First overnight futures were up, I can only guess it was on an overall more dovish Yellen at the 2-day Congressional hearings ended yesterday, however as I mentioned above, what a difference a day makes to the market's outlook.
First I want to quickly touch on Greece which is not only facing German popular opposition to their 4 month bailout extension with 60+ Bundestag politicians ready to vote against the measure (remember I said after the Troika accepts what turned out to be its own document, each of the countries must ratify it in their respective parliaments). The big issue is trust and whether the Greeks can be trusted to keep the deal being they fought against it so hard. Making matters worse, the mutiny inside Syriza grows as a 12-hour party meeting was said to be contentious with everyone freely voicing their displeasure with the deal the PM and Finance Minister walked away with,, essentially a 3rd memorandum.
There are already some defections that may cause problems with the Troika, for instance the Economy Minister says there will be no privatization of strategic state assets, one of the conditions of the bailout, specifically he mentioned the Piroeus Port which was supposed to be privatized (sold). The Energy Minister also joined in saying there would be no privatization of Energy.
On to the US data that sent the US futures falling at 8:30 as Initial Claims were posted with a 31k jump to 313k which probably didn't bother the market on its own, CPI data was also out with the first annual , year on year deflationary print of -0.1% since October 2009, however this was expected and the consensus, one might think that the market would rejoice at the deflationary print as one of the thresholds for a rate hike is the F_E_D has to feel comfortable inflation will return to the long run standard of 2% or show a healthy probability of that before a rate hike, yet the market did not respond well to the CPI data, in fact I believe it also did not respond well to the Initial Claims data, both released at 8:30 a.m.
So why the negative market response to the negative/deflationary headline print annually which is the first deflationary annual print since 2009 (before that you have to go back to 1955)?
In the CPI data Energy was down -9.9%, this is something Yellen sees as transitory,. Additionally the gas index printed at -18.7%.
However when you take CORE CPI which excludes the volatile food and energy (both of which printed negative), the goods and services index actually gained, this is usually what the F_E_D looks at. Core CPI came in at +.2% vs consensus of +.1% meaning there's some inflation which is what the F_E_D needs to see before hiking rates.
Additionally despite the Initial Claims printing higher, it was specifically the hourly wages or real wages adjusted for inflation that caused some trouble as they rose to $10.55 an hour above the previous $10.42, a +1.2% gain and the best move since 2008. This is the other component the F_E_D has been looking for, wage growth.
Taken together, this is what caused the 8:30 plunge after a rather strong overnight session.
In addition, as I said, Bullard would be on CNBC this morning and we know how he pops up at transitional areas in the market.
Here are some of his quotes...
The word "patient" should come out of the policy statement in March to give options for raising interest rates this summer.
"There's too much focus about the first move," he said. "It's really the path of rates that matter."
expects the unemployment rate to fall below 5 percent in the second half of the year and overall economic growth at 3 percent for 2015.
He characterized the policy rate as 375-400 basis points below normal.
"These labor markets are improving so rapidly...If you haven't even come off zero and the unemployment rate has come down below 5 percent, that seems like a bit little extreme to me."
On CPI data, "The core being a little hotter than expected, I think, will bolster confidence a little be that inflation is going to go back toward target,"
Dismissing the strong dollar argument, "We've grown at these dollar levels before. I don't see why we can't do it now." "We are going to pursue the best monetary policy for the U.S., and the dollar is going to go where it's going to go,"
The bottom line... The market is now looking at this data and once again thinking a June rate hike is now very likely. Interesting, Yellen good cop/Bullard bad cop or whatever he needs to be at the moment. Will today be another Bullard transitory moment? We sure are in the right place for it...
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