Powell sticks to the script

• Fed Chairman Jerome Powell struck a dovish tone as expected in the first of two days of testimony in Congress.  He told the Senate Banking Committee that the Fed would maintain the current pace of bond purchases until “substantial further progress” had been made on employment and inflation.  He noted that the recent run-up in bond yields was a sign of confidence about the economic recovery and said that the economy could grow as much as 6% in 2021.  On inflation, Powell reiterated that while inflation will pick up in the coming months on base effects and recovering demand, he did not expect it to reach “troubling levels” or to be long-lasting.  He did not comment on the USD 1.9tn fiscal stimulus package proposed by the Democrats, but did say that bigger budget deficits had not led to inflation recently.
• US consumer confidence rose to 91.3 in February from 89.3 in January, the highest reading in three months. The improvement in sentiment was largely due to the easing of coronavirus restrictions in parts of the country boosting the present situation component.  The expectations index softened slightly from December as the outlook for jobs remained uncertain.
• UK unemployment rose slightly to 5.1% in the three months to December from 5.0% in November. Employment fell by a larger than expected 114k in December.  The extension of the furlough scheme through the second and third lockdowns has helped keep the unemployment rate relatively low, but this set to expire at the end of April.  It remains to be seen whether the chancellor will extend it again in the budget.
• Eurozone inflation came in in line with forecasts in January, up 0.2% m/m and 0.9% y/y, unchanged from December.  Core inflation was also unchanged at 1.4% y/y. 
• Saudi investment minister Khalid Al Falih provided more details on what the government would require from companies moving their regional headquarters to the Kingdom over the next three years to qualify for public sector contracts.  Companies will be required to show a major commitment to the kingdom by basing C-suite staff there as well as their main support functions. However, these international firms may have some exemptions from Saudisation regulations, according to the minister.   

Today’s Economic Data and Events

• Germany Q4 GDP (final): 11:00 forecast 0.1% q/q
• Bank of England Governor Andrew Haldane to testify before parliament’s Treasury committee: 18:30
• US new home sales (Jan): 19:00 forecast 855k

Fixed Income

• Bond markets showed little material response to Fed chair Jerome Powell’s testimony to the US Senate banking committee overnight as he reiterated the dovish stance from the Fed and pledged to continue buying assets. Powell also downplayed the run-up in UST yields as a “statement of confidence” in the US economy.
• Reaction across the UST curve was limited. The 2yr UST yield closed essentially unchanged at 0.1108% while the 10yr yield slipped by 2bps to settle at 1.3416%. European bonds markets were lower on the day with gilt yields continuing to gain—adding 4bps to close at 0.716%—while bund yields added another 2bps.
• Moody’s lowered their sovereign rating on Tunisia to ‘B3’ and kept the rating on a negative outlook..

 FX

• The dollar managed to snap a three-day losing streak overnight but gains were limited and mixed across major peers. The DXY index added 0.18% to rise to 90.169 although it has given up a large part of the move in early trade today.
• Euro ended the day slightly lower at 1.215 while JPY and CHF saw more considerable weakening. Sterling extended its gains, rising to 1.4113 against the USD and is on its way to testing 1.42. Commodity currencies were also mixed overnight with the NZD and CAD gaining against the USD but the AUD fell marginally.

Equities

• Moves in global equities were a little more measured yesterday, although even Fed Chair Jerome Powell’s pledge that QE was far from done was not sufficient to bring back the animal spirits of earlier in the year. In the US, the S&P 500 and the Dow Jones both managed to eke out gains of 0.1%, but losses in the tech sector dragged the NASDAQ down a further -0.5%.
• The UK’s FTSE 100 was a relative outperformer yesterday, gaining 0.2% despite the highest unemployment figure in nearly five years and sterling climbing to levels not seen since April 2018. There is a high degree of optimism around the UK owing to its successful vaccination programme. Elsewhere in Europe, the DAX lost -0.6% while the CAC gained 0.2%.
• Within the region, the DFM gained 0.2% and the Tadawul 0.8%. In Egypt, the EGX 30 lost -1.2%.

Commodities

• Oil prices showed only modest gains overnight with WTI adding 0.29% at USD 61.67/b and Brent up 0.2% at USD 65.37/b. However, both contracts have more than given up those gains in early trade today as the market responds to a modest build in US crude stocks reported by the API, the first build in five weeks.
• Production is continuing to come back online in Texas after freezing conditions shut in enormous parts of the US energy infrastructure.
• Copper prices continue to lurch higher, closing up more than 1% overnight at USD 9,206/tonne on the LME. A marked deficit and few sources of additional supply capacity amid an economic recovery set up a strong case for copper to continue pushing higher.

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