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Treasurys Resume Selloff Following Fed Rhetoric, Robust Economic Data

Today, the momentum continued from yesterday afternoon’s Treasury selloff, which was largely prompted by more hawkish Fed commentary, as yields/swap rates increased an additional 1-7 bps across the curve in a bear-steepening pattern.  New York Fed President William Dudley, one of the more closely watched officials, created news with his analysis that the US economy’s recently released data falls in line with the trajectory appropriate for gradual removal of accommodation.  Dudley has been known for his dovish views in the past, however given the current market conditions, he ascertained that “the case for monetary policy tightening has become a lot more compelling.”  The probability for a rate hike at the March FOMC meeting jumped as high as 82% today, as implied by fed funds futures contracts.  Another market focus was President Trump’s speech to Congress last night, in which he displayed a more conciliatory / less combative tone than past addresses as he reinforced his pro-growth goals.  While light on policy specifics, the speech reassured investors of the plan to move forward with “massive” tax cuts, increased infrastructure spending, and reduced regulations that could allow the economy to grow at a more robust pace in the future. 

A day packed with economic data releases began with a 0.2% rise in consumer spending during January, a bit weaker than December’s 0.5% increase and 0.1% below expectations.  The slowdown was partially mitigated by a 0.4% jump in the personal consumption expenditures (PCE) price index, representing the steepest gain since February 2013 and adding fuel to the debate for a March rate hike.  Personal income remained robust, recording a 0.4% monthly rise (+0.3% expected).

In a separate report, the Institute for Supply Management’s (ISM) manufacturing index rose 1.7 points to a 57.7 reading (56.4 expected) for February.  The monthly growth was the largest since August 2014 as new orders surged.  Backlog orders (+7.5 points) and production (+1.5) also produced strong levels in a month where 17 of 18 industries showed growth.  Standing out as one of the few concerns in the report was cost inflation, which remained close to a 6-year high.

All three major US stock indices surged during the trading session, advancing 1.35%-1.45% to new record highs, led by a 2.6% jump in financials.  The US dollar rose 0.4% against major peers, reaching its highest level in over a month and gaining 0.8% against the Japanese yen.  Crude oil prices posted modest losses for the day, with WTI crude shedding 0.5% to $53.75/barrel and Brent crude falling 0.35% to $56.30/barrel.

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