Powell dampens inflation concerns

• Fed Chairman Jerome Powell said that it could take three years for the Fed’s 2% inflation goal to be reached, reiterating that rising short-term prices due to base effects are not the same as sustained inflation over time, and that the economy would continue to need supportive monetary policy for a while.  His comments were made during his testimony to the House of Representatives on Wednesday.  These views were reiterated separately by Fed Vice Chairman Richard Clarida, and Fed Governor Lael Brainard yesterday. Powell also said that the Fed would be “engaging” with the public and Congress about a digital currency this year. The Fed’s comments helped US equities recover yesterday, even as 10yr yields ticked higher.
• The Bank of England echoed the Fed’s views on inflation risks. Governor Andrew Bailey and other MPC members told parliament’s Treasury committee that they don’t see inflation overshooting the 2% target and that the economy was likely to contract in Q1 2021. They were also concerned about long-term scarring in the labour market. MPC member Jonathan Haskel said that survey data showed 70% of respondents planned to hold onto their savings built up during the pandemic rather than boost spending once restrictions were lifted. The BoE also noted that they had no concerns about US inflation despite the sizeable stimulus still expected there.     
• Germany’s Q4 GDP was revised up to 0.3% q/q from 0.1% previously. Construction and exports grew but domestic demand was soft. The slow rollout of vaccines in the Eurozone will weigh on growth in Q1 21 however, and most analysts expect the German economy to contract in the first quarter.    
• US new home sales rose by more than expected in January, up 4.3% m/m to 923k against expectations of a 1.7% increase.
• Saudi Arabia’s Public Investment Fund has launched a USD 3bn project to develop infrastructure and tourism in the Asir region of the country.  The project will deliver 2700 hotel rooms, as well as residential units and commercial and entertainment attractions and create 8000 jobs by 2030.
• Israeli Prime Minister, Benyamin Netanyahu, has set the date of April 5 for the reopening of the economy as the country benefits from being the world leader in the rollout of vaccinations. Many retail and leisure outlets already opened over the weekend for those who could prove that they have already been vaccinated, providing a blueprint for the rest of the world. Israeli GDP growth surprised to the upside in Q4, and the outlook for 2021 is positive with the Bank of Israel projecting growth of 6.3% if vaccinations continue at the current pace.

Today’s Economic Data and Events

• Eurzone M3 money supply (Jan): 11:45 forecast 12.5% y/y
• US durable goods orders (Jan): 17:30 forecast 1.1% m/m
• US initial jobless claims (20 Feb): 17:30 forecast 825k
• US continuing claims (13 Feb): 17:30 forecast 4460k
• US Q4 GDP (second reading): 17:30 forecast 4.2% q/q annualised
• US pending home sales (Jan): 19:00 forecast 0.0% m/m

Fixed Income

• US Treasuries fell across the curve as risk appetite returned to markets with global equity markets recording strong overnight gains. Yields on the 2yr UST broke out of their current range around 0.11% and closed at 0.12% and are in reach of 01.3% this morning. Yields on 10yr USTs added 3bps to settle at 1.3756% although they did move as high as 1.43% at one point during the session and are above 1.4% in early trade today.
• Bond markets globally sold off with yields higher—marginally—in the UK, France and Germany. High-yield and emerging market bonds also were down marginally. Performance against EM local currency markets was more mixed with South African 10yr yields slipping slightly by 2bps to 8.798% while 10yr Turkish bond yields rose 11bps to 12.76%.
• Saudi Arabia priced a dual tranche EUR issuance overnight. A EUR 1bn 3yr bond priced at MS+40 while a EUR 500m 9yr bond priced at MS+70. Both tranches coming in tighter than initial guidance.

 FX

• Haven currencies were in the firing line overnight as risk appetite returned. USDJPY added almost 0.6% to move up to 105.87 and is over 106 in early trade today while USDCHF is consolidating above 0.9 having given up more than 1.2% in the last three days.
• Higher beta currencies are benefitting with gains across the AUD (up 0.7% overnight), NZD (up 1.3%) and CAD (up 0.6%). Sterling is also carrying some positive momentum, adding 0.2% overnight to settle at 1.4141.
• EM currencies were generally stronger overnight with INR gaining almost 0.2% to close at 72.325 and EGP gaining modestly against the dollar. USDTRY was a notable underperformer, however, rising 0.8% overnight and seeing TRY depreciating by almost 3% over the last three days.

Equities

• More reassuring words from Jerome Powell in his testimony to congress helped soothe the inflation concerns that had been troubling equity markets over the past week or so, and the gains in major indices were almost universal around the world. Travel, construction and energy firms in particular have been strong gainers.
• In the US, the NASDAQ (1.0%), the S&P 500 (1.1%) and the Dow Jones (1.4%) all gained. The blue-chip Dow Jones closed at an all-time high, while the other two remain slightly off their record closes from two weeks ago.
• In Europe, the FTSE 100 gained 0.5%, with optimism around reopening offsetting any negative sentiment generated by the multi-year high for the pound and its potential drag on the earnings of multinationals. The DAX gained 0.8% and the CAC a more muted 0.3%.
• Within the region the DFM lost -1.6% while the Tadawul closed -0.4% lower.
• In morning trading today the optimism has continued in Asia, with the Shanghai Composite, the Nikkei and the Hang Seng up 1.3%, 1.6% and 1.9% respectively at the time of writing.

Commodities

• Oil prices rallied more than 2.5% in both Brent and WTI as markets digested the full impact of freezing weather on US energy infrastructure along with a general risk-on move. Brent futures settled at USD 67/b and are pushing higher today while WTI was up over USD 63/b and is nearing on USD 63.50/b in trade today.
• US oil production fell by 1.1m b/d last week to 9.2m b/d thanks to the impact of freezing weather in Texas. Crude inventories managed to post a modest build of 1.3m bbl but saw heavy draws across the rest of the barrel. Total petroleum stocks fell by almost 14m bbl last week. Product supplied fell almost 2m b/d. However, the data will be largely superseded in coming weeks as the weather conditions have passed and output is already returning to normal.

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