Daily Commentary BY THE CURVE TEAM –

Geopolitical Uncertainty Could Derail the Outlook

2nd of March, 2018

It is difficult to know where to start this morning as growing geopolitical instability looked to overshadow the data as well as Fed Chairman Powell’s second appearance before Congress. It has made for a rather messy night of price action as correlations breakdown across markets.

It is an incredibly interesting and potentially perilous time for markets, particularly surrounding the economic stability around the globe at present. Much of the headlines this morning revolve around geopolitical instability on a number of fronts, which could threaten to overshadow broader economic themes over the months ahead.

In the US, President Trump is following through on another of his campaign promises with an announcement of tariffs on steel and aluminium imports into the US. It is a move that has been in the works for a little while, with the announcement of a 25% tariff on steel and 10% tariff on aluminium imports only adds to growing geopolitical instability, and is likely to result in swift reaction from other nations.

Still on geopolitics and  Vladimir Putin was touting increased nuclear capabilities in his annual state of the nation address ahead of elections in the coming months. All the while, the spat between the UK and the EU over Brexit is looking increasingly messy with the UK fast running out of options.

The geopolitical news overshadowed what was another positive night of data. The PCE data, the Feds preferred measure, posted a solid monthly gain but failed to move the needle on the annual rate. The ISM manufacturing data was solid once again and jobless claims fell to another new low.

On the Fed and Chairman Powell was a little more circumspect in his second appearance before congress. While he didn’t exactly walk away from the comments from his first appearance, he appeared a little more measured in his responses. ‘Gradual’ remains the buzz word when it comes to monetary policy and exactly what gradual means remains open to interpretation.

While the consensus for rate hikes in the US moves towards 4 this year and volatility is not yet a concern according to the Fed Chair, we could see this all change if market volatility continues to rise.

Volatility is always greatest at inflection points and we certainly look as if we are in the middle of one. Equity markets were hit again overnight and look pretty awful from a technical point of view. The USD is also off a little, while bond markets were bid on the growing political instability with the US 10s back at 2.81% this morning, 15bp off their high a week ago.

With so many moving pieces at the moment, it is only feeding into growing uncertainty which will only feed further volatility.

David Flanagan

Director - Interest Rate Markets