The relentless risk rally which took the Dow above 21,000 and the S&P over 2,400, has taken a breather overnight, with S&P futures modestly lower tracking European stocks, while Asian stocks advanced on US momentum; late Wednesday comments by a unexpectedly hawkish Lael Braniard has pushed the dollar higher, pressuring oil lower.

Fed Governor Lael Brainard said late Wednesday it will probably be “appropriate soon to remove additional accommodation,” boosting expectations for higher borrowing costs. Traders are pricing in an 86% chance of a rate increase at the March 15 decision, more than double the odds last Friday, Fed fund futures showed.

As rates creep higher, threatening to disrupt the basis of the Fed's argument for why stocks are not in a bubble, the goal seeked narrative continues to threat a fine line, and while higher interest rates would raise U.S. companies' costs, they are also being "explained" as a sign of confidence in the economy and, along with U.S. President Donald Trump's speech to Congress, were cited as factors behind Wall Street's rise.

In Europe, today we got February CPI data which as expected rose to 2.0% for the first time since 2013 - matching the ECB's inflation target - while core inflation rose 0.9% Y/Y, on one hand pressuring the ECB to move, on the other giving it a loophole to tell the Bundesbank that core inflation is still low.

However, while CPI was in line, PPI rose more than expected, with headline PPI risin 3.5% Y/Y, well above the 3.2% expected. Meanwhile, major slack remains in the European labor force, which printed at 9.6% unemployment for January.

The European STOXX 600 index fell 0.1% after adding 1.5% on Wednesday and hitting its highest since December 2015, as losses on consumer-related stocks outweigh gains in miners and construction companies, which are among shares deemed most sensitive to economic growth. The biggest contributor to gains on the Stoxx 600 was Roche Holding AG, up 5.8 percent after its breast-cancer medicine Perjeta succeeded in the company’s most anticipated patient study, a key step for a franchise that could exceed $9 billion in sales by 2021. Among shares active on corporate results, Travis Perkins Plc slid 6.6 percent after the building-materials distributor said the post-Brexit slump in sterling is pressuring its supply chain. Melrose Industries Plc jumped 13 percent after posting a jump in 2016 underlying profit.

For now the biggest support for European stocks appears to be a technical one: it is shown with the purple and green lines in the chart below.

MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.3 percent, while Japan's Nikkei .N225 closed up 0.9 percent after hitting a 14-month high as a weaker yen helped exporters.

In currencies, the dollar index hit a seven-week high. The euro fell 0.1 percent to $1.0535, the yen fell 0.5 percent to 114.26 per dollar and sterling was flat at $1.2290, having earlier touched a six-week low around $1.2260.

In rates, the prospect of higher rates and a potential $1 trillion boost to U.S. infrastructure sought by Trump pushed U.S. Treasury bond yields higher on Wednesday, but they pulled back from those highs on Thursday. Rate-sensitive two-year yields edged up to 1.292%, off Wednesday's peak of 1.308 percent, its highest since 2009. German 10-year yields pulled back from the day's highs after data showing euro zone inflation hit the European Central Bank's 2 percent target last month, as expected. ING's global head of debt and rates strategy Padhraic Garvey said prior to the data that such a reading could extend the bearish momentum in bonds.

Commodities were focused on the third consecutive drop in oil prices after data showed another record build-up in U.S. crude inventories. Brent crude fell 11 cents to $56.25 a barrel. The stronger dollar weighed on metals prices, which wee buoyed however, by signs of growing demand. Chinese factory activity expanded faster than expected in February, purchasing manager data showed on Wednesday. Copper fell 0.3 percent to $5,995 a tonne. Gold fell 0.3 percent to $1,245 an ounce.

Bulletin Headline Summary from RanSquawk

• European equities take a breather from some of the rampant gains seen in recent days to trade relatively flat across the board
• The USD may be on the front foot, but further gains from levels achieved yesterday are modest at best
• Looking ahead, highlights include U.S Initial Jobless Claims, Canadian GDP, Fed's Powell and ECB'S Lautenschlager

Market Snapshot

• S&P 500 futures down 0.1% to 2391
• STOXX Europe 600 down 0.2% to 375.00
• MXAP up 0.2% to 145.06
• MXAPJ up 0.1% to 466.34
• Nikkei up 0.9% to 19,564.80
• Topix up 0.8% to 1,564.69
• Hang Seng Index down 0.2% to 23,728.07
• Shanghai Composite down 0.5% to 3,230.03
• Sensex down 0.6% to 28,816.51
• Australia S&P/ASX 200 up 1.3% to 5,776.59
• Kospi up 0.5% to 2,102.65
• Brent Futures down 0.9% to $55.83
• Gold spot down 0.4% to $1,244
• U.S. Dollar Index up 0.2% to 101.98
• German 10Y yield rose 1.3 bps to 0.295%
• Euro down 0.2% to 1.0526 per US$
• Brent Futures down 0.6% to $56.00/bbl
• Italian 10Y yield rose 3.8 bps to 2.124%
• Spanish 10Y yield rose 2.5 bps to 1.716%

Top Overnight News via BBG

• Sessions Met Twice With Russian Envoy During Trump Campaign
• Snap IPO Values Photo-Chat App Maker at Twice Facebook’s Worth
• Henkel to Buy GCP’s Darex in First Major Adhesive Deal in a Decade
• Mexico Said to Consider Fed Swap Line; Carstens Denies It
• West Corp. Said to Attract Bids From Advent, Apollo and KKR
• Cisco Victory in Second Case Against Arista to Be Reviewed
• Icahn to Sell Trump Taj Mahal to Group Led by Hard Rock
• Mystery Traders Said to Make Millions Illegally on Fortress Deal
• Yahoo Chief Counsel Exits After Hack Probe Finds Inaction
• Tesla Overcomes China Stumbles as Sales Triple, Pass $1 Billion
• Intercept’s Ocaliva Recommended by U.K.’s NICE
• Seacor Postpones 4Q on Possible Weaknesses in Internal Controls

Asia stocks traded mostly higher as regional markets carried over the momentum from the record day on Wall St. where the DJIA and the S&P 500 broke above 21,000 and 2,400 respectively, as financials led on increased prospects of a March Fed rate hike. This bolstered ASX 200 (+1.3%) and Nikkei 225 (+0.9%) with the former led by strength in mining and material sectors. Elsewhere, Hang Seng (-0.2%) and the Shanghai Comp. (-0.5%) lagged after the PBoC kept its daily liquidity operations at a paltry CNY 30bIn and as the banking regulator signalled to restrict shadow banking growth. 10yr JGBs were flat as early pressure alongside strength in riskier assets was reversed following a 10yr JGB auction where the b/c and average prices increased from prior, while the tail-in-price also narrowed.

Top Asian News

• China’s Didi Said to Weigh Raising Billions in Fresh Capital
• Malaysia Holds Rates as Faster Inflation Limits Scope to Ease
• China’s New Watchdog to Tackle Shadow Banking, Property Bubbles
• Investors With $6.6 Trillion Reveal Bets on Chinese Politics
• Nalco to Pay Higher-Than-Expected Interim Dividend; Shares Rise
• Yuan’s Calm Faces Test With Dollar Rally as Fed Rate Bets Surge
• Brokerage Misreported 6b Yen of Tokai Carbon OTC Trades: JSDA
• Inflation Spike Puts Southeast Asian Central Banks on Watch
• Poor Man’s Gold Spurned as Indian Farmers Strapped for Cash
• ONGC Said to See Spending Plans Curtailed by Potential Merger
• Delhi Municipal Body to Conduct Auction of Taj Mansingh Property

European bourses have taken a breather from some of the rampant gains seen in recent days to trade relatively flat across the board. As such, stock specific news took major focus with SMI large cap Roche leading the way higher after positive developments regarding their breast cancer treatment. Elsewhere, earnings from Capita, Adecco, Luxottica and AB Inbev have seen their respective shares trade lower, with LafargeHolcim's earnings report seeing the Co.'s shares trade in the green. Fixed income markets have seen gilts outperform this morning amid touted short covering, while elsewhere Bunds trade in negative territory and below the 165 level, with supply from France, UK and Spain digested by the market. Contacts also highlighted a midmorning wave of BTP selling in screens in the belly of the curve of around EUR 400mln according to some contacts.

Top European News

• Roche’s Aphinity Succeeds, Boosting Breast-Cancer Business
• Sberbank Shakes Off Recession to Earn Record Profit in 2016
• Credit Suisse CFO Sees Bank’s Growth Slowing Capital Build
• U.K. Construction May Weaken as ‘Intense’ Brexit Inflation Bites
• Switzerland’s Economy Grows Less Than Expected on Weak Exports
• Sessions Spoke With Russian Envoy During Trump’s 2016 Campaign
• Engie Sees 2017 Earnings Growth on Cost Cuts Following 2016 Dip
• Is Investment Recommends Taking Profit in Turkish Stocks
• Turkish Lira Slides on Concern Over Central Bank Bond Buying
• GAM Beats Profit Estimates Even as Performance Fees Drop 96%
• JCDecaux Gains; Guidance Less Severe Than Expected, Kepler Says

In currencies, the USD is again on the front foot, but further gains from levels achieved yesterday are modest at best, with some key levels coming into focus and containing some of the euphoria over the likelihood over a March Fed rate hike. USD/JPY has fared the best, posting a comfortable move through 114.00, but exporter offers are said to wait above 114.50 as Japanese year end looms (at month end) with billions said to be left to hedge. The second reading of EU inflation produced no surprises, and with French and Dutch election headlines thin on the ground, we continue to see the EUR spot rate meandering in the low 1.0500's. Many anticipated some congestion at these levels, and there are few signs as yet that this will change materially over the session. Gains seen against the AUD to suggest s delayed reaction to the much larger than expected drop in the Australian trade surplus, but this has come in tandem with losses in NZD and CAD, though the latter is now coming against some strong resistance at 1.3400. AUD/USD is still trading on a 0.7600 handle though, having dropped a modest 1.2 cents since the turnaround in USD sentiment.

In commodities, precious metals lower still in line with the higher USD and lower Treasuries, but today's price action shows modest losses as yet as the progress in the greenback slows. The March rate hike odds have clearly driven trade, but some notable resistance starting to materialise. Gold looks to be content around the USD1245.00 level for now. Silver pivots on USD18.30-40. Oil prices have backed off again as supply issues dictate. The overall range — in WTI and Brent — are largely influential however, and the former ahead of USD55.00 looks well contained irrespective of inventory levels and/or news on OPEC/non OPEC compliance. All base metals showing modest losses on the day so far, but we have seen strong gains over the last 24-48 hours, where Copper and Iron Ore have been bolstered by production curbs (China) and broader supply issues (strikes in Chile).

The day ahead looks set to be a fair bit lighter for data. In the US the sole data release is the latest weekly initial jobless claims print. The Fedspeak looks set to go quiet with no officials scheduled to speak while at the ECB Lautenschlaeger is due to speak this evening.

US Event Calendar

• 8:30am: Initial Jobless Claims, est. 245,000, prior 244,000; Continuing Claims, est. 2.06m, prior 2.06m
• 9:45am: Bloomberg Consumer Comfort, prior 48
• 7pm: Fed’s Mester Speaks on Leadership in New York

* * *

DB's Jim Reid concludes the overnight wrap

The biggest questions from investors last night centred around whether Trump trades would ever fully materialise or were more based on a mirage and also on everything happening with European Government bonds at the moment. There was a big post mortem into the extreme events in German government bonds from last week. Clients didn't really buy the redenomination risk story but our own Francis Yared didn't think anything has majorly changed on the collateral shortage front to justify the recent large move. So still difficult to put a finger on the full reason for some of the recent fixed income moves except to say that in what is a traditionally risk free market, some investors have absolutely no tolerance for risk and therefore buying Bunds last week when French risk was at a local peak made sense to them. And given these were particularly risk averse investors then perhaps the rest of the market could ignore it as a market signal to run for cover in other assets.

Those questions about Mr Trump are still unanswered in the wake of his speech yesterday given the lack of any additional detail but the market has been in party mood over the last 24 hours. The spotlight for markets was well and truly hogged by the comments from the Fed’s Dudley and Williams the night before which helped the S&P 500 close up +1.37% - its best day since November 7th. That is also the first 1% move (up or down) since December 7th or a run of 57 consecutive days which was the longest run in nearly 3 years. The Dow (+1.46%) also closed above 21,000. Back on the 26th of January we highlighted how the Dow had just crossed the 20,000 level and that it had only taken 64 calendar days to go from 19,000 to 20,000 which was the second quickest ever. Well the next 1000 point move to 21,000 took just 35 days which in fact matches the quickest ever. Obviously the percentages get smaller as the index goes higher but it is notable nonetheless. Meanwhile the risk on mood was shared in Europe too yesterday with the Stoxx 600 (+1.47%) also surging higher. Credit markets weren’t left out. CDX IG closed 2.4bps tighter and the iTraxx Main and Crossover indices were 2bps and 9bps tighter respectively. This morning we’ve seen Asian bourses follow suit with the Nikkei (+1.14%), Hang Seng (+0.41%), Kospi (+0.48%) and ASX (+1.18%). China is flat perhaps reflecting some caution ahead of this weekend’s National People’s Congress gathering.

Elsewhere the moves for rates have unsurprisingly been concentrated at the short end of the Treasury curve. Before we dig through them it’s worth highlighting that late last night the Fed’s Brainard – who is considered one of the most dovish Fed officials – said that a rate hike will be “appropriate soon to remove additional accommodation”. 2y Treasury yields, at 1.290% this morning, are up about 10bps from the moments prior to Williams and Dudley speaking and hit the highest on an intraday basis since 2009. 10y yields are at 2.458% and up about 10bps too. Bloomberg’s calculator (which slightly overstates things) continues to show an 80% probability priced in for March, from 52% earlier this week. Yields also surged in Europe yesterday. 10y Bund yields rose 7.5bps to 0.278% and had their weakest day since January 3rd.

There is clearly a lot of political risk that resides in markets in 2017 and this is something we still think creates periodic bouts of volatility. However data will be the key to risk asset performance over the whole year assuming political risk is eventually contained. With that yesterday's global PMIs showed that the recent up move in equities can be justified. In the PDF today we republish the charts we've often used with PMIs from major countries alongside the YoY change in equity markets with a table as to where the PMI suggest equity markets should be YoY. At the moment the PMIs across the key markets suggest equities should be approximately 10-20% higher than a year ago. This is pretty much where they are with some regional variations. We always say this should be a general guide to valuations and works best looking across the board rather than to individual markets where quirks can lead to temporary divergence from 'fair value'. While data remains this strong, equities are doing what they should be expected to. We still think political risk (and perhaps later rising yields) will likely lead to a temporary dislocation but not a lasting one over the coming months.

While we’re mentioning politics there was an update to highlight in the French presidential race yesterday. It centred on Francois Fillon following the news that a formal investigation has now been launched over the alleged arrangement of a fictitious job for his wife. Fillon had previously said that he would quit the presidential race should a formal investigation be launched however yesterday he pledged to continue with his candidacy, despite one of his more senior advisers resigning in the process. We’ll wait to see how much of an impact that has on the polls, if any. Staying in Europe, the latest polls for the Dutch elections have revealed fading momentum for Geert Wilders’ Freedom Party. The Peilingwijzer poll aggregator now has the Liberals as taking between 23 and 27 seats versus 22 to 26 for the Freedom Party. That is the first time since November that the Liberals have gone ahead in the poll of polls. Finally in the UK the House of Lords voted in favour (by 358 votes to 256) of an amendment to the Brexit bill that will protect the rights of EU nationals to remain living in the UK when the country leaves the EU. The legislation is now to return to the House of Commons, so worth watching when it lands.

In terms of yesterday’s data, it was the solid 1.7pt rise in the ISM manufacturing print in the US in February to 57.7 (vs. 56.2 expected) which stood out most. That is the best reading since August 2014 while the details revealed a decent jump in the new orders index to 65.1 from 60.5. On the inflation front the January personal income reading did reveal a slightly bigger than expected +0.4% mom rise in income (vs. +0.3% expected) although there was a little bit of disappointment in the spending data with personal spending up only +0.2% mom (vs. +0.3% expected). Real spending also declined more than expected (-0.3% mom vs. -0.1% expected). The PCE deflator rose +0.4% mom which lifted the YoY rate to +1.9% from +1.6% while the core came in at +0.3% mom as expected and so leaving the annual rate at +1.7%. The remaining data consisted of a soft construction spending print in January (-1.0% mom vs. +0.6% expected) and vehicle sales data which showed annualized sales as holding steady in February. It’s worth noting that as a result of the real personal consumption data, the Atlanta Fed lowered their Q1 GDP forecast to 1.8% from 2.5%.

Before we wrap, for completeness yesterday’s Markit manufacturing PMI in the US was confirmed at 54.2 which is a small one-tenth downward revision from the initial flash. The Euro area PMI was confirmed at 55.4 (from 55.5) compared to 55.2 in January and is now at the highest level since 2011. Regionally in Europe the standouts were Germany (56.8; 69-month high), Italy (55.0; 14-month high) and the Netherlands (58.3; 70-month high). The UK came in at a slightly more disappointing 54.6 from 55.7 in January. Staying with the UK, mortgage approvals data yesterday revealed that approvals printed at 69.9k in January which was a fair bit ahead of the 68.7k expected. Unsecured lending came in at £1.4bn which was in-line but down from the £1.6bn average of the previous six months. The last data to note yesterday was that out Germany. Headline inflation rose +0.7% mom in February which has had the effect of pushing the YoY rate up from +1.9% to +2.2% and at a four and a half year high.

The day ahead looks set to be a fair bit lighter for data. In Europe this morning the most notable release is likely to be the February CPI data for the Euro area where the consensus is for a two-tenths lift in the headline rate to +2.0% but the core to hold steady at +0.9% yoy. PPI and the latest unemployment rate for the Euro area will also be released. In the US this afternoon the sole data release is the latest weekly initial jobless claims print. The Fedspeak looks set to go quiet with no officials scheduled to speak while at the ECB Lautenschlaeger is due to speak this evening.