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The FOMC minutes were deemed more dovish but this wasn’t enough to inspire a significant rally in US equities as some mixed data dampened sentiment. It seems many fed members felt there are many risks which would justify a later lift-off.
The result was USD weakness while rates sold off as treasuries rallied. While the minutes were not all-out dovish, positioning had been skewed to the hawkish side as investors felt the statement from the meeting suggested lift-off around the middle of the year, along with some fairly hawkish fedspeak.
The bottom line is jobs growth in the US has been solid but concerns on wage growth, inflation and premature lift-off are seeing many members take a cautious approach. Essentially, while there are some good signs that lift-off is on track, the Fed is concerned about disrupting the recovery.
Focus now shifts to Janet Yellen’s testimony next week as market participants look for more direction on when to expect lift-off and the key risks to look out for.
Japan equities outperforming
USD/JPY was tracking higher heading into the release of the minutes but has since lost a bit of ground on the back of the release and is back below ¥119.00. There has been talk recently suggesting BoJ Governor Kuroda is considering delaying the 2% inflation target and that could be having an effect on the yen.
However, this has not deterred Japanese equities, which have remained above 18,000 and traded through 2007 highs to their highest since 2000. There has been trade balance data out of Japan today showing a narrower-than-expected trade deficit.
Strong export growth (17% rise) drove the numbers with the country enjoying strong demand around Asia. Clearly the yen weakness is playing a big role in Japan’s exports with automobiles drawing the most interest.
Perhaps the interest in Japanese goods as the yen weakens has also been playing a role in the drop off we recently saw in China’s exports. As testament to how well trade is going for Japan, firms in the country are holding a record amount of cash.
Yesterday Japan Post Holdings announced a takeover of Australian transport and logistics company Toll Holdings at a significant premium. With trade activity for Japan picking up around the Asian region, it seems the acquisition makes strategic sense and hence the premium.
After rallying to a fresh six-year high earlier, the ASX 200 has pulled back as we approach a fairly important night on the European front.
Euro risk heightens
European markets are also pointing to a weaker open as we approach the deadline on Greece submitting an extension application. Investors have been anticipating an application from Greece for a couple of days now and failure to submit one by tomorrow would mean Greece has to request an extension to its current bailout before it expires at the end of this month.
While there is still optimism that Greece will submit something, it remains uncertain whether the submission will be acceptable. With time running out and risk heightening on that front, it’s not surprising to see a mild risk-off tone in equities.
Surprisingly, the euro has remained resilient and EUR/USD is holding its ground above $1.1400. I would expect this to be the first to react once headlines start filtering through on Greece. Once again, I would prefer to react to headlines as opposed to pre-empting a result in this environment.
On the European calendar we have French CPI and current account numbers for the region. In the US we have unemployment claims and the Philly Fed manufacturing index.