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The Early

22 Feb 2018 09:04

Markets: mounting a challenge

US 10-year bond yields are continuing their march towards 3%, providing a sustained challenge for the valuation of equity markets in general, and the rate sensitive groups in particular. It looks like a tricky start for European markets this morning.

A mixed day for European equities ended with the Euro Stoxx benchmark effectively unchanged and some very narrowly clustered sector moves, with only utilities -1.06% standing out to the downside; there were a couple of company-specific disappointments from Atos -5% and Glanbia -7%. It was a better day in the UK, with the FTSE 100 enjoying a double push from the mining sector +2.05%, and the well-received numbers from Lloyds +3%, which drove banks ahead by +1.41%. The mid/small caps were unable to match that advance as the Mid 250 was hit by AA -28% and First Group -12%. Technology +0.7%, industrial goods +0.60% and health care +0.52% led the PHySiCS sectors on another good day for the momentum, revisions and quality style factors .

Overnight. Long-term Treasury yields touched a four-year high at 2.96% in US trading, after the release of the Fed minutes, which made it a tough session for telecoms -1.65% and utilities -1.52%; energy also struggled -1.66%. Asia generally followed that lead lower although the Chinese market returned from the holidays with some upside catch-up to do. The US dollar found some support which in turn weighed on the oil price. Europe is called sharply lower.

Early numbers. Dow -0.67%, S&P -0.55%, NASDAQ -0.22%, VIX 20.02; US 10 yr 2.94%; Nikkei -1.07%, Hang Seng -0.90%, Shanghai Comp +2.01; £=$1.3889, £=€1.1320, Brent $65.00/bbl, Gold $1323.17; FTSE 100 indication -73 (at 6.40 UK).

Macro: waiting for wage growth

The UK's headline ILO unemployment rate rose for the first time in two years to 4.4% in Q4 2017, but that reflected a decline in inactivity. Total employment is still growing, with most of that growth through last year being driven by UK nationals as the influx of EU labour slowed. Growth in headline average earnings of +2.5% YoY, and the ex-bonuses rate at the same level, were a shade ahead of forecasts and the single-month readings for December are pointing to modest acceleration. MPC members testifying to the Treasury Select Committee confirmed those expectations, and again cited shrinking spare capacity as a key element in the more hawkish stance outlined in the Inflation Report.

Meanwhile, the UK public finances continue their steady improvement; the January PSNB surplus was higher than expected at £11.6bn and cumulative borrowing in the first nine months of FY2017/18 is down -16% YoY.

Finally there are hints that the pace of the Eurozone recovery may be flattening out. The 'flash' readings of the regional PMIs for February saw all the main indices retreat from the January peaks, although they remain elevated by historic standards; manufacturing dipped to 58.5 (from 59.6) and services was at 56.7 (58.0), leaving the composite index at a three-month low of 57.5, which remains consistent with GDP expanding by +0.9% QoQ through Q1.

The minutes of the January FOMC meeting confirmed greater confidence among members that inflation is picking up and growth will be boosted by the tax reform package, hence the planned upward path of the Fed funds rate this year is intact. US existing home sales fell unexpectedly by -3.2% MoM in January, as tight inventory kept prices high and deterred first-time buyers.

Today's events. Germany Feb IFO survey (9.0) 117.0; UK Q4 GDP 2nd est (9.30) +0.5% QoQ, +1.5% YoY; ECB minutes (12.30).

Ian Williams
Economics & Strategy
020 7418 8819

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