Weekly Review March 6
US interest rate expectations were the dominant focus during the week with a run of hawkish rhetoric from key Fed officials as markets adjusted interest rate expectations sharply. Bond yields increased during the week while equity markets remained extremely buoyant.
The US ISM manufacturing index was stronger than expected at 57.7 for February from 56.0 previously, the strongest reading for over two years while the non-manufacturing index strengthened to 57.6 from 56.5.
Consumer confidence strengthened to the highest level for 15 years.
Commentary from Fed speakers was an extremely important focus during the week, especially given the impact on interest rate expectations.
New York Fed President Dudley stated that the case for an interest rate increase was much more compelling, especially given strong gains in business and consumer confidence, together with buoyant financial markets.
There was no dissent from the normally dovish Governor Brainard and the hawkish tone was completed by Chair Yellen who stated that the FOMC would be likely to raise interest rates in March if the data continues to meet their expectations.
Futures markets indicated that the chances of a March Fed rate increase had increased to around 85% by the end of the week from below 40% the previous week.
The dollar strengthened during the week before a late round of profit taking as EUR/USD rallied to the 1.06 area from lows near 1.05.
The UK February PMI manufacturing index was weaker than expected at 54.6 from 55.7 the previous month.
Although the construction data was slightly above expectations, the services-sector data was also weaker than expected with a five-month low of 53.3 for February from 54.5 in January.
The government lost a vote in the House of Lords on an amendment to the Article 50 Bill which guaranteed the rights of EU citizens who are living in the UK.
Sterling was under pressure for much of the week due to disappointing data and lower yields. EUR/GBP rallied to four-week highs above the 0.8600 level while GBP/USD dipped to lows just above the 1.2200 level before a rebound to the 1.2300 region.
The Euro-zone CPI inflation rate increased to 2.0% for February from 1.8% and this was the highest rate for four years, although underlying inflation held at 0.9%.
There were no major moves in opinion polls for the French Presidential election with Le Pen still slightly ahead of Macron in first-round intentions, although market concerns surrounding the outcome eased slightly as German yields rose late in the week.
The latest Chinese PMI data was stronger than expected which boosted confidence in the growth outlook both for China and the global economy.
The Bank of Canada left interest rates on hold at 0.50% following the latest policy meeting. The statement was relatively dovish with further warnings over uncertainty and an intention to look through a short-term increase in inflation.
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