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Jerome Powell’s testimony yesterday has potentially put a fourth U.S. interest rate hike this year on the table, underscored by his rising confidence that the U.S. economy is strengthening, and that inflation is heading back towards its target. Powell said that his own personal outlook for the economy has strengthened since December, citing a stronger labour market, firming inflation, strength in the global economy and fiscal policy that is becoming more stimulatory. There was little in his testimony to alter the view about a March hike, with debate likely to heat up about whether he implied three more similar moves after that. Attention will next fall on the dot plot following the March 21st FOMC meeting to see whether this is indeed becoming more likely.
Illustrating Powell’s point about the underlying strength of the economy U.S. consumer confidence rose to 130.8 in February from 124.3 in January, a 17-year high, with expectations rising to 109.7 from 104.0. Only slightly offsetting this good news, U.S. durable goods orders declined -3.7% m/m, although excluding the volatile transportation component (which fell 10%) orders were only down by -0.3%. Moody's yesterday lifted its U.S. growth forecasts, to 2.7% in 2018, up from 2.3% previously estimated, and to 2.3% for 2019, up from 2.1%. This fits with the general market view, with upward revisions to U.S. growth forecasts largely reflecting the boost to the economy coming from fiscal expansion.
Elsewhere yesterday the Eurozone economic confidence index (ESI) fell back to 114.1 in February. This was the second consecutive decline in the headline reading, but it remains far above the levels seen throughout last year consistent with ongoing robust growth. Meanwhile the Bundesbank’s President Jens Weidmann flagged the possibility of a 2019 rate hike by the ECB when presenting the German central bank's annual report saying that it is not totally unrealistic and that he doesn't see a reason to extend QE beyond this year.
Source: Bloomberg
US Treasuries sold off across the curve after the Fed Chairman said that his outlook for the economy has strengthened since December 2017. He also said that Fed is not concerned about risk aversion in February and is considering whether to potentially raise rates four time this year. Yields on the 2y USTs, 5y USTs and 10y USTs closed at 2.26% (+4 bps), 2.66% (+6 bps) and 2.89% (+3 bps) respectively.
Regional bonds continued to see some buying activity. The YTW on the Bloomberg Barclays GCC Credit and High Yield index remained flat at 4.14% and credit spreads tightened by 4 bps to 152 bps.
Moody’s downgraded Ezdan Holdings rating to B1 from Ba1 with stable outlook.
FX
The dollar is firmer in the aftermath of Fed Chairman Powell's testimony to Congress. Powell showed continued optimism on US economic growth by stating that “Some of the headwinds the U.S. economy faced in previous years have turned into tailwinds.” In addition, he reaffirmed that continued gradual rate hikes would be required to keep the economy from overheating and guard against inflation. The greenback gained momentum after his comments prompted investors to increase speculation about four interest rate hikes in 2018.
EURUSD is trading lower this morning, currently at 1.2220, showing continued declines from the February highs of 1.2557 and approaching our Q1 2018 forecast of 1.22. With the 14 day Relative Strength Indicator showing bearish momentum and at 42.11, EURUSD softness should continue in the short term, with the next level of support coming in at 1.2180. Investors will be looking towards the US this evening where economic data is expected to show that the economy expanded by 2.5% in Q4 2017. Any upside surprises are likely to be bullish for the dollar and risk appetite.
Developed markets closed lower as the Fed Chairman presented an upbeat outlook on the economy and reiterated the rates will continue to increase. The S&P 500 index lost -1.3% while Euro Stoxx 600 index declined -0.2%.
Regional markets continued to remain sluggish. There was very little in terms of stock movements as volumes continued to remain below-par.
Oil prices sold off yesterday in response to API data showing a build in US crude inventories and an improvement in the dollar following new Fed chair Jerome Powell’s comments to the US Congress. Brent slipped almost 1.3% to close at USD 66.63/b and WTI fell slightly more to settle at just above USD 63/b.
A court in Germany also endorsed the legality of a proposed ban on diesel cars in the country’s cities, potentially setting off a major shift away from diesel vehicles in Europe’s largest car market. the rules could come into effect from September next year but German government officials noted the ban could be avoided if carmakers take further steps to improve emissions, particularly in older vehicles.
Emirates NBD Research