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Wednesday 14:00 GMT. The dollar and Treasury yields are rising as building US inflation is seen encouraging the Federal Reserve to increase borrowing costs at a faster pace than investors expected.
Equities are struggling for traction, with the S&P 500 barely changed at 2,016 as the pan-European Stoxx 600 retreats 0.1 per cent, despite gains for London-listed energy groups on a firmer oil price.
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The Fed is forecast to keep interest rates in a range of 0.25-0.50 per cent when it delivers a strategy statement at the conclusion of its March meeting at 18:00 GMT. A press conference by Fed chair Janet Yellen follows half an hour later.
The important issue for investors is what clues the Fed gives about its expectation for future interest rate rises. In particular, traders will want to see that the central bank is moving more towards the market’s thinking on the trajectory for higher borrowing costs.
At the start of the day, Fed funds futures pricing suggested only one more 25 basis point rate rise in 2016, while many Fed members at the latest update predicted up to four such hikes.
However, data released on Wednesday showed US core consumer price inflation rose in February by a faster than expected 0.3 per cent month-on-month and is running at 2.3 per cent over the past 12 months.
The CPI news has pushed up US government bond yields as traders bet the Fed is now more likely to mostly maintain its relatively hawkish tone.
“We think that the Fed should and will not ignore the message from today’s [inflation] report,” said Harm Bandholz, chief US economist at UniCredit.
“The FOMC will reiterate its baseline view that further normalization of the policy stance is warranted. The median “dot” should signal three rate hikes for this year, in line with our forecast, but more than what is currently priced in by financial markets.”
The more policy-sensitive 2-year US note yield, which moves inversely to the bond price, is up 3 basis points at 1.0 per cent, a two-month high. The 10-year Treasury yield is advancing 4bp to 2.0 per cent.
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Equivalent maturity benchmark German paper is down 2bp to minus 0.46 per cent and off 1bp to 0.30 per cent, the meagre offerings reflecting the European Central Bank still being in monetary easing mode.
The yield differential in favour of US assets is supporting the greenback, and the dollar index (DXY) is up 0.4 per cent to 97.06, on track for a fourth straight day of gains, its longest run since a six-session winning streak to January 5.
The firmer dollar and higher bond yields are contributing to gold’s $3 fall to $1,229 per ounce.
Sterling is off 0.6 per cent to $1.4069 and 10-year gilt yields are slipping 1bp to 1.52 per cent as trader absorb the UK Budget, while also helping the DXY gain ground is weakness in the Japanese yen.
A day after the Bank of Japan left monetary policy unchanged but downgraded its outlook for the economy, Haruhiko Kuroda, the BoJ governor, told parliament that “an additional rate cut to minus 0.5 per cent is possible, in theory”.
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Last updated: March 16, 2016 2:00 pm
Dollar and Treasury yields rise
Jamie Chisholm, Global Markets Commentator
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The Fed is forecast to keep interest rates in a range of 0.25-0.50 per cent when it delivers a strategy statement at the conclusion of its March meeting at 18:00 GMT. A press conference by Fed chair Janet Yellen follows half an hour later.
The important issue for investors is what clues the Fed gives about its expectation for future interest rate rises. In particular, traders will want to see that the central bank is moving more towards the market’s thinking on the trajectory for higher borrowing costs.
At the start of the day, Fed funds futures pricing suggested only one more 25 basis point rate rise in 2016, while many Fed members at the latest update predicted up to four such hikes.
However, data released on Wednesday showed US core consumer price inflation rose in February by a faster than expected 0.3 per cent month-on-month and is running at 2.3 per cent over the past 12 months.
The CPI news has pushed up US government bond yields as traders bet the Fed is now more likely to mostly maintain its relatively hawkish tone.
“We think that the Fed should and will not ignore the message from today’s [inflation] report,” said Harm Bandholz, chief US economist at UniCredit.
“The FOMC will reiterate its baseline view that further normalization of the policy stance is warranted. The median “dot” should signal three rate hikes for this year, in line with our forecast, but more than what is currently priced in by financial markets.”
The more policy-sensitive 2-year US note yield, which moves inversely to the bond price, is up 3 basis points at 1.0 per cent, a two-month high. The 10-year Treasury yield is advancing 4bp to 2.0 per cent.
Equivalent maturity benchmark German paper is down 2bp to minus 0.46 per cent and off 1bp to 0.30 per cent, the meagre offerings reflecting the European Central Bank still being in monetary easing mode.
The yield differential in favour of US assets is supporting the greenback, and the dollar index (DXY) is up 0.4 per cent to 97.06, on track for a fourth straight day of gains, its longest run since a six-session winning streak to January 5.
The firmer dollar and higher bond yields are contributing to gold’s $3 fall to $1,229 per ounce.
Sterling is off 0.6 per cent to $1.4069 and 10-year gilt yields are slipping 1bp to 1.52 per cent as trader absorb the UK Budget, while also helping the DXY gain ground is weakness in the Japanese yen.
A day after the Bank of Japan left monetary policy unchanged but downgraded its outlook for the economy, Haruhiko Kuroda, the BoJ governor, told parliament that “an additional rate cut to minus 0.5 per cent is possible, in theory”.
The yen is 0.4 per cent softer at Y113.67 per dollar, but that slip came too late for the currency-sensitive Japanese stock market, where the Nikkei 225 shed 0.8 per cent.
The People’s Bank of China set the reference rate around which the renminbi is allowed to trade 0.1 per cent lower at Rmb6.5172 per dollar, weaker for a third straight day. On Tuesday, the fix was weakened 0.3 per cent, the most since January 7.
The words and actions of the PBoC will be just as important, if not more, than those of the Fed, according to Capital Economics analysts, who noted that the fortunes of the US equity market have closely matched the movements of the renminbi against the dollar.
“Fortunately, the PBoC seems genuine about targeting broad stability in China’s currency on a trade-weighted basis, rather than opting for the substantial devaluation that many fear.”
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Analysts at Standard & Poor’s struck a hopeful tone, noting that uncertainty about China’s exchange rate regime — as well as growth momentum — has subsided.
“Markets have concluded that the Chinese sky is not falling and the People’s Bank of China will act to keep the exchange market harmonious and broadly stable. Post-lunar new year, we see little change in the macro outlook: manufacturing PMIs are weak but non-manufacturing PMIs are outperforming, trade continues to contract and consumption is holding up reasonably well,” they said.
The Shanghai Composite rose 0.2 per cent but Hong Kong’s Hang Seng fell by the same amount.
In commodities, the mood is equally muddled, with Brent crude, the international oil benchmark, up 2.8 per cent at $39.85 a barrel as hopes build for production cuts, but base metals lack consensus.
