World Week Ahead: Rate path check from Powell

Monday 26th February 2018

Investors will eye Federal Reserve chair Jerome Powell’s first testimony to Congress as well as a slew of US economic reports for clues on the incline of the path of interest rate increases.

Powell, who succeeded Janet Yellen this month, testifies before House and Senate committees on Tuesday and Thursday. The Fed’s semiannual monetary policy report, already released last Friday, did not signal anything that suggested central policy makers have changed their mind about their plans to hike interest rates three times this year.

Recent wage data had spurred concern about a steeper path of rate hikes, helping to trigger a correction in US equities.

US Treasuries climbed on Friday, sending yields on the 10-year note five basis points lower to 2.87 percent.

Declining bond yields underpinned Wall Street, which continued to recover from its drop earlier this month.

The Dow Jones Industrial Average rallied 1.4 percent, while the Standard & Poor’s 500 Index advanced 1.6 percent, and the Nasdaq Composite Index jumped 1.8 percent.

“Certainly bond yields pulling back today is helpful for stocks, at least for the short term, that has been the narrative that is out there — that higher bond yields are weighing on stocks and this preoccupation with 3 percent,” Willie Delwiche, investment strategist at Baird in Milwaukee, told Reuters on Friday. “So moving away from that, for today at least, provides a bid for equities.”

Other Fed officials scheduled to speak this week include James Bullard today and William Dudley on Thursday.

There are several US housing market reports on tap including new home sales today, S&P Corelogic Case-Shiller and FHFA house prices indices, on Tuesday, and the pending home sales index on Wednesday.

Another host of economic data slated for release include Chicago Fed national activity index and Dallas Fed manufacturing survey, due today; durable goods orders, international trade in goods, retail and wholesale inventories, consumer confidence, and Richmond Fed manufacturing index, due Tuesday; gross domestic product, and Chicago PMI, due Wednesday; weekly jobless claims, personal income and outlays including core PCE, ISM manufacturing index, and construction spending, due Thursday; as well as consumer sentiment, due Friday.

"Core PCE, the Fed’s preferred measure of inflation, will be closely watched by markets to see the effect of stronger growth, higher oil prices and a tighter labour market on inflation," National Australia Bank said in a note on Friday. "Markets will also be looking for other signs of a robust economy from ISMs and durable goods data, although both are expected to ease."

Wall Street’s fear gauge — the CBOE Volatility Index or the VIX — dropped 11.9 percent on Friday to 16.49, the lowest close since February 1. It briefly spiked to more than 50 earlier this month.

“Concerns about interest rates are overblown,” Don Townswick, the director of equities at Hartford, Connecticut-based Conning, told Bloomberg. “The markets will tend to remain strong. Historically markets have been strong during the first 18 to 24 months of rising interest rates as long as inflation is under control.”

For the week, the Dow rose 0.4 percent, the S&P 500 added 0.6 percent and the Nasdaq climbed 1.4 percent.

In Europe, the Stoxx 600 Index ended Friday with a 0.2 percent advance from the previous day’s close.

Investors will be listening closely to European Central Bank president Mario Draghi who is set to deliver testimony before the European Parliament’s Economic and Monetary Affairs Committee today.

“With no other speeches from Draghi on the calendar, this appears to be his last big chance to deliver any substantial messages before the March 8th ECB meeting,” TD Securities said in a note on Friday. “However, we expect him to stick to the same message of patience and prudence, with no real indication of veering away from the ECB’s current forward guidance.”

(BusinessDesk)

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