Decent End to a Decent Week

Good News Everyone 

More good news from China lifted the boats early on Friday after a positive session on Wall Street gave heart to bulls. Equities in Europe took their cue from Asia after the Caixin services PMI for China rose to 55. Equity markets also got a boost as yields pulled back from intraday highs amid some marginally more dovish Fed speak. The 10yr Treasury yield pressed on 4.1% at one point but has retreated to around 4.02%, whilst the 2yr was at its highest in a decade.  

Data Leading the Green 

Miners led the FTSE 100 higher by about a third of a percent I guess on ‘China data’, with the blue chips on course for a weekly gain of about one percent. The Chinese recovery is important – as detailed in the Watchlist, a smart exit from Covid and surge in demand from Chinese consumers could be all that’s needed to get the global economy out of its funk. In Germany, the DAX added 0.9%, set for a weekly gain of 1.7% or so, as Lufthansa shares soared almost 6% after it reported a doubling in revenues. Shares in Paris rose half a percent, set for a gain of almost 2% for the week. Final European services PMIs are mixed but remain in expansion territory. Later we’re looking at the US ISM services PMI report, forecast at 54.5. US futures are flattish with the major indices heading for minor gains this week. 

Dovish Fed Comments?  

Atlanta Federal Reserve President Raphael Bostic said he favours a "slow and steady" approach to hikes, calling for a hike of 25 basis points later this month. This seemed to placate markets somewhat after being on a relentless ‘higher for longer’ train for the last few days. Governor Waller was more direct saying that "if those data reports continue to come in too hot, the policy target range will have to be raised this year even more to ensure that we do not lose the momentum that was in place before the data for January were released". My view is to focus on Waller more than Bostic. 

More Inflation? Or Recession Looming? 

More on inflation – EU inflation fell to 8.5%, from 8.6% in the previous month. This was less of a decline than anticipated, whilst core inflation worryingly jumped from 5.3% to 5.6%. The smart rise in the core reading only makes it more likely the European Central Bank follows up an expected 50bps hike in March with a further half point move in May. Everyone and his dog now piling into 4% terminal rate consensus…what if inflation does retreat suddenly? Hard to see inflation being adequately shoved back in the bottle without some kind of recession. 

In the Charts... 

Core consumer inflation in Japan's capital slowed in February, easing some of the pressure on the Bank of Japan to start to normalise monetary policy. The Tokyo core CPI rose 3.3% in the 12 months to February, from a four-decade high 4.3% in the prior month, but still a ninth straight month above the BoJ’s supposed target. BoJ is up next week with the focus on what sort of direction new man Ueda is likely to inherit from Kuroda. 

Note the yen here prodding around various technical levels.  

The S&P 500 bounced smartly from its 200-day SMA and 50% retracement zone on the near-term rising trendline to close three-quarters of a percent higher. The Dow rose more than 1% as Salesforce shares jumped on earnings beating expectations. 

Oil firmer this week, back above its 50-day SMA, but the chop sideways continues