The growth numbers for the U.S came in Friday and it was as a whopping 4.1%. The number exceeded expectations, or did it? Apparently not. Fixed income traders looked at the number and bought fixed income. In another time, traders would have sold and sold ’til they could not stand up. In the wake of the number, traders felt that the number was a one off and would be hard to repeat.
Notwithstanding a number of house economists were looking for a stronger number and perhaps that’s part of the disappointment. The curve flattened and the equity market, well, it just sat there, trading around earlier levels. The number that traders were looking at and why they were so dismayed was the core PCE. Core PCE A key Fed inflation measure eased back to 2.0% from 2.2%. Fed Fund futures are indicating a 71% probability that the Fed will hike rates two more times this year.
As such, traders are of the belief that the Fed will be hard pressed to tighten more than two times this year. The fixed income market is in no doubt that Trump’s miracle will not last long.
For the equity market, the tech stocks were the disappointment. The main laggards being Twitter and Facebook. The outlook for growth though is muted and this is why the equity market is struggling at present. The IMF has forecast growth for the U.S. at 2.9%. S&P profits are expected to surge 22.7% this year versus 8.5% for companies in the Stoxx 600.
However, the impact of the tax cuts on earnings will wane in 2019. Trade disputes continue to weigh on the markets. The uncertainty of trade tariffs and the impact on growth are causing equity markets to remain under a cloud. If the trade disputes are settled easily then there is a strong capacity for equity markets to rally.
A strong marker for Asian markets is the yuan. The yuan continues to remain weak with the prospect of Trump’s tariffs looming large.
Equities: The S&P fell 0.7% The Dow fell 0.3%. The Stoxx 600 rose 0.4%
Currencies: The Bloomberg Dollar Index fell 0.2%.
Bonds: The ten-year closed around at 2.958%. The 2-year closed at 2.677% and the 30-year closed at 3.085%. The ten-year bund closed at 0.409% and the UK gilt closed at 1.286% and the OAT closed at 0.705%. The U.S. curve closed the day with the following closes 2/10 at 28.1 bp, 2/30 at 40.9 bp and the 10/30 closed at 12.6 bp. The U.S. 5-year closed at 2.846%.
Commodities: WTI fell 1.1%. Gold rose 0.15%, and copper rose 0.1%.
Bitcoin is trading around $8,185.
Aussie Market Today.
Equity markets should be weak on the day. Expect further bond purchases as many traders remain unconvinced that the U.S. economy can continue to grow and expect rates to remain steady.
Geopolitical risks remain high.