Wednesday Feb. 15, 2017 Feb. 15, 2017 Jan. CPI, Retail Sales, IP; Yellen Testimony, Day Two By Ben Baris and Geoff King What to Watch: It's a busy day for U.S. economic data releases. Economists surveyed by Bloomberg forecast January headline and core rose 0.3 consumer prices percent and 0.2 percent, respectively, from the month before, equaling their gains in December, 8:30 a.m. Released concurrently, January are forecast to rise retail sales 0.1 percent from the previous month, following a 0.6 percent advance in December. The New York Fed's , the first look at February manufacturing sentiment, will Empire survey also be released at 8:30 a.m. January is expected to be flat industrial production following a 0.8 percent rise in December, 9:15 a.m. Economics: Fed Chair continues her two-day testimony, appearing Janet Yellen before the House Financial Services Committee. Boston Fed President Eric Rosengren will address the New York Association for Business Economics at the Harvard Club in New York City at 12 p.m. Philadelphia Fed President Patrick Harker is the keynote speaker at La Salle University’s Annual Economic Outlook, in Philadelphia at 12 p.m. Government: Israeli Prime Minister visits U.S. President Benjamin Netanyahu amid controversy surrounding the recent vote in Israel’s parliament to Donald Trump legalize settlements built on private Palestinian land. Companies: , and are among Cisco Systems Inc. Credit Agricole SA Pepsico Inc. companies reporting earnings. Markets: Banks led gains in as traders awaited U.S. inflation data that global stocks looks poised to further strengthen the Federal Reserve’s resolve to raise interest rates. (All times local for New York.) Live chart on the Bloomberg . terminal Commentary in This Issue Janet Yellen's Congressional testimony to a compelling added signal that the Fed is satisfied with current expectations toward the path of interest rates: Carl Riccadonna and Yelena Shulyatyeva. Savvy bond investors aren’t waiting for more evidence of quicker inflation amid the debate over whether the U.S. economy will receive the jolt promised by President Trump's administration: Liz Capo McCormick. Fed Chair defended the Janet Yellen central bank’s of Wall oversight Street in the years since the financial crisis, arguing banks are safer, have kept lending and remain profitable, despite claims by President Donald Trump's administration and Republican lawmakers that regulations have crippled economic growth. 23 Percent The percentage of investors that expect an outright “boom” over the next year, according to a survey released by Bank of America Merrill . The number predicting Lynch negligible growth over the next 12 months has fallen by more than half to 43 percent. President Donald Trump is scheduled to meet with a group of today retailers to discuss the border-adjustment tax, a controversial proposal that has divided corporate America. Federal Reserve Headline and Core CPI Gap to Finally Invert January's CPI report is unlikely to alter how Fed officials assess the policy landscape, as core inflation is likely to continue trending sideways. The persistent gap between the headline and core is poised to finally close, due mainly to rising energy prices. Retail gas prices were up by roughly $0.43 per gallon over year-ago levels. If the consensus forecast for a 0.3 percent headline and 0.2 percent core rise is accurate, the 12-month change in the headline of 2.4 percent will surpass the core (2.1 percent) for the first time since mid-2014. Analysts will be on the lookout for any evidence of a changing composition of inflation drivers in an otherwise seemingly stable core. In particular, they will watch to see if the 368-basis-point gap between core services and core goods prices is starting to narrow. — Carl Riccadonna and Yelena Shulyatyeva, Bloomberg Intelligence economists
Transcript
Wednesday
Feb. 15, 2017
Feb. 15, 2017
Jan. CPI, Retail Sales, IP; Yellen Testimony, Day TwoBy Ben Baris and Geoff King
What to Watch: It's a busy day for U.S. economic data releases. Economists surveyed by Bloomberg forecast January headline and core rose 0.3 consumer pricespercent and 0.2 percent, respectively, from the month before, equaling their gains in December, 8:30 a.m. Released concurrently, January are forecast to rise retail sales0.1 percent from the previous month, following a 0.6 percent advance in December. The New York Fed's , the first look at February manufacturing sentiment, will Empire surveyalso be released at 8:30 a.m. January is expected to be flat industrial productionfollowing a 0.8 percent rise in December, 9:15 a.m.
Economics: Fed Chair continues her two-day testimony, appearing Janet Yellenbefore the House Financial Services Committee. Boston Fed President Eric Rosengrenwill address the New York Association for Business Economics at the Harvard Club in New York City at 12 p.m. Philadelphia Fed President Patrick Harker is the keynote speaker at La Salle University’s Annual Economic Outlook, in Philadelphia at 12 p.m.
Government: Israeli Prime Minister visits U.S. President Benjamin Netanyahu amid controversy surrounding the recent vote in Israel’s parliament to Donald Trump
legalize settlements built on private Palestinian land.
Companies: , and are among Cisco Systems Inc. Credit Agricole SA Pepsico Inc.companies reporting earnings.
Markets: Banks led gains in as traders awaited U.S. inflation data that global stockslooks poised to further strengthen the Federal Reserve’s resolve to raise interest rates.
(All times local for New York.)
Live chart on the Bloomberg .terminal
Commentary in This Issue
Janet Yellen's Congressional testimony to a compelling addedsignal that the Fed is satisfied with current expectations toward the path of interest rates: Carl Riccadonna and Yelena Shulyatyeva.
Savvy bond investors aren’t waiting for more evidence of quicker inflationamid the debate over whether the U.S.economy will receive the jolt promised by President Trump's administration: Liz Capo McCormick.
Fed Chair defended the Janet Yellencentral bank’s of Wall oversightStreet in the years since the financial crisis, arguing banks are safer, have kept lending and remain profitable, despite claims by President Donald Trump's administration and Republican lawmakers that regulations have crippled economic growth.
23 Percent
The percentage of investors that expect an outright “boom” over the next year, according to a surveyreleased by Bank of America Merrill
. The number predicting Lynchnegligible growth over the next 12 months has fallen by more than half to 43 percent.
President Donald Trump is scheduled to meet with a group of todayretailersto discuss the border-adjustment tax, a controversial proposal that has divided corporate America.
Federal Reserve
Headline and Core CPI Gap to Finally Invert
January's CPI report is unlikely to alter how Fed officials assess the policy landscape, as core inflation is likely to continue trending sideways. The persistent gap between the headline and core is poised to finally close, due mainly to rising energy prices. Retail gas prices were up by roughly $0.43 per gallon over year-ago levels. If the consensus forecast for a 0.3 percent headline and 0.2 percent core rise is accurate, the 12-month change in the headline of 2.4 percent will surpass the core (2.1 percent) for the first time since mid-2014. Analysts will be on the lookout for any evidence of a changing composition of inflation drivers in an otherwise seemingly stable core. In particular, they will watch to see if the 368-basis-point gap between core services and core goods prices is starting to narrow.
— Carl Riccadonna and Yelena Shulyatyeva, Bloomberg Intelligence economists
Yellen Passes on Chance to Reshape Market SentimentBy Carl Riccadonna and Yelena Shulyatyeva, Bloomberg Intelligence economistsThe fact that neither the January FOMC statement nor Fed Chair Janet Yellen’s prepared remarks for her testimony before Congress leaned against prevailing market sentiment is a compelling signal that the Fed is satisfied with current expectations toward the path of interest rates.
Yellen did not provide explicit guidance regarding the Fed’s next decision, to be released on March 15, but noted the need to continue normalizing policy if the central bank’s economic forecasts are being validated — something which will not be conclusively evident when policy makers next convene.
Bloomberg Intelligence Economics continues to expect the next rate increase to come in the second quarter, presumably at the June meeting. While Yellen’s tone was positive with respect to growth prospects, continued labor-market improvement and additional firming of inflation pressures, her optimism was measured, to be sure. For example, she anticipates a moderate firming of growth prospects, not a more pronounced break-out, due to a confluence of factors including foreign growth/strong dollar headwinds and muted household-income growth.
Yellen noted that inflation moved higher “mainly because of the diminishing effects of the earlier declines in energy prices and import prices.” The Fed had also removed the old references to these transitory factors from the latest FOMC statement. This signals greater confidence that policy makers will achieve their mandated inflation objective, but does not indicate the Fed is concerned about significantly mounting price pressures.
Yellen felt reassured that market-based measures of inflation compensation “have risen from the very low levels.” The five-year/five-year forward inflation expectation rate bounced up after troughing below 1.5 percent in 2016 and remained steady as of late hovering around 2 percent.
Live chart on the Bloomberg .terminal
Nonetheless, it remains below its 2.5 percent long-term average. Most survey measures of longer-term inflation expectations “have changed little, on balance, in recent months.” As reflected by the University of Michigan Survey, the expected inflation five to 10 years down the road, with the lone exception of a 2.3 percent print in December, has remained steady in a very narrow range of 2.4 percent to 2.9 percent since the beginning of 2014.
Until real GDP growth accelerates above its trend pace on a sustained basis, the dovish core of the FOMC will likely remain unconvinced that they need to act more aggressively to head off an inflation flare-up.
With respect to future rate moves, Yellen reiterated the notion that policy was not on a preset course and that the committee could reevaluate their assessments based on incoming data. It is unlikely that committee members are significantly reassessing prospects at the moment, as the post-election improvement in sentiment does not yet appear to be manifesting itself in the hard economic data. Instead, the prevailing tone of the incoming data remains
consistent with continued, albeit sluggish, economic growth.
Yellen again expressed concern that if the Fed goes too slowly now it could be forced to move more aggressively at a future date — but she does not view this as a significant risk given the projected 2-3 rate hikes this year. She does not view the Fed as being behind the curve, especially assuming that gradual policy-normalization continues, but she similarly wants to avoid such a perception becoming entrenched.
During the question and answer session, Yellen reiterated the FOMC’s longer-run goal to shrink the balance sheet by allowing assets to roll off in an orderly fashion. While she noted that the Fed will continue to discuss this topic in great detail and provide guidance, she did not reveal any new information with respect to the timing of the eventual balance sheet unwind.
The FOMC wants to ensure the economy is on solid footing and could endure additional tightening of financial conditions. For now, the Fed prefers to rely to the “maximum extent possible” on their tradition tool — short-term policy rates.
Big Picture
Yellen Reassured by Inflation Expectations Up From Lows
Best-Performing Treasuries Suggest Inflation Threat Is RealBy Liz Capo McCormickSavvy bond investors aren’t waiting for more evidence of quicker inflation amid the debate over whether the U.S. economy will receive the jolt promised by the Trump administration.
While deliberations drag on about the merits of what’s become known as the Trump reflation trade, investors have been buying protection against a rise in consumer prices this month at the fastest pace since just after Donald Trump’s victory in November.
The iShares TIPS Bond ETF, the largest exchange-traded debt fund featuring Treasury Inflation Protected Securities, had $547 million of inflows during the past two weeks, according to data compiled by Bloomberg. The 10 largest TIPS ETFs have seen aggregate net inflows in each of the last 10 weeks.
“All roads point to a firming in inflation,” said Tom Porcelli, the chief U.S. economist at RBC Capital Markets LLC in New York. “Demand for TIPS tells you what people are thinking and feeling for the here-and-now about inflation. If you want to use it as a barometer of how people are gauging or viewing inflation, it does a good job.”
That bodes well for Treasury as it prepares to sell $7 billion of 30-year TIPS by auction tomorrow. And that’s after a report showed yesterday that U.S. wholesale prices jumped in January by the most since September 2012. Consumer prices likely rose 2.4 percent on an annual basis, according to analysts’ forecasts before today’s report.
The last auction of TIPS was on Jan. 19, when the Treasury sold $13 billion of 10-year securities. Bidder-participation metrics and the auction yield revealed strong demand, with investors such as foreign central banks and mutual funds
View a live version of this chart on the Bloomberg .terminal
scooping up 84 percent of the offering, leaving primary dealers with little supply to absorb.
Thirty-year TIPS were last sold by the Treasury on Oct. 20.
TIPS have returned 0.73 percent this year, compared with 0.33 percent for nominal Treasuries, based on Bloomberg Barclays index data.
For all of 2016, the iShares $22 billion TIPS ETF pulled in $6 billion — the second-biggest windfall of all bond ETFs and returned 3.6 percent, the most in three years.
A favored bond-market measure of expectations for consumer prices based on TIPS, known as the break-even rate, has risen to above 2 percent for most maturities — including the 30-year which is at 2.16 percent, versus 1.9 percent on Nov. 8.
The post-election surge in U.S. assets slowed after wage growth proved disappointing in January. This, and little in
the way of concrete initiatives by Trump early in the year, brought the reflation trade into question. That faith was rekindled last week after Trump promised a “phenomenal” tax plan to be announced in coming weeks.
U.S. households, for their part, also envision price pressures will march higher. Expectations for consumer price inflation rose to the highest level since mid-2015, according to a New York Fed survey released Monday. The median respondent reported an expected inflation rate last month of 2.9 percent three years ahead, up from 2.8 percent in December.
“It makes sense to be long some inflation exposure in this market,” said Subadra Rajappa, head of U.S. interest-rate strategy at Societe Generale SA in New York. There is money flowing into TIPS funds “given people’s view that there are going to be more reflationary policies put in place with the new administration.”
8:30 U.S. Retail Sales Ex Auto and Gas 0.30% 0.00%
8:30 U.S. Retail Sales Control Group 0.30% 0.20%
9:15 U.S. Industrial Production MoM 0.00% 0.80%
9:15 U.S. Capacity Utilization 75.40% 75.50%
9:15 U.S. Manufacturing (SIC) Production 0.20% 0.20%
10:00 U.S. NAHB Housing Market Index 67 67
10:00 U.S. Business Inventories 0.40% 0.70%
16:00 U.S. Net Long-term TIC Flows — $30.8b
16:00 U.S. Total Net TIC Flows — $23.7bSource: Bloomberg. Surveys updated at 5:20 a.m. in New York.
Live chart on the Bloomberg .terminal
Calendar
Click on the to see the full range of economists' forecasts on the terminal. highlighted releases
Overnight
Sweden’s maintained its Riksbank ultra-expansionary monetary policy and repeated a threat to intervene in currency markets should a strong krona derail efforts to reach its inflation target. The world’s oldest central bank held its main rate at a record low of minus 0.5 percent and left intact a government bond-buying program that’s already soaked up more than 40 percent of the market. The decision was expected by all economists surveyed by Bloomberg.
U.K. declined and unemploymenta measure of the number of people in work rose to a record, pushing the labor market closer to “full capacity,” according to the statistics office. The number of jobless fell 7,000 in the fourth quarter to 1.6 million people, leaving the unemployment rate at 4.8 percent, the lowest in more than a decade. increased by Employment37,000 to 31.8 million, and the rate rose to a record 74.6 percent, the
said Office for National Statisticstoday. Basic slowed in pay growththe quarter to 2.6 percent from 2.7 percent, weaker than economists had forecast.
China’s benchmark money-market rate climbed to the highest level since July 2015, with banks seen holding onto cash amid concern liquidity will tighten with more than $150 billion of loans coming due. The seven-day
, a gauge of repurchase rateinterbank funding availability, jumped as much as 29 basis points to 2.81 percent in Shanghai, according to weighted average prices. While the central bank added 393.5 billion yuan ($57.3 billion) to the financial system through its Medium-term Lending Facility today, the injection is dwarfed by the 1.1 trillion yuan of central bank loans maturing in the seven days through Feb. 19.
Europe
Asia
Market Indicators
BNP Index Flashing 'Love' Is Red Signal for U.S. Stocks
A BNP Paribas SA contrarian index hovering around its highest level since 2014 shows the U.S. equity rally may be at risk. Among factors suggesting complacency are the recent outperformance of small-cap shares and inflows into American stocks, according to a note from the French bank. The S&P 500 Index has climbed 14 percent since BNP Paribas’s Love-Panic gauge hit a record low last year, indicating a potential rebound.
