Market movers today
Today, we will get a range of PMI data across countries : in the euro area, Spanish and Italian manufacturing PMI figures for January are being released. For UK PMI manufacturing, we estimate an increase from 56.3 to 57.3, as it has decoupled from the euro area one recently.
In the US , focus is also on ISM manufacturing for January, and with regional PMIs having fallen, we expect ISM to decrease to 59.3 from 59.7. It is noteworthy that there remains a large gap between ISM manufacturing and PMI manufacturing.
In Scandinavia, Swedish and Norwegian PMI figures for January are on the agenda (see next page).
Selected market news
As expected, Fed Chair Janet Yellen did not come out with any surprises at her last meeting as Fed Chair, and kept the Fed funds target range unchanged at 1.25-1.50%. As it was one of the smaller meetings without updated projections and a press conference, focus was on changes to the statement. Also, here there were no major surprises. The Fed no longer says that inflation will 'remain somewhat below' the 2% target, as it now says it will 'move up this year', most likely due to a combination of higher oil prices and the weaker USD. Although it recognises that market inflation expectations have moved up, the Fed is still 'monitoring inflation developments closely'. The Fed still says risk to growth is 'roughly balanced'.
However, importantly, a new word was added, which was interpreted as a 'hawkish' twist. The Fed now says that 'further' rate hikes are warranted. In general, the Fed seems more confident in its outlook. We still expect three hikes this year, with the first one at the next meeting in March, the first one chaired by Jerome Powell. See Flash Comment US: Fed Chair Powell is 'Yellen in Disguise' amid discussions about price-level targeting , 24 January.
EUR/USD edged lower yesterday before and after the FOMC meeting, supported by the healthy ADP report earlier in the day. As such, we now see tentative signs of the cross having established an upper end of its newfound trading range with good resistance around the 1.25 mark.
The end result in the FI market was a further flattening of the curve. The inclusion of 'further' in the FOMC statement added to yields in the monetary policy sensitive 2y-5y segment, whereas longer yields were kept down by month-end extensions and not least the new funding announcement from the US Treasury. It showed that the Treasury has no plans to add maturity to the market and the result was a small drop in 30Y yields fell of some 2bp. Hence, the US curve continued to flatten 2Y10Y and 10Y30Y. We expect the same pattern to prevail in Europe in 2018.
The US equity market took the updated FOMC statement positively despite the hawkish twist and the major indices ended the day with small plusses. The positive sentiment has been carried over to Nikkei, which is also seeing support from a weaker JPY in the aftermath of the FOMC statement.
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