Thursday, January 19, 2017

Dollar Up On Yellen's Wednesday Comments, Dribbles Down On Ennui, Angst, Weltschmerz

It's quiet out there...

From Marc to Market:

Comments late yesterday by the Fed's Yellen after headline CPI rose above 2% for the first time in a couple of years, and the largest rise in industrial output since November 2014, spurred a rise in US yields and the dollar.  The US 10-year note yield rose 10 bp to 2.43%.  It was the biggest rise in a month.  The dollar snapped a seven-day drop against the yen with an exclamation point--a 1.8% jump, its best in a two months.   

While the US 10-year yield is unchanged, the dollar is consolidating its gains against the yen in a relatively narrow range of about half a big figure below JPY115.00.  It has seen its gains pared more against the euro and sterling, where most of Yellen-inspired gains have been unwound.  Sterling found support near $1.2250 and was bid up to $1.2335 by early in the European sessions.  The euro recovered have a cent from $1.0620.  

Some observers saw in Yellen's comments stronger confidence in the economy.  Bloomberg's calculation of the odds of a March hike increased to a little more than 34% from a little less than 30%.  The CME calculation was unchanged at a little below 20%.  The March Fed funds futures contract slipped half a basis point yesterday (to 68.5 bp from 68 bp). It is now near 69.5 bp.  

The focus now shifts to the ECB.  Of course, after adjusting policy last month, the ECB is highly unlikely to take new initiatives today.  The most important new development since the December ECB meeting is the rise in inflation. Headline CPI stood at 1.1% at the end of last year, nearly double the 0.6% pace seen in November.  The rise in German CPI to 1.7% can only increase the criticism of the German representatives of the ECB's stance.  

We look for Draghi to push back.  Like several other national central bank presidents, Draghi is likely to caution against exaggerating the increase in inflation, and see it as mostly reflecting the recovery in energy prices.  The core rate is at 0.9% having bottomed at 0.6%.  The ECB will have to wait until new staff forecasts are available in March to understand better if the trajectory of inflation has changed.  

Last month, Draghi acknowledged that deflation forces were almost vanquished.  He can extend this analysis a little, but it may not yet be time to change the balance of the outlook quite yet.  Still, there may be scope for another type of concession to the more hawkish contingent: the reference that rates will remain low or lower can be modified to suggest less risk of a lower rates.  

Draghi, like Yellen, will also likely recognize the high degree of uncertainty.  In addition to the uncertainty around the policies and priorities of the new US Administration, Draghi also has to navigate through several elections, including Germany, France, and Netherlands.   There is also some risk of elections in Greece and Italy too.  

US data, including housing starts, permits, initial jobless claims, and January Philly Fed, will be overshadowed by the ECB press conference a quarter hour later.   Yellen speaks late in the US, which will be early in the Asia's Friday session but after yesterday's comments, her views are a known quantity....MORE 
Here's Mental Floss on the difference between the three mental/emotional states.