The Daily Prophet: Yellen Doubles Down, Stocks Up and Cocoa Gets Crushed
Done deal. Slam dunk. No brainer. No matter how you want to describe it, the bond market is becoming more convinced that the Federal Reserve will raise interest rates next month.
Fed Chair Janet Yellen was just as hawkish on her second day of testimony to Congress as she was on the first, reiterating that waiting too long to tighten monetary policy "would be unwise." Her comments came about 90 minutes after the Labor Department said its consumer price index rose 0.6 percent in March, double the consensus estimate and the most since early 2013. Bond traders who enjoyed a surprise rally last month are now dealing with another selloff. Treasury 10-year yields rose back above 2.5 percent as bond prices fell for a fifth straight day in the longest slump this year.
"The tone of Yellen's testimony over the last two days is unmistakable and the market pricing of a March hike bears this point out,'' Tom Porcelli, the chief U.S. economist at RBC Capital Markets, said in a report. "The March confab is no longer an afterthought.''
CAN'T STOP STOCKS
I'm not sure what's in the water that stock traders are drinking these days, but bond traders could sure use some of it. Equities rose again today, leading the MSCI All-Country World Index to a new record high for the first time since May 2015. No longer does the slightest hint of higher rates send stocks into a tailspin. Although it would be a good sign if the resilience means the economy is strong enough to withstand higher borrowing costs, but there's also a lot of hope built into stock prices -- hope that President Donald Trump can follow through on campaign promise to cut taxes and engineer some fiscal stimulus.
Or, maybe the rally in stocks is really based on improved profits at companies. Earnings started rising in the second half of 2016, and forecasts call for 11.7 percent growth for 2017, which would make this the best year for profits since 2010 for members of the S&P 500. Despite the gains, workers aren't benefiting. The Bureau of Labor Statistics said today that real average weekly earnings fell 0.6 percent in January from a year earlier, the biggest drop since 2012. Hourly earnings showed no increase for the first time since 2014. No wonder profit margins are expanding.
CHINA VOLATILITY COLLAPSED
Don't discount the lack of negative news out of China for the relative calm in global stock markets. The wild swings seen in China’s currency less than two months ago are abating. A gauge of volatility in the offshore yuan is at a three-month low, while one-year forward contracts suggest reduced demand for dollars. Both measures surged to almost one-year highs in January. China added more credit last month than the equivalent of Swedish or Polish economic output, with aggregate financing climbing to a record 3.74 trillion yuan ($545 billion). That exceeded the median estimate of 3 trillion yuan in a Bloomberg survey.
The cocoa market is getting routed, according to Bloomberg News' Agnieszka de Sousa. Prices have sunk 10 percent in New York this year to an eight-year low on signs of growing supply and slowing demand, as well as a series of defaults among local exporters in Ivory Coast, the top producer. Those exporters have told the regulator Le Conseil du Cafe-Cacao that they can’t honor commercial agreements for about 350,000 metric tons of beans after wrongly speculating that prices would rise, according to a person familiar with the matter. "The market is in a spiral," said Michael Donovan, a broker at Sucden Financial Ltd. in London. "There is nothing too bullish about it."
Is it time to start questioning the health of the housing market? U.S. home-loan delinquencies increased for the first time since 2013 in the fourth quarter, rising from the lowest level in a decade, according to data released today by the Mortgage Bankers Association . The portion of loans that were at least one month late climbed to a seasonally adjusted rate of 4.8 percent, up from 4.52 percent in the third quarter, which was the lowest since 2006. On Thursday, the Commerce Department will report on housing starts and building permits for January. The consensus is for no change in starts after December's big 11.3 percent jump.
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