China's Official Manufacturing PMI (Feb) 51.6 vs. Exp. 51.2 (Prey. 51.3).
- Chinese Non-Manufacturing PMI (Feb) 54.2 (Prey. 54.6);4-monthlow.
- Chinese Caixin Manufacturing PMI (Feb) 51.7 vs. Exp. 50.8 (Prey. 51.0).
Back to Trump: in a nutshell the long awaited Trump address had a familiar ‘America first’ theme throughout and plenty of echoes of his inaugural address. However the disappointment market wise has been the lack of detail. But there did seem to be a big effort to sound presidential. In terms of what we did get, the President returned again to the subject of rebuilding infrastructure, highlighting that he will be asking Congress to approve legislation that produces a $1tn investment financed through both public and private capital and guided by the principals of “hire American and buy American”. Trump also reconfirmed that he intends to repeal and replace Obamacare, increase defence spending, enforce immigration laws and also overhaul tax including cuts for the middle class. The tax subject was only really lightly touched. Trump said that his economic team is developing a “historic tax reform that will reduce the tax rate on our companies so that they can compete and thrive anywhere and with anyone” and also “at the same time provide massive tax relief for the middle class”. There was no specific mention whatsoever of the much anticipated border-adjusted tax. Another subject of much debate, bank regulation, was also avoided.
Overall, a speech that while disappointing on one hand (lack of specifics) was greeted as perhaps a return to Trump's conciliatory, "presidential-sounding" roots. So as investors moved on from President Donald Trump’s address to Congress, shifting their focus to the timing of a U.S. rate increase as the dollar strengthened, stocks surged and bonds tumbled.
The Bloomberg Dollar Spot Index climbed the most in three weeks, the yield on 10-year Treasuries rose and European banking stocks gained after odds jumped for a Federal Reserve rate increase this month. Shares of commodity producers found support from a report indicating improving health for Chinese manufacturing which also helped prices for raw material exports.
“Fed speakers trump Trump,” Richard McGuire, the head of rates strategy at Rabobank International in London, wrote in a note. Trump’s speech lacked “fresh content for the market to trade off, with big tax cuts, deregulation and an infrastructure plan being mentioned but not supported by any details. Given this, all focus instead turned to the slew of hawkish rhetoric from Fed speakers.”
The dollar index climbed as much as 0.7 percent to its highest levels in seven weeks, having also been helped by data showing robust U.S. consumer spending.
"After dominating the markets since November, President Trump could now fade into the background as the focus shifts to the Fed and the prospect of rate increases," said Kathleen Brooks, Research Director at City Index in London. "Fed members don't just let words slip out when they speak to the press - this was a message for the markets, and the markets have duly reacted."
European shares gained, with basic resources the top-performers on Trump's promise of $1 trillion of infrastructure spending. The STOXX 600 index rose over 1 percent, with Germany's DAX and France's CAC 40 outperforming peers to climb 1.3 percent and 1.4 percent respectively, helped by strong company earnings reports. European stocks climbed the most since Feb. 1 as all industry sectors advanced. A gauge of banks gained 2 percent, leading the advance, while basic resources shares rose 1.9 percent.
Japan’s Topix index increased 1.2 percent, propelled by a weaker yen towards the the biggest rally in more than two weeks. The Shanghai Composite Index added 0.2 percent after data on the producer price rebound, giving top officials gathering in Beijing a solid economic backdrop as they seek to rein in financial risks.
The global MSCI ACWI index, which has risen more than 10 percent since Trump's election in November, was flat, with gains in Europe offsetting earlier falls on Asian and U.S. bourses. The MSCI's broadest index of Asia-Pacific shares outside Japan dipped 0.2 percent.
Futures on the S&P 500 Index added 0.5 percent, after the Dow Jones Industrial Average snapped a 12-day winning streak to close down 0.1 percent in the prior session. The S&P500 finished February with its best monthly gain since March, climbing 3.7 percent.
In commodity markets, crude oil prices lost more ground, with rising U.S. oil output adding pressure on the market, although OPEC production cuts continued to offer support. The stronger dollar weighed on gold, which dropped 0.3 percent to 1,244.36 an ounce, extending Tuesday's decline.
2Y Treasury yields jumped to 1.304%, the highest since December, to match their highest levels since 2009. The gap between them and their German equivalents increased to its widest since 2000. Yields on 10-year Treasuries rose three basis points to 2.42 percent, climbing for a third straight day. Yields on benchmark German bonds climbed four basis points to 0.25 percent after a report showed unemployment continued to decline. Yields on French benchmarks and gilts both rose three basis points.
- S&P 500 futures up 0.5% to 2,375.50
- STOXX Europe 600 up 1% to 373.75
- MXAP down 0.3% to 144.70
- MXAPJ down 0.3% to 464.87
- Nikkei up 1.4% to 19,393.54
- Topix up 1.2% to 1,553.09
- Hang Seng Index up 0.2% to 23,776.49
- Shanghai Composite up 0.2% to 3,246.93
- Sensex up 0.9% to 28,990.65
- Australia S&P/ASX 200 down 0.1% to 5,704.80
- Kospi up 0.3% to 2,091.64
- Brent Futures up 0.5% to $56.81/bbl
- Gold spot down 0.3% to $1,244.68
- U.S. Dollar Index up 0.6% to 101.68
- US 10Y Yield
- German 10Y yield rose 4.1 bps to 0.249%
- Euro down 0.3% to 1.0540 per US$
- Brent Futures up 0.5% to $56.81/bbl
- Italian 10Y yield fell 4.8 bps to 2.086%
- Spanish 10Y yield rose 3.1 bps to 1.686%
Top Overnight News via BBG
- Trump’s Softer Tone Masks Hard Road Ahead for Agenda in Congress; Trump’s Scant Specifics Leave Questions on His Border-Tax Plans
- Comcast Targets Asia With Harry Potter-Featured Theme Park Deal
- Ahold Delhaize Profit Beats Analyst Estimates on Cost Cuts
- AMC Cinemas Beefs Up Marketing With Dine-In, Bottomless Popcorn
- Snap’s Investors Could Pile On Then Disappear After the IPO
- Hamilton Lane Prices 11.9m-Share IPO at $16: IPO Boutique
- Time Inc. Said to Ask Suitors to Submit Offers by Next Week
- TD Ameritrade Cuts Pricing Fee to $6.95 for Online Equity Trades
- World’s Second-Largest Copper Mine to Resume Some Operations
- Iberiabank Sees Sabadell United Deal 6% Accretive to 2018 EPS
- Apollo Commercial Got Justice Department Information Request
- Orexo Commences Patent Infringement Litigation Against Actavis
- Avianca Says It Hasn’t Been Notified of Lawsuit by Kingsland
- Femsa Sees Capex of About $1.3b in 2017
- Volkswagen Closes $256 Million Acquisition of Navistar Stake
- Euro-Area Manufacturing Picks Up as Inflation Pressures Build
- Toshiba Said to Seek Bids for Chip Unit at $13 Billion Value
Asia equity markets traded higher as the region digested a deluge of data including better than expected Chinese PMIs figures. Despite this, ASX 200 (-0.1%) was dampened by the negative lead from Wall St where the DJIA snapped a 12-day win streak, while better than expected Australian GDP also failed to inspire as the strong data also reduces prospects of future RBA action. Nikkei 225 (+1.4%) was underpinned by a weaker JPY, while Shanghai Comp (+0.3%) and Hang Seng (+0.2%) gained after the latest PMI figures in which the Official Manufacturing PMI and Caixin Manufacturing PMI surpassed estimates, although upside was capped on a weak PBoC liquidity operation and after Non-Manufacturing PMI fell to a 4-month low. 10yr JGBs saw spill-over selling from T-notes which were weakened following hawkish Fed comments that suggested a March hike was firmly on the table, while the BoJ's Rinban announcement also added to the pressure as the central bank reduced its purchases in 1yr-3yr and 3yr-5yr government debt.
Top Asian News
- China Plans to Cut 500,000 Jobs This Year in Smokestack Sectors
- China’s Factory Gauge Strengthens as Producer Prices Rebound
- China’s Policy Balancing Act Faces Bumps as Bond Pain Swells
- Hedge Fund Oasis’s Wosner Named Director of Premier Foods
- Hong Kong Stocks Eke Out Gains as Galaxy Reports Higher Earnings
- Foxconn’s Gou Says Very Serious About Bid for Toshiba Chip Unit
- Being a Woman Means 43% Less Pay Than Men on Singapore Boards
- Stock Investors Have Seven Reasons to Be Cheerful: Markets Live
- Bouncing Back From Cash Ban, India Chasing V-Shaped Recovery
European bourses were also propelled higher, with the Stoxx 600 index rising more than 1%, after a barrage of hawkish comments from FOMC members yesterday has supported EU bourses in tandem with US equity futures with notable outperformance in financial names as the futures market raised the probability of a March hike (pricing stands at 80%). While markets were somewhat unresponsive to President Trumps speech in congress who failed to provide any significant surprises. Elsewhere, despite the build in API's overnight, WTI and Brent crude futures are at elevated levels amid increased optimism over the prospects of the US economy. In fixed income markets, the overnight weakness in treasuries saw bunds opened lower, while the gains in equities have also weighed on prices. While the German curve has seen some notable bear steepening this morning, elsewhere the GE-FR spread is a touch tighter with reports that Presidential candidate Fillon called to speak to judges over probes in fake jobs. Additionally, he will give a speech at 1100GMT.
Top European News
- Euro-Area Manufacturing Picks Up as Inflation Pressures Build
- U.K. Manufacturing Growth Weakens as Price Pressures Slip
- German Unemployment Declines as Confidence in Economy Improves
- BP Targets $40 Break-Even Oil Price to Reassure Investors
- FCA to Overhaul IPO Information Flow Over Conflict Concerns
- CRH Capacity for Buys EU2b-EU3b in Next 18 Months, CEO Says
- London Home Price Cuts Spread and Deepen as Market Stagnates
- French Candidate Fillon Called in to Speak to Judges, JDD Says
- OATs Dip After Fillon Said to Continue Presidential Race
- European Miners Rebound as China Economic Data Spur Optimism
- Fillon Wife in Custody, Search Ongoing: Mediapart
- U.K. Consumer Borrowing Remains Below Average as Confidence Ebbs
In currencies, the Bloomberg Dollar Spot Index jumped 0.4 percent as of 9:53 a.m. in London, climbing for a fourth straight day and heading for the biggest advance since Feb. 7. The yen slumped 0.7 percent to 113.52 per dollar, for a third day of losses. The euro fell 0.3 percent to $1.0545 and the British pound was little changed at $1.2383 after slipping 0.5 percent Tuesday.FX markets have followed the lead set by Fed members Williams and Dudley yesterday, setting the USD free on the upside as has been threatening given the US rate profile. Along with hesitancy over president Trump's general conduct and communication, the market has been split between the prospect of 2 or 3 rate hikes this year, but with March now firmly on the table, the short end of the Treasury yield curve has rallied, putting the 2yr back to the highs just shy of 1.30%. Gains in the belly look a little more reluctant, and the modest 5-6bp rise in the 10yr sees USD/JPY back in the mid 113.00's, but struggling ahead of 114.00. EUR/USD has been pulled back into mid-low 1.0500's, but sizeable expiries in the 1.0500-50 area look to be containing for now. German regional inflation rates are all higher, but within expectation levels, while unemployment was also largely as expected.
In commodities, gold dropped for a third day, falling 0.3 percent to $1,244.66 an ounce after completing a 3.1 percent gain in February. West Texas Intermediate Crude rose 0.5 percent to $54.26. Oil ended last month 2.3 percent higher. Copper added 1.7 percent, advancing for a fourth straight session. Oil prices have edged higher despite the impact of a stronger USD, but near term price action is all base on production cuts, with strong compliance to the agreement from OPEC members edging towards 95%. Non OPEC members are lagging according to the latest figures, but sources suggest the current path will lead to WTI rising to USD60.00. In light of this, hesitant gains through USD55.00 may be taking this into account, but price stability will clearly be welcomed all round. Precious metals have softened inversely with the USD, with Gold now trading just under USD1245.00, with Silver dipping to USD18.24/5 before finding support. Base metals find support from the latest China manufacturing stats — Copper rising close to 2% on the day, but Zinc outperforming 2.5% up on the day. Zinc prices still set to rise higher on mine closures, but the latest appointment of the environment minister has/is running into some opposition.
In terms of the day ahead, while the bulk of the attention will be on Trump’s speech there is still a reasonable amount of data to get through. Much of the focus will be on the January personal spending and income reports, alongside the core and deflator PCE readings. Also due out is the ISM manufacturing print for February as well as the final manufacturing PMI revision, while construction spending and vehicle sales round out the releases. If that wasn’t enough already, the Fed’s Beige Book is also due out this evening while Kaplan (6pm GMT) and Brainard (11pm GMT) are both due to speak.
US Event Calendar
- Wards Total Vehicle Sales, est. 17.7m, prior 17.5m; Wards Domestic Vehicle Sales, est. 13.7m, prior 13.6m
- 7am: MBA Mortgage Applications, prior -2.0%
- 8:30am: Personal Income, est. 0.3%, prior 0.3%; Personal Spending, est. 0.3%, prior 0.5%
- 8:30am: Real Personal Spending, est. -0.1%, prior 0.3%; PCE Deflator MoM, est. 0.5%, prior 0.2%; PCE Deflator YoY, est. 2.0%, prior 1.6%; PCE Core MoM, est. 0.3%, prior 0.1%; PCE Core YoY, est. 1.7%, prior 1.7%
- 9:45am: Markit US Manufacturing PMI, est. 54.5, prior 54.3
- 10am: ISM Manufacturing, est. 56.2, prior 56; ISM Prices Paid, est. 68, prior 69; ISM New Orders, prior 60.4; ISM Employment, prior 56.1
- 10am: Construction Spending MoM, est. 0.6%, prior -0.2%
- 1pm: Fed’s Kaplan Speaks in Dallas
- 2pm: U.S. Federal Reserve Releases Beige Book
- 2pm: U.S. Federal Reserve Releases Beige Book
- 6pm: Fed’s Brainard Speaks at Harvard
DB's Jim Reid concludes the overnight wrap
Welcome to a new month and in reality only one place to start this morning and that is President Trump's prime time address to Congress that started at 9pm EST last night. Before we delve into the details a reminder that as it's the first of the month we'll be doing our usual performance review at the end with all the tables and charts in the PDF. It's our second performance review in a row as yesterday we looked back on 10 years of the EMR and looked at how assets have performed over what is essentially the period since the start of the financial crisis in February 2007. So if you missed it, see yesterday's EMR at your leisure.
So in a nutshell the long awaited Trump address had a familiar ‘America first’ theme throughout and plenty of echoes of his inaugural address. However the disappointment market wise has been the lack of detail. But there did seem to be a big effort to sound presidential. In terms of what we did get, the President returned again to the subject of rebuilding infrastructure, highlighting that he will be asking Congress to approve legislation that produces a $1tn investment financed through both public and private capital and guided by the principals of “hire American and buy American”. Trump also reconfirmed that he intends to repeal and replace Obamacare, increase defence spending, enforce immigration laws and also overhaul tax including cuts for the middle class. The tax subject was only really lightly touched. Trump said that his economic team is developing a “historic tax reform that will reduce the tax rate on our companies so that they can compete and thrive anywhere and with anyone” and also “at the same time provide massive tax relief for the middle class”. There was no specific mention whatsoever of the much anticipated border-adjusted tax. Another subject of much debate, bank regulation, was also avoided.
Markets in Asia are mostly higher following Trump’s speech. The Nikkei (+1.03%), Hang Seng (+0.17%) and Shanghai Comp (+0.38%) are all up although the ASX (-0.13%) has struggled slightly. US equity index futures are also up +0.20% although they are little changed relative to the minutes prior to Trump speaking. Rates have crept higher however that may in part be to do with the Fedspeak late last night which we’ll touch on shortly. 2y yields are up +3.6bps and 10y yields up +2.9bps. The Dollar index is +0.45%, Gold (-0.42%) is weaker and other commodities little changed. We may have to wait for the European session to really kick in though for markets to digest the speech.
It would be fairly easy to wrap up here and move on to today’s calendar given that for the most part yesterday’s session was a fairly dull one and essentially just preparing the stage for Trump. However, there was some last minute month end excitement as after the US close we got some pretty hawkish comments out of both the Fed’s Dudley and Williams. In an interview with CNN, the usually dovish NY Fed President Dudley said that the case for tightening has become “a lot more compelling in recent months” and that “risks to the outlook are now starting to tilt to the upside”. Dudley was also quoted as saying that “animal spirits have been unleashed a bit post the election” and that “there’s no question sentiment has improved quite markedly”. He also said that 3-4% GDP growth in the medium term is possible should we see further improvement in productivity. Shortly before that San Francisco Fed President Williams said that a March hike is getting “serious consideration” given that the Fed is “very close” to achieving its dual mandate goals.
After trading fairly flat for much of the session short-end Treasury yields spiked in the last 30 minutes or so (and have continued to rise this morning as highlighted above). 2y yields closed 6.6bps higher at 1.260% and 5y yields finished 6.4bps higher at 1.929%. 10y yields also ended 2.5bps higher at 2.390%. Unsurprisingly Fed Funds contracts were also on the move with the March contract now at 0.750% (+3.5bps). It’s worth noting that one of the more dovish Fed officials, Lael Brainard, is due to speak this evening, while Fed Chair Yellen then speaks on Friday. The imperfect Bloomberg calculator (which overstates the chances but offers a good history of pricing) has also seen the March hike probability jump to 80% this morning from 52% yesterday and just 40% at the end of last week. Prior to that excitement, equity markets had largely limped through much of the session. The Dow (-0.12%) finally brought to an end a streak of 12 consecutive record highs while the S&P 500 (-0.26%) also finished in the red not helped by Senate Finance Chairman Orrin Hatch telling CNBC that he has real reservations about the border adjustment tax. In Europe the Stoxx 600 (+0.19%) recovered from a slow start. Commodities were generally a non-event for much of the session.
The rest of yesterday’s session was largely focused on the data. In the US the main release was the second estimate of Q4 GDP which came in at an unrevised +1.9% qoq annualized. The consensus had been for an upward revision to +2.1%. In the details growth in final sales was unrevised at +0.9% while personal consumption was revised up five-tenths to +3.0%. This was offset by a 1.1pt downward revision for business investment to +1.3% while the core PCE was also revised down one-tenth to +1.2%. Away from that there was some good news in the latest consumer confidence reading for February which was revealed as rising 3.2pts to 114.8 (vs. 111.0 expected) and the highest since July 2001. The Chicago PMI also surprised to the upside with the index up 7.1pts to 57.4 (vs. 53.5 expected) in February and the highest since January 2015. The Richmond Fed manufacturing index reading also rose 5pts to +17. Finally the advance goods trade balance reading in January revealed a wider than expected deficit ($69.2bn vs. $66.0bn expected). Over in Europe the only notable data came from France where headline CPI was revealed as rising a fairly benign +0.1% mom in February (vs. +0.4% expected). Q4 GDP did however come in as expected at +0.4% qoq.
Quickly coming back to Asia, this morning we also had some data out of China which very much played second fiddle to Trump. The official manufacturing PMI was confirmed as rising 0.3pts to 51.6 in February (vs. 51.2 expected) while the non-manufacturing PMI declined 0.4pts to 54.2. The Caixin manufacturing PMI also came in at 51.7 and up 0.7pts from January.
In terms of the day ahead, while the bulk of the attention will be on Trump’s speech there is still a reasonable amount of data to get through. The European session will also see a continuation of the February PMI releases with the final manufacturing prints to be confirmed alongside a first look at the data for the periphery and UK. We’ll also get the February CPI report in Germany as well money and credit aggregates data in the UK. It’s set to be another busy afternoon for data releases in the US again too. Much of the focus will be on the January personal spending and income reports, alongside the core and deflator PCE readings. Also due out is the ISM manufacturing print for February as well as the final manufacturing PMI revision, while construction spending and vehicle sales round out the releases. If that wasn’t enough already, the Fed’s Beige Book is also due out this evening while Kaplan (6pm GMT) and Brainard (11pm GMT) are both due to speak.