The Daily Prophet: Um, Has Anyone Checked Out the Yen Lately?

Connecting the dots in global markets.

Traders often tie themselves up in knots trying to uncover the next “warning sign” in markets. So much so, that they can overlook the obvious. That may be the case with the yen.

A traditional haven for traders in times of stress (largely because of a sizable current-account surplus that doesn’t make the nation reliant on foreign capital), Japan’s currency has quietly been on a roll. It is by far the best-performing major currency over the last week, gaining almost 2 percent against a basket of peers as measured by Bloomberg. It’s at its strongest level since late November. Strategists say the gains are related to questions about President Donald Trump’s ability to shepherd his pro-business policies through Congress now that his first big test -- repealing and replacing Obamacare -- is proving harder than promised. Optimism that he could do so and quickly move on to tax cuts and infrastructure spending has underpinned global markets since the election.

Besides the wrangling in Washington, traders are also on edge about the increasing pace of Federal Reserve interest-rate hikes and the potential for that to send markets awry. “The yen is the rapid bellwether for sentiment concerning the Fed and the President,” Jim Vogel, a strategist at FTN Financial, wrote in a research note today.

The bond market is back in the green for March after the Bloomberg Barclays Global Aggregate Index erased its loss for the month Wednesday. If the market is able to hold on to the gains through next week, it would mark the third straight month that fixed-income assets have generated a positive return -- the longest streak since early last year. Fixed-income assets are in demand for much of the same reasons traders are seeking out the yen. At the same time, a measure of investors’ outlook for inflation has fallen to its lowest level since the first half of February. According to Bianco Research, there seems to be a nearly universal bearish opinion in the bond market, which the firm said in report today can be taken as a contrarian indicator.

As discussed in this space previously, one of the reasons why the bond market is tempering its outlook for inflation is because of the recent slide in oil prices. And if energy experts are to be believed, inflation expectations may continue to slide. Analysts following the $1.8 trillion-a-year oil market are paring their bullish price outlooks after the commodity lost about 10 percent of its value in less than two weeks amid signs the worldwide supply glut may not be shrinking, according to Joe Carroll and Bailey Lipschultz of Bloomberg News. Tudor, Pickering, Holt & Co. International, the Houston investment bank, on Wednesday slashed its 2017 second-half forecast for the dominant North American crude, West Texas Intermediate, by $10 to $62.50 a barrel. JPMorgan Chase & Co. revised its estimate down to $53.75.

Not all is doom and gloom, especially when it comes to the housing market. The Commerce Department said purchases of new homes increased in February to a seven-month high, indicating the effects of the recent rise in borrowing costs on the U.S. residential real-estate market have been modest. Home builders like to say that consumer confidence is a bigger driver of sales than interest rates, pointing to the 1980s as proof. If true, then developers should be downright giddy, as the Bloomberg Consumer Comfort Index today showed that household confidence in the U.S. rose last week to the highest level in 16 years, extending to two months a pickup in sentiment since Trump’s inauguration. Shares of housing-related companies have recently started to outperform the broader market.

Ford Motor Co. said it expects first-quarter profit to fall from last year’s record, in part because of slowing U.S. demand. That may be true, but it’s hard to reconcile with what’s happening the market for palladium. The precious metal just rose for a seventh day, to its highest price in two years, amid a generally positive outlook for sales of pollution-control devices for cars, according to Bloomberg News’s Thomas Seal and Luzi Ann Javier. Its gains this year stand at 18 percent. Federal Reserve data last week showed output of U.S. motor vehicles and parts rebounded 0.8 percent in February after a 0.8 percent decrease the previous month. Data from the China Passenger Car Association earlier this month showed retail sales of cars, SUVs and multipurpose vehicles climbed 8.9 percent to 1.5 million units in February.

Manufacturing has been a bright spot of late for the global economy, even in the euro zone, where Markit’s manufacturing index has risen for six straight months. Investors on Friday will get March’s preliminary reading, and the consensus of economists surveyed by Bloomberg is for it to be little changed at 55.3, compared with 55.4 in February. The results may help determine whether there is anything to the European Central Bank’s claims this week that the European Union’s less-is-more approach to fostering reforms among its 28 member states has failed, with countries continuing to lag in their efforts to improve macroeconomic imbalances.

The Problem With Trying to Handicap the Bond Market: Ben Carlson

This Gold Rally Has Recent History on Its Side: Shelley Goldberg

SEC May Regret the Day It Allowed Leveraged ETFs: Jared Dillian

Booze, Women and a Serious Point On the Euro: Leonid Bershidsky

The ECB’s Murky Path to Normal Policy: Ferdinando Giugliano

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