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MACRO MORNING NOTE| Powell Rate Hikes, China Data Stinks, UST Yields Elevated

SBA’s Alastair Williamson concludes the Macro Morning Note from Baltimore, Maryland

Asian stock markets declined, the dollar has held onto gains, and UST yields remain elevated following the Federal Reserve chairman’s assessment of the U.S. economy at his first congressional testimony. Jay Powell’s comments fueled speculation that the Federal Open Market Committee will conduct at-least four rate hikes this year, sending the dollar somewhat higher but more importantly sending Treasury yields back to a four year high.

Once Powell finished his remarks on Capitol Hill, the stock market sold off as yields surged on his four rate hike projection.

Powell’s testimony confirmed a sizeable resistance level at .764%-fib (2,795) SPX500… Cross-asset deleveraging from bonds vibrated into equities.

Powell’s rate hike projection coupled with higher yields unraveling the low vol complex has constructed a bearish candlestick for February.

“Finally, we note that US macro economic surprise data has tumbled to its lowest since October… are stocks about to catch back down?”- per Zero Hedge

Powell’s projection of rate hikes induced a surge in UST yields…

As the dollar bids on Powell’s comments, there is some evidence the dollar auction could be stabilizing. Here is a monthly/weekly timeframe outlook:

With a stronger dollar, commodities have taken a beating…

Asia stock markets closed lower on Wednesday after Chinese manufacturing data shocked the overnight session and came in below estimates. Asian-Pacific markets also digested Powell’s comments on a negative stance as yields surged.

Starting in Japan, the Nikkei225 declined -1.44% to 22,068, as the Yen continues to strengthen. Industrial output figures for Janurary showed a decline of -6.6% m/m, which surely weighed down the sentiment in the region. Reuters confirms the data was well below the target of -4.2%.

In South Korea, the KOSPI tumbled -1.17% to 2,427. Over in Australia, the ASX200 closed down -.68%, with commodities weighing on the overall index.

Meanwhile, greater China stock markets declined after terrible economic data in the region.

Hong Kong’s Hang Seng declined -1.36% to 30,844, as major financial service companies were lower on the close. On the mainland, stock markets were mixed with the Shanghai Composite down -.99%, but Shenzhen closed slightly higher.

Official manufacturing PMI in China for the month of February came in at 50.3, below the Reuters estimate of 51.2, which sent sentiment negative across the world. Officials blame the low print on the Lunar New Year holiday this year.

China manufacturing PMI versus Dow Jones stock market

China manufacturing PMI versus ASX200

China manufacturing PMI versus US Industrial Production

China manufacturing PMI versus Copper

China manufacturing PMI bottomed in 2016, right around the time where Central Banks around the world ramped up more buying. Perhaps, the balance sheet expansion which started ramping in 1Q16 is starting to become ineffective in driving the real economies of the world higher?