Daily Market Color

Fed Official Rhetoric Leads Treasurys Lower While Stocks Touch Record Highs

US Treasury yields climbed higher in the first day of trading following the long weekend, influenced largely by hawkish commentary from Federal Reserve Bank of Philadelphia President Patrick Harker earlier this morning.  Speaking to the business school at the University of Pennsylvania, Harker (voter) reinforced his past views that deem three increases to the benchmark interest rate in 2017 appropriate.  “Given the state of the economy, more or less back to normal, I continue to see three modest rate hikes of 25 basis points each as appropriate for 2017, assuming things stay on track,” he explained.  Harker detailed that the labor market is “more or less” at full strength, and inflation is expected to reach the Fed’s 2% target either this year or the next.  He also left open the option for a March rate hike depending on the economic data received before the Fed’s meeting in three weeks.  US data reporting today was limited to February’s PMI flash, which displayed a marginal decline from the previous month to a seasonally adjusted 54.3.  Expectations were for a 55.4 level, but a pullback in optimism over the business outlook weighed on the reading.  Treasury yields/swap rates increased 2-4 bps across the curve as the yield on the 10-year note topped 2.43%.  The US dollar rose 0.2% against major peers after initially jumping 0.6% following Harker’s speech.  All three major US stock indices climbed to new record highs, helped in part by positive earnings reports from retailers.       

Eurozone PMI Picks Up in February
IHS Markit provided a welcomed distraction to the swirling political concerns in the eurozone with the reporting of its Purchasing Managers Index on Tuesday.  Composite PMI for the eurozone increased to 56.0 in February, its highest level in April 2011 and improving upon January’s 54.3 reading.  Median forecasts had called for a slight contraction in the month, but surges in new orders and hires propelled the measure higher, as new orders grew at the fastest pace in six years while firms added workers at the steepest rate since the financial crisis.  The eurozone’s largest members, France and Germany, displayed the biggest gains with France recording its highest PMI mark (56.2) since May 2011.  Major European stock indices advanced 0.5%-1.2% on the day while the euro slide 0.6% to $1.055/EUR.             

Oil Rises on Compliance with Output Cuts           
The price of crude oil climbed to a three-week high today following an interview with OPEC secretary-general Mohammad Barkindo as investors gained further insight into the progress of the supply-curbing agreement that was struck at the beginning of this year.  Barkindo stated his expectation for full compliance from all nations involved in the pact and “anything less than 100 percent is not satisfactory.”  Specifically highlighted in the interview was OPEC’s second largest producer, Iraq, who is documented as only implementing 40% of its promised cuts to date.  “I have got commitment from the highest level of government in Baghdad that they will implement their obligations fully,” Barkindo explained. “What we are seeing is the efforts they are making in achieving their targets. Each member country has their own peculiar logistical challenges and Iraq is not an exception.”  Currently, the 1.8- million barrels per day reduction targeted in the accord is 90% complete with another four months remaining on the term of the initial agreement.  Barkindo provided no comment as to whether he believed the output-reducing faction would need to extend or increase the cuts beyond the initial six-month term.  Crude jumped as much as two percent throughout the day before paring a portion of the gains, as WTI settled near $54/barrel and Brent traded close to $56.70/barrel. 


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