Dollar Bulls Charge Ahead

The US dollar's bull advance, spurred by the divergence in the monetary policy, is continuing in earnest today after briefly consolidating yesterday.  The greenback traded at new multi-year highs against the euro, yen and Australian dollar, but is stronger against all the major currencies and emerging market currencies.  The lone exceptions are the Hong Kong dollar and the Chinese yuan, which are flat. 

There has been no fresh impetus.  Yes, comments from the outgoing Dallas Fed President Fisher talked about how waiting too long to raise rates may force more aggressive action later.  There is nothing new in his hawkish stand.  Cleveland's Fed Mester reiterated that should the economy continue to perform as she expects, a hike in Q2 would be appropriate.  However, short-end of the curve, most sensitive to the timing of Fed action, was unmoved.  If anything, it is continuing to consolidate rise in yields seen in response to the jobs data at the end of last week.  

The Eurosystem's Public Sector Purchasing Program continues to get underway, and it seems to be helping drive the dollar higher.   In the US experience, bond would rally in anticipation of central bank purchases and then sell-off as it began.  There has been no "buy the rumor, sell the fact" activity in Europe.  European bond yields continue to fall.  New record low10-year yields are being recorded in Germany, Italy, Spain, Portugal and Netherlands.   Record low 2-year yields are being seen in France, Italy, Spain and Portugal. 

Economic data for the eurozone was mixed and does not appear to the be impetus for the price action.  French industrial output was stronger than expected in January, rising 0.4% instead of falling by 0.3% as the consensus expected.  However, this was marred by the 0.1% decline in manufacturing output, which was expected to have risen by as much.  It was the third monthly decline over the past four months.  A bright spot is the auto sector, where output tuned positive in December (0.6%) and accelerated in January (1.4%).

It is difficult to find the bright spot in Italy's industrial production report.  It fell 0.7% in January.  That is its largest decline since last September.  The market had anticipated a 0.2% increase.  On a workday adjusted basis, industrial production fell 2.2% from a year ago, which also undermines an improving trend seen in Q4.  

The most interesting news comes from China today.   First, it reported February inflation figures.  Consumer price to 1.4% year-over-year, increasing from January's 0.8% increase and besting expectations for a 1.0% rise.  On a month-over-month basis, China's CPI rose 1.2% after a 0.3% increase in January.  Food prices jumped 2.4% from 1.1% while non-food prices firmed to 0.9% from 0.6%.  To be clear, this does not appear to be the start of a new inflation cycle in China.  We suspect some distortions were caused by the Lunar New Year--calendar effect.  

Deflation deepened for producer prices.  The 4.8% decline on a year-over-year basis is the sharpest decline in nearly six years.  Producer prices have not increased in three years.  Part of the recent decline can be attributed to the fall in commodity prices, which in part also reflect a slowing of the Chinese economy.  The economy continues to suffer from excess capacity. 

Separately, Chinese Finance Ministry officials have signaled a three-fold increase in the amount of bonds local governments can issue to CNY1.5 trillion (~$240 bln).  Only a small part of this will be allowed to finance new spending.  The bulk will be used to roll-over existing debt from off-balance sheet vehicles to their balance sheets and at lower interest rates.  Officials project interest rate savings of around CNY40-50 bln.   In effect, local governments will be allows to convert high yielding bonds into province-backed municipal notes. 

The economic calendar for North America is light.  The main features are wholesale inventories and the JOLTS report on the labor market.  The Treasury auctions 3-year notes.