The seemingly inexorable rise in global equities continued this week, though US stocks took a pause, hovering just below all-time highs as the fourth-quarter earnings season draws to a close and US economic data remains pretty decent. The Shanghai Composite saw strong gains as China returned from the Lunar New Year holiday to more injections of PBoC liquidity. European equity indices surged to multi-year highs this week thanks to a glimmer of positive economic data and the upcoming launch of the ECB’s quantitative easing program in March. More details on the program are expected at the ECB meeting next week. European and Greek officials kicked the can four months down the road while preliminary February German CPI inflation was +0.1%, after falling to -0.4% in January. US interest rates drifted lower led by the back end of the Treasury curve. The 10-year yield declined by more than 10 basis points on the week. A combination of mixed US economic data and Fed Chair Yellen’s testimony on Capitol Hill failed to cement expectations that a June liftoff was definitely in the cards. For the week, the DJIA was about flat, the S&P500 fell 0.3% and the Nasdaq eked out a 0.2% gain.

Yellen’s Congressional testimony largely reiterated the tone and content of the FOMC minutes from the January meeting. Yellen established more flexibility for rate lift off by emphasizing that changes to the forward guidance regarding the “patient” language would proceed hikes but would not necessarily indicate imminent tightening. Policy changes remain dependent on employment and inflation data, although Yellen reiterated there is no evidence inflation will move above 2% anytime soon. In a speech late in the week, Atlanta Fed Governor Dennis Lockhart framed the Fed’s dilemma: it must weigh weak inflation data against good growth and continued employment gains. Fed moderate Bullard reiterated that if the Fed got too far behind the curve on rate hikes, financial markets could react violently to policy changes.

Another look at solid fourth quarter GDP and the January CPI readings underscored the Fed’s dilemma: headline y/y CPI fell into negative territory for the first time since December 2009, with the -0.1% decline a big slip from the prior month’s +0.8% reading. There’s no mystery behind the reading, which was widely expected: depressed crude prices. The core reading, which strips out energy prices, was unchanged from the prior month at +1.6%, but was still well short of the Fed’s 2.0% target. Meanwhile the second reading of fourth-quarter GDP was pretty good, declining less than expected to +2.2% from the +2.6% advance number and personal consumption slipped a bit to +4.2%. EUR/USD saw a major move lower after the US CPI data, dropping from 1.1380 to 1.1190 on Thursday, and then testing 1.1180 on Friday. Recall that the 1.1110 level seen in late January was the lowest level in the pair since 2003.

Continue reading “Futures Levels & Economic Reports 3.03.2015”