2018Feb

FC: US CLOSING REPORT: MONDAY – 26TH – FEBRUARY – 2018 February 26, 2018 at 09:15PM

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US cash equity markets have made strong gains this afternoon (DJIA +1.6%, S&P +1.2%, NASDAQ +1.4%) with all major indices now down by just over 3% from all-time highs. Steel stocks have outperformed, supported by hopes that US President Trump will impose harsh tariffs on imports. Trump did say this afternoon that if it takes tariffs to bring back the steel industry, so be it. Investors have also welcomed further declines in US government bond yields today from last week’s multi-year highs, weighed by weak US new home sales and dovish remarks from St Louis Fed President Bullard. He argued that the natural, safe real rate of interest, and hence the appropriate policy rate, is relatively low and unlikely to change very much over the forecast horizon. We later heard from Fed Governor Quarles there are some upside risks to the economic outlook for the US, adding a sustainability of upturn in growth economically depends on an increase in investment and productivity. He said fiscal policy will likely spur increased growth over the next couple of years, including a boost to the economy’s potential capacity adding he believes a tightening labour market will feed through prices and wages. He mentioned it remains to be seen if higher growth would spur inflation. Elsewhere, speaking at his hearing to become ECB Vice President, Luis De Guindos said the ECB focusing on price stability has been successful. He also noted the ECB are in a different phase than the Federal Reserve but expects over time that their policies will converge.

Key Headlines/Data:

* Apple (%): Apple are said to be planning a giant high-end phone and a lower priced model for around the fall.

* Reuters: The European Commission wants to tax large digital companies’ revenues based on where their users are located rather than where their headquarters are, at a rate between 1 and 5 percent, a draft Commission document showed.

* US President Trump said the US loses a lot of money to Canada and Mexico and called the WTO a catastrophe. He also said if it takes tariffs to bring back the steel industry, so be it.

* Speaking at his hearing to become ECB Vice President, Luis De Guindos said the ECB focusing on price stability has been successful. He also noted the ECB are in a different phase than the Federal Reserve but expects over time that their policies will converge. He added that the Euro Zone would benefit from an acceleration of the reduction in NPL’s

* Moody’s: The UK economy grew at a slightly slower pace in early 2018, survey data suggest, and retail sales remained sluggish in January, Moody’s Investors Service said in its latest Brexit Monitor today.

* Fed Governor Quarles said there are some upside risks to the economic outlook for the US, adding a sustainability of upturn in growth economically depends on an increase in investment and productivity. Quarles stated higher growth rate could cause a raised neutral interest rate, and added he expects inflation to move back to 2% over the next year or so. He said fiscal policy will likely spur increased growth over the next couple of years, including a boost to the economy’s potential capacity adding he believes a tightening labour market will feed through prices and wages. He mentioned it remains to be seen if higher growth would spur inflation. Quarles said he will carefully monitor if growth and inflation start to push up against constraints of the economy. He also repeated that further gradual rate increases will be expected and appropriate. In later comments, Quarles stated the 2% inflation target is not a cap, the target is symmetric, adding indications are that the US has a sustainably strong economy. Lastly, Quarles said balance sheet unwinding hasn’t caused market disruptions, adding they are to look at the Volcker Rule over the next several months.

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