Markets reversed some of recent moves after ECB announcement and US employment data last week. After initial fall to 15349.69, the Dow staged a strong rebound towards the end of the week and closed higher at 15794.08. Same was seen in treasury yields. 30 year yield dropped to 3.539 but drew support from 3.565 and recovered to close the week higher at 3.665. 10 year yield also closed the week higher at 2.675. Dollar index failed to break through 81.48 resistance and weakened towards the end of the week to close at 80.691. In the currency markets, New Zealand dollar was the strongest currency last week followed by Australian dollar, which was boosted by RBA. Canadian dollar also strengthened thanks to a solid employment report but was over shadowed by European majors. Yen was the weakest as risk aversion receded.
To recap the fundamental events, US economic data were generally disappointing. But it seemed like markets are still expecting Fed to continue with the measured tapering and the data are not weak enough to alter the pace. New Fed chairman Yellen will testify this week and would probably give the markets more clues on her thoughts on the economic outlook and Fed's policy path. Non-farm payroll showed only 113k growth in January versus expectation of 175k. December's figure was revised upward from 74k to 75k, which made it nothing but a weak figure. Unemployment rate dropped to 6.6% in January, hitting a five year low. ISM manufacturing index. The headline index dropped sharply to 51.3 in January, down from December's 57 and compared to expectation of 56.4. That's the worst reading since May 2013. ISM non-manufacturing was slightly better than expected, rose to 54.0, up from 53.0, versus expectation of 53.9.
The ECB refrained from easing further in February despite heightened disinflationary pressures. The accompanying statement is more dovish than expected, though. President Draghi indicated that the economic situation has got more complex and the central bank is 'extremely cautious' over incoming data. To our surprise, the ECB would publish the staff projections through 2016, nine months earlier than normal. The focus is on the inflationary outlook which we believe should remain far below the central bank's target. We expected the ECB to cut interest rates further in March. More in ECB Kept The Powder Dry, Announced To Release New Economic Projections In March.
The BoE left rates unchanged at 0.50% and maintained the asset purchase size at GBP 375b. Only a brief statement was released and focus will turn to the Inflation Report to be released on February 12 and meetings minutes to be released on February 19. In particular, BoE governor Carney has made it clear before that he will deliver the "evolution" of forward guidance with the quarterly inflation report. The central bank is expected to revamp its forward guidance as unemployment rate, at 7.1% in the quarter through November, is already so close to the 7% threshold. Carney will also have the chance to explain in details the changes during the press conference that day.
The RBA, as expected, left the cash rate unchanged at 2.5% in February as inflation climbed higher than expected in the last quarter. Most importantly, the central noted in the statement that "on present indications, the most prudent course is likely to be a period of stability in interest rates." That is, the RBA is somewhat ruling out the case for another rate cut this year. The economic outlooks at home as well as in other advanced economies also have improved. More in RBA Shifted To Neutral Stance, Lifted Reference Of Uncomfortable AUD. Late in the week, " RBA revised GDP projection to 2.25%-3.25% in 2014, up from prior forecast of 2.00%-3.00%, thanks to the depreciation in Aussie. Meanwhile, it also projected that inflation would peak between 2.25% to 3.25% between now and June 2015.