European stock markets rallied, with the DAX up 1.1% and well above the 13000 mark. The FTSE 100 underperformed but touched record highs before falling back again and remains up 0.13% on the day after a strong session in Asia, where the Nikkei gained more than 3% as local markets reopened after a long holiday weekend and a weaker Yen underpinned exporters. U.S. benchmarks hit record highs yesterday and after the Fed minutes showed ongoing backing for a “gradual approach” to raising rates and global markets seem to be in buoyant mood and risk appetite is soaring, leaving Eurozone peripherals bond as well as stock markets outperforming, with MIB and IBEX up 2.1% and 1.5% respectively. U.S. stock futures also continue to rise, suggesting the party will continue in U.S. trade.
Crude oil touched new trend highs of 62.20 after the API revealed a large 5.0 million barrels weekly inventory draw after the close on Wednesday. Strong global PMI data have supported, ramping up demand expectations. Unrest in Iran has put a floor under prices as well. The market has been in process of pricing in a ramped-up level of geopolitical risk following the anti-government protests in OPEC member Iran, which has more than offset any concerns about prospects for rising U.S. crude supply.
Eurozone PMI Services Were Revised Higher
Eurozone services, composite PMIs revised slightly higher, to 56.6 and 58.1 respectively from 56.5 and 58.0 reported with the preliminary reading. Survey compiler Markit reported that economic growth reached the highest level since early 2011 judging by the numbers, amid near-record expansion of manufacturing production and the steepest increase in services sector activity for over six and a half years. Job creation continues but upward price pressures abated slightly in December according to the survey, with rates of increasing input costs as well as output charges easing for the first time in five months. Still, Markit stressed that the pace of inflation signaled for both measures remains strong relative to long-term trends.
FOMC minutes showed that most policymakers supported the gradual rate hike trajectory. There was considerable debate over inflation in the minutes, as expected, and as seen in Fedspeak over Q4. The majority continued to expect the inflation rate to rise to the 2% target, with many seeing cyclical pressures from the tight labor market pushing prices higher over the medium term. But several officials were concerned by the low inflation expectations, something Chair Yellen had mentioned.
A few, meanwhile, believed inflation expectations had been broadly stable over the year despite the low reading on prices and through that would support the Committee’s view of a gradual rise. With respect to risks, there was concern that “inflation pressures could build unduly if output expanded well beyond its maximum sustainable level, perhaps owing to fiscal stimulus,” and that could lead to a steeper trajectory in rate hikes. There was also discussion over the narrowing of the yield curve, with “some” expressing concern over a potential inversion, although the recent spread wasn’t viewed as alarming, but rather still in the range of historical norms.