Daily Commentary BY THE CURVE TEAM –

Rates Up, Currencies and Equities Whipsaw on US Data

15th of February, 2018

Volatility remains alive and well as we saw some wild swings across a number of markets in the wake of the US data overnight. While it was the US CPI that was the highly anticipated release, it was another data release that is being touted as the big market mover.

The market had talked itself into a frenzy ahead of last nights US CPI release following the uptick in wages data earlier in the month. As I said on Sky Business News yesterday afternoon, I thought the emphasis being placed on the single data point was a little overblown, but it certainly had an initial impact on markets.

When the data was released, the larger than expected increase in US CPI had an immediate impact on the market. While the headline and core readings were only slightly ahead of expectations, it saw the USD soar, bonds sell off and equity markets plunge. As quick as markets fell, they quickly bounced back.

In the aftermath of the turnaround, the popular consensus was that the other data release on the night was the catalyst for the recovery. The other data release was retail sales, which showed sales actually fell heavily in December. That popular consensus suggest that markets are apparently now less worried about the Fed accelerating the pace of rate hikes due to consumer weakness, despite the rise in inflation.

Tell that to the bond market though. While equities quickly recovered and the USD gave up its gains, the bond yields continued to grind higher. The 10 year rate, after initially jumping to the key 2.88% on the CPI release, has since traded up through that level and is sitting at 2.90%, off a high of 2.92%.

When we see moves like we did last night, a famous quote springs to mind. Benjamin Graham, widely known as the ‘father of value investing’ once said “in the short run, the market is a voting machine but in the long run, it is a weighing machine.”

In the short run, the weak retail sales data is may well be touted as salve from the accelerated normalisation of interest rates, thus keeping the party going a little longer. However over the long run, the persistent grind high in bond yields is likely to eventually become the focus again.

Turning to the local data and the recent spike in volatility in global markets hit consumer confidence in February. The index was off 2.5% with consumers views on their own finances and the near term economic outlook taking the biggest hit. Despite the pull back, the index remains above 100 indicating pessimists outweighs optimists.

The focus now shifts to today’s employment numbers. The market is expected the standard moderate gain of 15,000 jobs and an unchanged unemployment rate.

David Flanagan

Director - Interest Rate Markets