Futures Trading Update

– The week hinged on big announcements out of top Chinese officials and the ECB, as well as the latest US jobs report. The PBoC started the week off with another unscheduled rate cut, which helped soften the blow of Premier Li confirming a lower GDP growth target for 2015. The ECB offered up operational details for its quantitative easing program and said it would begin next week. The dollar index, already at a decade high, gained more strength in the wake of another solid US employment report bringing Fed rate lift off closer to reality. US Treasury yields moved up across the curve, the 2-10 year spread widened 150 basis points, and the US benchmark 10-year Treasury yield is now up on the year at 2.24%. On Monday, the Nasdaq Composite crested the 5,000 mark for the first time since the year 2000 tech bubble popped, but that marked the top for the week as the Nasdaq dropped 0.7%, the DJIA lost 1.5%, and the S&P500 fell 1.6%.

– Heading into the trading week risk appetite was getting a tailwind from another surprise PBoC rate and the anticipation of the launch of ECB QE. Early on, the USD maintained a firm tone against most currencies with the Dollar Index hitting fresh 11-year highs. By Thursday the ECB confirmed that it would begin its QE purchases on March 9th and that the program would indeed purchase government bonds with negative yields, sending the Euro below 1.10 and European bond yields to fresh record lows.

– Another stellar US employment report Friday only fueled the USD rally. The USD/JPY approached 3-week highs and tested near the 121 handle. The Yen weakness encouraged some verbal intervention when a Japanese government advisor stated that the pair’s present levels were in the “upper limit of comfort zone.” Emerging market currencies also remained highly sensitive to US Fed expectations. The USD/BRL tested above 3.03 level (weakest Real level since 2004), and the South Africa Rand hit 13 year lows as USD/ZAR approached the 12 neighborhood.

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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.

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