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ONG Focus | Insights | Written by Oil N' Gold | Fri Feb 09 18 01:49 ET

Selloff of the stock market resumed with the DJIA plunging another 1000 points Thursday. Shares in Asia Pacific followed suit today with Hong Kong's Hang Seng Index breaking below 30000 for the first time since December last year. China's CSI 300 index has slumped over -4% in morning session. Treasury yields strengthened while US dollar was mixed. Among major currencies, British pound was the strongest performer against the greenback as BOE indicated that monetary tightening could come earlier and in greater extent than the market had anticipated. In the commodity sector, oil prices extended the selloff for 5 consecutive days. The front-month WTI crude oil contract, falling to as low as 60.27, lowest in a;lmost 2 months, before settling at 61.15, down -1.04% for the day. The Brent contract declined -1.075 and closed at 64.81 for the day.

The BOE left the Bank Rate unchanged at 0.5% and the asset purchase program unchanged at 435B pound. The members voted unanimously (9-0) for the decision. At the accompanying statement, the central bank noted that"monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period than anticipated at the time of the November Report". This has significantly raised market speculations for a rate hike in May. On the economic growth outlook, the members lifted the GDP growth forecast to +1.8% (previous: +1.6%) for 2018 and to +1.8% for 2019 (previous: +1.7%). The members have also turned more upbeat over the employment situation. As such, they have revised lower the NAIRU, the equilibrium unemployment rate, to about 4.25%, from 4.5% previously. Meanwhile the overall slack within the economy is expected to be just below under 0.25% of GDP. Inflation would remain strong in coming years and is expected to remain persistently above target at 2.2% in 1Q20 and 2.1% in 1Q21. The members judged that it is "appropriate to set monetary policy so that inflation returns sustainably to its target at a more conventional horizon". It is believed that the central bank now focuses on a 2-year horizon, rather than three.

It appears that the recent correction in the equity market would not alter the Fed's rate hike schedule. As New York Fed President William Dudley noted the recent correction is "small potatoes". He added that "clearly the market is adjusting to the fact that the global economy is growing quite quickly, and as a consequence of that, monetary authorities around the world are either starting to remove accommodation or are thinking about starting to remove accommodation".

On the dataflow, US initial jobless claims fell -9K to 221K in the week ended February 3. The 4-week average declined -10K to 225K, a new cyclical low. Continuing claims dropped -33K to 1 923K in the week ended January 27. Elsewhere in Canada, housing starts slipped -0.1K to 216.2K in January. Released earlier today, headline CPI in China moderated to +1.5% y/y in January, from +1.8% a month ago. PPI also eased to +4.3% y/y in January from +4.9% in December. For the rest of the day, the UK would release its industrial production report. IP growth probably celebrated to +0.4% y/y in December, from +2.5% a month ago. Manufacturing production might have expanded +1.2% y/y, slowing from +3.5% y/y in November.


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