After yesterday's aborted market liftoff, which saw the S&P spike at the open then fizzle lower amid easing trade tensions and a goldilocks US economy, today world stocks are going for it again, with European stocks climbing following a mostly green Asian session.

The MSCI All-Country World index of stocks was up less than 0.1%, and has recovered about half its losses from the February correction.

S&P futures were trading at session highs while the dollar strengthened with less than 90 minutes to go until the much anticipate U.S. inflation report which will provide more clues on the pace of Fed tightening. Treasury yields were fractionally higher as oil slipped.

It's all about the CPI print today, and as Deutsche Bank notes, "will we see yields march up today or will the latest batch of US inflation data disappoint? We’ll know the answer to that with the release of the February CPI report in the US. As a reminder, market expectations for the data is for a +0.2% mom headline and core reading. Should we see that then the annual rate should nudge up one tenth at the headline to +2.2% yoy while the core should hold at +1.8% yoy. One interesting point our colleagues make is that the annual growth rate of core CPI will mechanically rise by around 20bps in the March data release just from annualizing the -10% decline in wireless telephone services. In our economists’ view this should help core CPI to exceed +2.0% yoy in March, before then rising further to +2.3% yoy by the end of this year."

Others chimed in: "Today’s CPI inflation data is likely to add further color to the US inflation picture, however it probably won’t add any further clarity to the overall inflation outlook puzzle, given that the Fed doesn’t use CPI as its inflation benchmark,” Michael Hewson, chief markets analyst at CMC Markets in London, told Reuters. “Nonetheless it is still a useful gauge in establishing when and how the price pressures we’ve been seeing build up in US supply chains start to filter down into the wider economy.”

That said, while the CPI is closely watched by traders, it is not the primary gauge the Fed uses to determine whether it is meeting its mandate of price stability. Instead, the Fed uses the personal consumption expenditure (PCE) index, or as UBS' Paul Donovan puts it:

US consumer price inflation is due. Markets focus on this price measure. It matters to inflation-linked US government bonds. The Federal Reserve does not focus on this price measure. A relatively large part of US consumer price inflation is prices people do not pay in the real world. These prices may start adding to inflation this year.

Back to markets where the Stoxx Europe 600 Index rose for a seventh day in Europe's longest run since October, led by oil and mining shares. Italian and Spanish stocks rose 0.3 to 0.4 percent, while Britain's FTSE was a laggard, down 0.1 percent, and in early trading triggered a "death cross."

MSCI’s Asia-Pacific shares ex-Japan index rose 0.2% after spending much of the day swerving in and out of negative territory, and after surging 1.5% on Monday. Japanese stocks fluctuated before closing higher, while Hong Kong and Chinese shares slipped. The yen weakened as investors digested the political fallout from a scandal embroiling Japanese Finance Minister Taro Aso, and decided - for now - that it won't rock the Abe administration materially.

However both Asian and European trading has been muted, with modest volumes as most are waiting for U.S. CPI report. According to Bloomberg, a figure that misses or meets estimates is likely to reaffirm the case for just three rate hikes this year and give the green light to fresh appetite for risk assets.

Politics also remain in focus after President Donald Trump issued an unexpected executive order blocking Broadcom Ltd. from acquiring Qualcomm Inc., scuttling the $117 billion hostile takeover which would have been the biggest tech deal in history, and had been the subject of scrutiny over the deal’s threat to U.S. national security.

In FX, the Bloomberg Dollar Spot Index pared Monday’s drop ahead of the CPI reports as investors covered dollar-yen shorts after Aso refused to resign as part of the Moritomo scandal. Volatility remains in defensive mode with buyers yet to surface, while most major currencies stay in tight ranges in an overall quiet session. Pound traders stay sidelined, looking for headlines on Brexit and Hammond’s Spring Statement.

Overnight FX recap from Bloomberg:

  • The euro was steady against the dollar with the pair hovering below the 21-DMA resistance, while the Treasury curve bear- steepened modestly
  • The pound edged lower, slipping for the first time in three days and after failing to break the 21-DMA resistance; U.K. Chancellor Philip Hammond’s Spring Statement is seen more likely to give impetus to gilts as issuance is forecast to decline to the lowest in more than a decade
  • The yen was the worst Group-of-10 performer, with USD/JPY rising as much as 0.8% to 107.22 as gains in Japanese equities spurred traders to cover short positions and the looming U.S. inflation data drew traders’ attention from the land-sale scandal with links to Japanese Prime Minister Abe
  • New Zealand’s dollar climbed against all of its G-10 peers after the nation’s syndicated sale of April 2029 government bonds drew demand that was more than twice the expected range; NZD/USD rises as much as 0.5% to 0.7333, highest since Feb. 26

“The broader story remains that of U.S. monetary policy normalization in the backdrop of an improving economy and a further decline in currency market volatility would only fuel more risk taking appetite,” said Commerzbank’s FX strategist Thu Lan Nguyen.

The yen tends to suffer in an environment when riskier and higher-yielding assets are bid but Morgan Stanley strategists said in a note that a further deterioration in the political situation that affected the position of Abe, could see the yen“forcefully return towards its previous upward trend.”

The U.S. 10-year yield inched up to 2.88 percent after Monday’s Treasury auction was broadly in line with expectations. Gold retreated for a second day.

In Europe, Slovakia’s 10-year bond yield rose as much as five basis points and the cost of insuring exposure to its debt hit the highest in almost three months as the country’s government inched towards collapse. Slovak Prime Minister Robert Fico’s government moved closer to collapse on Monday after his junior coalition partner called for early elections amid a political crisis sparked by the killing of a journalist.

In commodities, crude oil prices staged a recovery after sliding on concerns over rising U.S. output. U.S. crude futures were up 0.2 percent to $61.51 per barrel. Brent also rose 0.2 percent to $65.08 per barrel. Spot gold fell 0.2 percent to $1,318 per ounce


Bulletin Headline Summary from RanSquawk

  • European bourses marginally in the green with newsflow relatively quiet.
  • JPY weakens across the board, USD/JPY back above 107.00
  • Looking ahead, highlights include US CPI, UK Spring Statement and a speech from BoC Governor Poloz

Market Snapshot

  • S&P 500 futures up 0.2% to 2,795
  • STOXX Europe 600 up 0.07% to 379.48
  • MXAP up 0.2% to 178.92
  • MXAPJ up 0.2% to 590.82
  • Nikkei up 0.7% to 21,968.10
  • Topix up 0.6% to 1,751.03
  • Hang Seng Index up 0.02% to 31,601.45
  • Shanghai Composite down 0.5% to 3,310.24
  • Sensex down 0.3% to 33,808.49
  • Australia S&P/ASX 200 down 0.4% to 5,974.71
  • Kospi up 0.4% to 2,494.49
  • German 10Y yield unchanged at 0.632%
  • Euro down 0.04% to $1.2329
  • Brent Futures down 0.3% to $64.78/bbl
  • Italian 10Y yield fell 0.7 bps to 1.746%
  • Spanish 10Y yield fell 1.5 bps to 1.39%
  • Brent futures up 0.2% to $61.1/bbl
  • Gold spot down 0.4% to $1,317.70
  • U.S. Dollar Index up 0.2% to 90.07

Top Overnight News

  • The EU could get an exemption from U.S. steel and aluminum tariffs if the union was to be considered a reliable partner in fighting over capacities, among other criteria, Politico reports, citing three unidentified people
  • Italy’s League senior lawmaker Giancarlo Giorgetti tells state television network RAI that the chance that the nation will have to hold a second elction this year is “more than 50%”
  • Japanese Finance Minister Taro Aso says it seems the documents were changed to fit the parliamentary testimony of a MOF official. On being asked why we won’t resign he replied that he feels it’s his responsibility to find out what happened and prevent a repeat incident
  • CNBC personality Larry Kudlow has emerged as President Donald Trump’s favorite to replace Gary Cohn, the outgoing director of the White House National Economic Council, two people familiar with the matter said
  • Treasury’s $28 billion three-year note sale, which was $4 billion larger than two months ago, offered the highest yield for that maturity at auction since 2007, while the strength of demand as measured by the bid-to-cover ratio dipped to the lowest since November. Purchasers of the $21 billion in 10-year debt demanded a rate unseen since 2014, and the appetite for that auction was around the average for the past two years
  • With his swift rejection of Broadcom Ltd.’s hostile takeover ofQualcomm Inc., Trump sent a clear signal to overseas investors: Any deal that could give China an edge in critical technology will be swatted down in the name of national security
  • China is giving its central bank the power to write the rules for the financial sector, as part of a sweeping overhaul aimed at closing regulatory loopholes and curbing risk in the $43 trillion banking and insurance industries. The China Banking Regulatory Commission and the China Insurance Regulatory Commission will be merged in the biggest industry overhaul since 2003
  • Trade wars are bad but President Donald Trump’s steel and aluminum tariffs won’t have much direct impact on the U.S. economy unless the situation escalates, according to a new survey conducted by Bloomberg News. Roughly two-thirds of the 35 economists polled by Bloomberg expect the tariffs that Trump signed last week would cause a small decrease in jobs and a small drop in U.S. economic growth
  • Prime Minister Theresa May publicly accused Russia of a chemical weapon attack on British soil and warned of retaliatory measures that will further strain relations between the West and the Kremlin

Asia stocks were mixed following a similar varied lead from Wall St where S&P 500 and DJIA finished negative as Trump tariff overhang weighed heavily on industrials, while the Nasdaq outperformed amid tech resilience to post a 7th consecutive gain and fresh record high. Furthermore, trade across the Asia-Pac region was quiet in which stocks lacked any significant drivers for price action. As such, ASX 200 (-0.4%) was subdued as mining and commodity-related stocks dragged on Australia, while the largest weighted financials sector was also lower as the royal commission began hearings on mortgage fraud. Nikkei 225 (+0.7%) spent most the session in negative territory, but later coat-tailed on a rebound in USD/JPY. Elsewhere, Hang Seng (-0.1%) and Shanghai Comp. (-0.2%) were choppy with trade indecisive after the PBoC kept its liquidity efforts tepid. Sector-wise, the Hang Seng Telecom Index underperformed following some downward broker moves, while banking names benefitted from proposals to consolidate regulatory agencies and after ‘Big 4’ AgBank reported preliminary earnings as well as a private placement to raise as much as USD 15.8bln. Finally, 10yr JGBs lack demand and retreated below the 151.00 level amid a late recovery in Japanese stocks and following mixed 5yr auction results which attracted reduced interest than prior. PBoC injected CNY 30bln via 7-day reverse repos and CNY 30bln via 28-day reverse repos.

Top Asian News

  • China’s Central Bank Gains More Power in Xi’s Regulatory Shuffle
  • $103 Billion Quant Firm Piles Into China as Foreigners Welcomed
  • Billionaire Agarwal’s Vedanta Jumps After Record Dividend Payout
  • Qatar Stocks Surge Amid Steps to Raise Foreign Ownership Limit

European equity open followed the mixed sentiment seen in Asia as investors focus on the pending US inflation data. Sectors are mixed with energy among the outperformers as oil prices recover from yesterday’s losses, despite the rise in US crude output whilst sector heavyweight Total (+1.4%) at the top of the CAC 40 following an upgrade at Barclays. Likewise, BP (+0.9%) and Royal Dutch Shell (+0.6%) are moving in sympathy. Telecom sector is underperforming after France’s Iliad (-5.7%) slumped after the company FY 2017 results miss forecast, whilst Mediaset (-3.1%) is at the foot of the FTSE MIB following a downgrade at JP Morgan. Elsewhere, German utilities company E.ON (+5.7%) is again performing strong amid reports of the company expecting as many as 5000 job cuts and EUR 600mln to EUR 800mln of synergies as part of its asset swaps with RWE (+1.3%).

Top European News

  • Steinhoff Seeks About $322 Million From KAP Share Placement
  • Greencore Will Miss Profit Expectations as U.S. Woes Grow
  • Paschi Names Rovellini CFO After Mele Unexpectedly Resigns
  • French Connection Says No Formal Offer After Approach Last Year
  • German Utility Deal Turns Coal Veteran Into Green Giant; EON to Cut 5,000 Jobs in Deal to Overhaul German Utilities

In FX, the DXY is still straddling 90.000, with the Usd largely rangebound vs G10 majors aside from the Jpy and Nzd that have broken out of Monday’s narrow bands in opposite directions. Usd/Jpy saw importer demand in the low 106.20 area and then short covering from leveraged accounts on the way up towards offers at 106.90 before eclipsing yesterday’s peak and retesting highs just over 107.00 seen after Friday’s NFP release. Follow through buying pushed the pair up to and just over nearest resistance around 107.20. Conversely, the Kiwi is looking to consolidate and build on gains above 0.7300 with the aid of some upbeat minor NZ data overnight (land prices), and ahead of tonight’s top tier Q4 GDP and current account updates. Aud/Usd continues to encounter resistance/offers in advance of 0.7900, and will look for further direction from RBA Assistant Governor Kent later. Eur/Usd remains in a tight band above 1.2300, and with a key Fib still limiting dips below the handle (1.2266), while the 30 DMA (1.2350) provides a near term cap. Cable is sticking close to the 1.3900 handle awaiting the UK Budget and any further Brexit news after some positive reports about transition implementation on Monday, while Usd/Cad is slightly firmer above 1.2850 after comments from Canada’s PM claiming that exemptions of US import tariffs are not contingent on NAFTA negotiations. Note, BoC Governor Poloz is due to speak this afternoon, and staying with Central Banks the January BoJ minutes will be released shortly before midnight.

In commodities, oil prices are taking a breather, with WTI and Brent trading with marginal gains, the latter back above USD 65/bbl from the sell-off seen yesterday fuelled by a Genscape build in stockpiles and the relentless rise in US Crude output reported by EIA. US April shale output is expected to hit record highs at 6.95mln bpd. In the metals complex, Iron ore continued the longest stretch of losses since 2016 whereas gold prices are creeping lower awaiting the US CPI data to gauge the outlook for inflation.


US Event Calendar

  • 6am: NFIB Small Business Optimism, est. 107.1, prior 106.9
  • 8:30am: US CPI MoM, est. 0.2%, prior 0.5%; Ex Food and Energy MoM, est. 0.2%, prior 0.3%
    • 8:30am: US CPI YoY, est. 2.2%, prior 2.1%; Ex Food and Energy YoY, est. 1.8%, prior 1.8%
  • 8:30am: Real Avg Weekly Earnings YoY, prior 0.44%; YoY, prior 0.8%

DB's Jim Reid concludes the overnight wrap

Will we see yields march up today or will the latest batch of US inflation data disappoint? We’ll know the answer to that in about six hours with the release of the February CPI report in the US. As a reminder, market expectations for the data is for a +0.2% mom headline and core reading. Should we see that then the annual rate should nudge up one tenth at the headline to +2.2% yoy while the core should hold at +1.8% yoy. Our US economists are slightly below market on the headline reading at +0.1% mom however also expect a +0.2% core print. As we also noted in yesterday’s EMR, one interesting point our colleagues make is that the annual growth rate of core CPI will mechanically rise by around 20bps in the March data release just from annualizing the -10% decline in wireless  telephone services. In our economists’ view this should help core CPI to exceed +2.0% yoy in March, before then rising further to +2.3% yoy by the end of this year.

This will also be the last CPI report that the Fed will see before the March FOMC meeting next week. So potentially an opportunity for officials to sharpen their pencils with the big debate being whether or not the median dot moves from 3 to 4 rate hikes. We’ll also have the PPI report tomorrow to digest. If you’re one for excitement, then one thing we would note is that recent evidence suggest that the CPI print tends to surprise one way or another. Indeed, for the core mom reading, the actual reading has differed from the consensus in 9 out of the last 13 months (69%) since the start of 2017. So the consensus estimate has only been right on 4 occasions in that time. Most of those have been a downside miss too (7 times) but remember that last month was a rare beat and the strongest monthly reading since 2005 (+0.35% vs. 0.2% expected). In the 2 and 3 years prior to that period, economists got it wrong just 29% and 36% of the time respectively.

As we head into that big data release, markets have largely spent the last 24 hours twiddling their thumbs with newsflow pretty light on Monday. After opening up on the front foot risk assets quickly seemed to take some chips off the table. Indeed, the S&P 500 ended -0.13% last night and the Dow -0.62%. However the seemingly unbreakable Nasdaq notched up another +0.36% gain which means it’s now closed higher for 7 consecutive sessions – the longest streak since last October. In Europe markets also faded from highs but for the most part stayed just above water. The Stoxx 600 in particular finished +0.25% and up for the sixth straight day.

Meanwhile rates markets were well offered to kick start the day however by the end of play yields ended lower across the board. 10y Treasuries ended the day down 2.6bps at 2.869% after trading as high as 2.909% earlier in the session. The double auction of 3y and 10y Treasuries proved to be no hurdle in the end with solid enough demand at both. While we’re on bonds it’s worth adding that the Treasury curve has flattened substantially since the recent highs, with the 5s30s and 2s10s at 49.4bp and 60.6bp respectively and c.12bp and c.18bp flatter than the February wides.

This morning in Asia, markets are mixed with the Kospi (+0.1%) and Nikkei (+0.51%) both firmer, while the Hang Seng (-0.27%), Shanghai Comp (-0.23%) and ASX (-0.36%) are all in the red. The most interesting overnight news is the announcement by President Trump that he has issued an executive order blocking Broadcom from acquiring Qualcomm. The President stated that “there is credible evidence that leads me to believe that Broadcom’s (takeover) might take actions that threaten to impair the national security of the US”. This of course follows the President’s toughened stance of foreign takeovers of US technology companies.

Moving on. Failing to break from tradition, headlines that we did get yesterday were mostly of a political nature. One of those was a WSJ story suggesting that President Trump’s lawyers were trying to negotiate a deal with special counsel Robert Mueller “that uses an interview with the president as leverage to spur a conclusion to the Russia investigation”. The article mentioned that Trump would agree to an interview so long as Mueller commits to a date for finishing at least the Trump-related portion of the investigation”. A separate Bloomberg report suggested that Mueller was likely to refuse this while he concludes other parts of the probe.

Staying with the US, President Trump confirmed yesterday that Secretary of Commerce Wilbur Ross will speak with EU representatives about limiting tariffs and barriers used against the US. To be honest there weren’t any real developments on the trade front yesterday aside from some retaliatory comments out of the EU. Also worth noting from the White House yesterday was a Politico article suggesting that Trump had narrowed down Gary Cohn’s successor to either former GM and Microsoft CEO Chris Liddell or current NEC deputy Shahira Knight. The article suggested that Cohn favoured Knight (who is also said to be a tax expert) however unnamed sources mentioned that she wasn’t necessarily interested in the job.

Closer to home we heard from Junior Brexit Minister Robin Walker yesterday. Robin said that the UK and EU are “very close to a deal” on a Brexit implementation period. Sterling actually dipped slightly following the comments – before recovering – although the comments seemed to be largely ignored in the end with no official statements from either the UK or EU to back it up. While we’re on the UK, another reminder that today we have the Chancellor’s Spring Statement. Our UK strategists aren’t expecting any policy announcements however they expect the market reaction to be focused on the publication of the 2018-2019 Gilt remit. You can find a preview note to the Statement here.

Earlier yesterday, the ECB’s Coeure noted that Euro area economic growth “is strong and well distributed” but it is still too dependent on monetary policy with at least 50bp of Euro area growth due to monetary policy. Elsewhere, he  noted “inflation is not yet where we want it” and interest rates “will remain low long after the end” of QE.

Before we look at the day ahead, it was a very light day for economic data yesterday. In Europe we had the latest ECB CSPP data. The CSPP/PSPP ratio was 26.8% (27.9% over last 4 weeks). As a reminder, before Apr 2017 when QE was still €80bn/m the ratio was 11.5%. Between Apr-Dec 2017 (QE €60bn/m) the ratio edged up to 12.7% but since Jan 2018 (QE €30bn/m) the ratio is now 26%. Indeed, the strength of corporate vs. government purchases as proxied by the CSPP/PSPP ratio has so far surpassed our expectations of "roughly 20%". In the US, the February monthly budget statement deficit was slightly better than expected at -$215bn (vs. -$216bn expected). Notably, the impact of recent changes in the tax code was evident in the revenue data, with net receipts down 9.4% yoy. Elsewhere, the NY Fed February survey of consumer expectations noted median one-year ahead inflation expectations rose to 2.83% from 2.71% in January, the highest reading in 12 months.

Looking at the day ahead, a reminder of the Special Congressional election in Pennsylvania which will likely be seen as a decent bellwether for the prospect of Republicans holding onto majorities in the House and Senate at the November midterms. Datawise, the big highlight is of course the February CPI report in the US, due out shortly after lunchtime. Away from that, we'll also receive the February NFIB small business optimism reading. In Europe, the only data of note is wages data for France for Q4, while late in the evening in Japan the latest BoJ meeting minutes are due out. In the UK, Chancellor Hammond will deliver the Spring Statement at just after midday. Elsewhere, there is the European Council and European Commission statements on Brexit.