LIVE MARKETS-Fed Policy rates: Nowhere fast
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FED POLICY RATES: NOWHERE FAST (1345 EDT/1745 GMT)
Nicholas Colas, Co-founder of DataTrek Research, is out with some comments on this week's FOMC Meeting and where markets think policy rates might be headed. The Fed is expected to conclude its two-day meeting on Wednesday.
Colas says that Fed Fund futures suggest very low odds that the Fed will make a rate change this year. Additionally, looking into 2022, the probabilities only increase slowly.
DataTrek believes that given all the recent improvement in the U.S. economy, vaccine rollouts and pent-up demand for travel/leisure activities, the Fed will likely increase its GDP and inflation forecasts. However, Colas expects the FOMC to do very little, if anything, to its rate forecast with its March 2021 projections.
In any event, Colas thinks it is telling that the 10-year Treasury yield US10YT=RR broke out to a fresh 1-year high on Friday, just ahead of the Fed meeting this week.
He sees this as an important signal that "sits well with the idea the Fed will be upbeat on the US economy and very, very reassuring that Fed Funds are going nowhere any time soon."
BARGAIN HUNTING AMID THE RATE ROTATION (1225 EDT/1625 GMT)
Interest rates have grabbed the spotlight in recent weeks, with benchmark U.S. 10-year Treasury yields ending last week at their highest level in a year.
In their Weekly Kickstart note, Goldman Sachs analysts foresee rates continuing their march upward in the coming months, with rising GDP forecasts and expected inflation fueling investor anxieties about the economy potentially overheating.
But are those fears overplayed?
"Most investors share our view that interest rates will continue rise," writes David Kostin, chief U.S. equity strategist at Goldman. "But many believe that the equity market rotations that have recently accompanied rising rates have gone too far."
Kostin says that in absolute terms, most of the U.S. stock market does carry an above-average valuation relative to history. However, he also says that "If the 10-year yield climbs to 2% and the forward P/E multiple remains unchanged, the yield gap between stocks and bonds would only return to its long-term average."
In any event, Kostin says that defensive sectors such as consumer staples .SPLRCS, communication services .SPLRCL, and healthcare .SPXHC trade at the lowest valuations relative to their own histories."
Additionally, tech .SPLRCT still has some headroom. Its current 16% P/E premium to S&P 500 is below its 32%, 40-year average, according to Kostin.
However, the "value" play is still attractive, according to the note, with energy .SPNY and financials .SPSY the sectors to watch.
Goldman analysts expect an 8% rise in Brent crude prices LCOc1 next year and energy is the only S&P sector with short interest above its historical average.
As for financials, in spite of its recent rally in tandem with Treasury yields, the sector's "relative valuations remain low compared to history and we would expect it to keep outperforming if the economy continues to accelerate and rates continue to rise," Kostin says.
SPRINGTIME IN NEW YORK: EMPIRE STATE SCALES 28-MONTH HIGH (1101 EDT/1501 GMT)
The dreaded ides of March brought with them better-than-expected manufacturing data as opposed to a toga-clad stab-fest.
The New York Fed's Manufacturing report - aka Empire State USEMPM=ECI - showed activity among the state's goods makers expanding at a faster-than-expected pace this month.
The March reading came in at 17.4, a 5.3 point jump from February's 12.1 reading and its highest level since November 2018. It was also well above the 14.5 consensus.
An Empire State number above zero signifies acceleration of activity over the previous month.
The U.S. manufacturing sector, which contributes nearly 12% of the economy, has weathered the pandemic storm as consumer demand shifted to goods at the expense of customer-facing services due to social distancing restrictions.
On a national level, manufacturing expanded in February at its fastest pace in three years, according to the Institute for Supply Management, even as ongoing supply chain disruption has sent prices spiking and inventories falling. nL2N2KZ1LN
"Input price increases continued to pick up, rising at the fastest pace in nearly a decade, and selling prices increased significantly," writes the NY Fed in its press release. "Looking ahead, firms remained optimistic that conditions would improve over the next six months, anticipating significant increases in employment."
But as inoculations progress and economic restrictions are lifted, will the demand pendulum swing away from goods and back to services?
"Looking farther ahead, factory gears will grind at a slower speed heading into the summer months as vaccine diffusion and improving health conditions tilt the recovery in favor of hard-hit services," says Kathy Bostjancic, chief U.S. financial economist at Oxford Economics. "However, manufacturing will stay well supported overall in 2021."
Investor sentiment is muted in morning trading, with utilities .SPLRCU posting the biggest rise among major S&P sectors. Tech .SPLRCT is also showing strength with the chip sub-sector .SOX outperforming. Energy .SPNY and financials .SPSY are suffering the biggest losses.
Market participants will look to the U.S. Federal Reserve for economic clues at the conclusion of its two-day monetary policy meeting on Wednesday.
MIXED AND MODEST (1024 EDT/1424 GMT)
U.S. stocks have kicked off Monday's session with mixed action and just modest changes. This as investors gear up for the Federal Reserve's meeting this week amid caution over rising borrowing costs spurred by massive fiscal stimulus. .N
Indeed, the Nasdaq .IXIC is just modestly green, while the Dow .DJI and S&P 500 .SPX churn near the flat line.
Meanwhile, markets continue to keep a close watch on bond market moves. The U.S. 10-Year Treasury yield US10YT=RR is pulling back slightly. With this interest-sensitive utilities .SPLRCU are the best performing major S&P sector, while more economically sensitive sectors such as energy .SPNY, financials .SPSY and materials .SPLRCM are among weaker groups.
With this, growth .IGX is ticking up very slightly vs value .IVX.
Here is your early-trade snapshot:
BITCOIN: MYSTERIOUS CORRELATIONS (1007 EDT/1407 GMT)
It's always been tricky business to try to call bitcoin's next move and today's no exception after this weekend's $61k record high.
Does it track gold? Inflation? Elon Musk? U.S. Treasuries? Risk-on swings? Crypto regulation? Money flows? Retail frenzy? Is it not mainly now driven by its acceptance in mainstream finance?
The chief economist of BNP Paribas has taken a look at the correlations the cryptocurrency has with other assets and has produced the following chart:
"Since the start of 2020, correlations between bitcoin and copper, equities and, in particular, breakeven inflation have increased", writes William De Vijlder who believes inflation expectations and investor sentiment also play a role.
"The extent of the change in the bitcoin price suggests that speculative waves are at work, driven by momentum buying and extrapolative expectations of price appreciation", De Vijlder adds.
In any event, the economist believes caution is of the essence for investors "when the fundamental value of an instrument like a cryptocurrency is very hard if not impossible to determine".
WILL THE DUTCH VOTE AFFECT EU POLICY? (0919 EDT/1319 GMT)
What is the EU public debt in the post-Covid era going to be about? Could it be Dutch PM Mark Rutte, the ‘frugalist’, against Italy's PM Mario Draghi, the advocate of a fiscal union?
There is no straight answer to this question, but fixed income-analysts are concerned about EU sovereign debt, while they seem to agree this week’s general elections in the Netherlands could change the scenario about EU fiscal rules.
Rutte, who is likely to win a mandate to lead a new government, “could indeed morph into the adversary of Mario Draghi,” according to DZ Bank.
“There are two clear camps: above all Italy, along with Italian EU currency Commissioner Gentiloni, is pushing for the EU fiscal rules to be suspended beyond 2021, resistance is coming from parts of core Europe,” DZ Bank says.
A large number of parties winning seats in the Dutch Parliament will mean that more time is “required to agree on the policy platform,” Citi analysts say.
“There is a risk of a slight shift to the left in terms of economic policies, not only domestically with less focus on short-term fiscal rectitude, but also at the EU level.”
“The Netherlands might have an opportunity to forge a closer relationship with Paris and Berlin, especially after Brexit, which might require toning down the rhetoric,” they add.
Dutch voters look set to give Prime Minister Mark Rutte's conservative VVD Party a fresh four-year mandate in a national election on March 15-17. nL8N2L755K
DOW INDUSTRIALS: BRACING FOR A BIG TEST? (0900 EDT/1300 GMT)
The Dow Jones Industrial Average .DJI is nearing what may be a major trip wire on the charts:
The blue-chip average closed Friday at 32,778.64, putting it only about 1% shy of a log-scale monthly resistance line drawn from its 1929 top. This 92-year line resides around 33,100 for the month of March. nL2N2L21D6
Of note, highs in early and late 2018, as well as early 2020, occurred when the Dow came within 5%-9% of this line, so this is the closest approach yet.
And with CBT e-mini Dow futures 1YMcv1 suggesting around 50 points of upside at the open, the DJI can come closer to tagging the line in early trade.
Thus, the blue-chip average may be bracing for a big test. That said, a momentum issue remains. Although the monthly RSI is finally mustering enough strength to move into overbought territory for the first time in 2-1/2 years, it is still lagging. It is failing to confirm the Dow's record highs given that it remains well below its 2018 tops.
Meanwhile, Dow opening strength on Monday would be coming in the wake of one wild week for the Nasdaq NQcv1. nL1N2LA17K nL2N2L31BY
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Empire State manufacturinghttps://tmsnrt.rs/3rO18sc
(Terence Gabriel is a Reuters market analyst. The views expressed are his own)