More Accommodative CPI Report

STOCK INDEX FUTURES

Stock index futures were higher in the overnight trade and extended gains when the February consumer price index report was released.

The February consumer price index on a month-to-month basis increased 0.2% when up 0.3% was expected, and on an annualized basis increased 2.8%, which compares to the expectation of up 2.9%. The February consumer price index excluding food and energy on a month-to-month basis was up 0.2% when a gain of 0.3% was estimated, and on an annualized basis was up 3.1%, which compares to the forecast 3.2% increase.

The February producer price index report will be released tomorrow and is anticipated to show a 0.3% increase.

In the longer term, a more accommodative Federal Open Market Committee will support futures.

CURRENCY FUTURES

The U.S. dollar index was higher in the overnight trade but gave back some of the gains when the smaller than expected increase in the consumer price index report was released.

Yesterday the greenback declined to the lowest level since November 5 in light of increasing concerns over the trade war.

Germany’s 10-year Bund yield soared above 2.9%, reaching its highest level since June 2011, as negotiations continued to secure parliamentary support for a significant increase in the country’s borrowing needs.

The Japanese yen weakened on Wednesday but remains near five-month highs as uncertainty over President Donald Trump’s tariff plans continue to drive demand for the safe-haven yen. While the Bank of Japan is widely expected to keep rates steady at its March 19 policy meeting, policymakers remain on course for further tightening later this year.

INTEREST RATE MARKET FUTURES

There was some flight to quality long liquidation in the overnight trade.

There was only temporary strength in futures when the bullish smaller than expected increase in the consumer price index was released.

There are no Federal Reserve speakers this week since the pre-FOMC ‘blackout’ period just started. The blackout period begins on the second Saturday before a Federal Open Market Committee meeting and ends on the Thursday following the meeting. The next FOMC policy meeting is scheduled for March 19.

The U.S. Treasury will auction 10-year notes today.

There has been a major change in the fundamentals and outlook for Federal Reserve policies. The probabilities are increasing that the central bank will more aggressively ease credit conditions this year.

Financial futures markets are predicting the FOMC will keep its fed funds rate unchanged at its March and May meetings but will lower its key interest rate three more times this year with the first reduction at its June policy meeting.

In light of increasing probabilities of the FOMC more aggressively moving to accommodation this year, additional price gains for futures across the yield curve are likely.

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