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Tue, 28th March 2017

Anirudh Sethi Report

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Posts Authored by: “Jim John”

Paris Airport Attacker’s Last Words: “I Am Here To Die For Allah, There Will Be Deaths”

The man shot dead by French soldiers at Paris Orly airport on Saturday shouted he was there to “die for Allah” when as reported this morning, he tried to seize a soldier’s assault rifle, apparently intending to open fire on passengers, a Paris prosecutor said. According to the Paris prosecutor, Francois Molins, who held a press conference in the French capital on Saturday evening the attack is being treated as a terrorist incident, and three people – the assailnt’s father, brother and cousin – have been placed in custody.

The attacker, named as Ziyed Ben Belgacem, arrived at Orly airport on Saturday morning, threw down a bag containing a can of petrol and seized hold of a woman air force member who was part of a military patrol at the airport. Using the servicewoman as a shield, he put his air pistol to her head and shouted at other soldiers with her: “Put down your guns. Put your hands on your head. I am here to die for Allah, there will be deaths.”

He was right, but the death was only one… his, because the moment he grabbed the woman, two soldiers fired eight bullets in three bursts at the man, killing him instantly. A Koran was found on his body.

According to Reuters, the prosecutor said the assailant, who tried to grab the woman’s Famas assault rifle, seemed bent on carrying out a serious attack. “Given the violence that is shown in the (CCTV) pictures … you sense that he was determined to go through with it,” Molins told a news conference. “Everything leads one to believe he wanted to seize the Famas so that there were deaths and then to fire at people.”

Upcoming Week :Fed speakers, Russia probe, Isis fight

With a rate rise in the books investors get to hear from a handful of Federal Reserve speakers next week. On the geo-political front a hearing on Russia’s interference in the US presidential election and a meeting on combatting Isis take the spotlight.

Here’s what to watch in the coming days.

Fed speakers

“Moreover, we’d also look for clarification on the addition of ‘symmetric’ in the press statement when it came to defining the inflation reaction function,” strategists at RBC Capital Markets said. “Our sense is that this was in an effort to put an end to inflation level targeting—also not a dovish development.”

Ms Yellen will deliver the opening keynote at the Federal Reserve System Community Development Research Conference in Washington on Thursday. Through the week, investors also get to hear from voting members of the monetary policy setting Federal Open Market Committee, including Chicago Fed president Charles Evans, Dallas Fed president Robert Kaplan and Minneapolis Fed president Neel Kashkari — the only voting FOMC member to dissent at the March meeting and who has explained his rationale for the move on Friday.

On the economic data front, the calendar is fairly light but investors will keep an eye on fourth quarter current account deficit figures due Tuesday and durable goods orders slated for Friday.

Russia probe

Atlanta Fed Slashes Q1 GDP Forecast To Just 0.9% Hours Before Fed Rate Hike

While it may not be the very definition of irony, we do find the fact that the Atlanta Fed has just cut its Q1 GDP forecast from 1.2% to 0.9%, a number which if confirmed would be the lowest quarterly print in year, just two hours before the Fed’s rate hike quite humorous. As a reminder, the number was as high as 3.4% one and a half months ago.

From the Atlanta Fed

Latest forecast: 0.9 percent — March 15, 2017 

The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2017 is 0.9 percent on March 15, down from 1.2 percent on March 8. The GDP growth forecast declined 0.3 percentage points on Friday when the February estimate of the model’s latent dynamic factor used to forecast yet-to-be released GDP source data declined after the employment situation release from the U.S. Bureau of Labor Statistics (BLS). The forecast for first-quarter real consumer spending growth inched down from 1.6 percent to 1.5 percent after this morning’s retail sales report from the U.S. Census Bureau and the Consumer Price Index release from the BLS.

 

FOMC preview: Hike a done deal

The important details

The decision is at 2 pm ET. That’s an hour earlier than usual for traders in most of the world because Washington moved its clocks forward by one hour on Sunday. So it’s at 1800 GMT, 0300 in Tokyo and 0500 in Sydney.

Along with the statement, the Fed will also release the latest dot plots and forecasts. The Fed is also going to start releasing fan charts but those won’t be until April 5, when the Minutes of this meeting are released.

Finally, Janet Yellen will hold a press conference about 30 minutes after the decision. She will start with a statement and then take questions from reporters.

What’s expected

Economists aren’t unanimous about a rate hike to a range of 0.75% to 1.00%, but it’s close. Just 3 of the 83 economists surveyed by Bloomberg expect no move on rates and I suspect they’re not overly committed to those positions.

The Fed funds futures market is a bit skewed because the effective rate has been at the top end of the band but a hike is at least 90% priced in. Current probabilities show 94% but that’s ticked a bit lower in the past 2-3 days.

Assuming the Fed hikes, all the focus will be on what happens next. The market is pricing in about a 12% chance of a second hike in May and that rises to 67% for June.

In terms of trading, the market is less concerned about the exact timing of a hike and more interested in the longer term. For instance, how many hikes will take place before year end.

The market is pricing a 92% of at least one more hike, a 64% probability of at least two more hikes and a 29% chance of three or more hikes. How those probabilities shift will be key to the market reaction.

RBOB Slides After Surprise Gasoline Inventory Build; New Record Glut In Crude

After a volatile day of White House rumors and denials, and OPEC headlines, WTI and RBOB ended the day lower ahead of tonight’s API data which showed a slightly smaller than expected crude build (+2.5mm against expectations of +3mm). However RBOB prices tumbled after an unexpected build.

API

  • Crude +2.502mm (+3mm exp)
  • Cushing +544k
  • Gasoline +1.84mm (-1.5mm exp)
  • Distillates -3.73mm

While crude built again (the 8th week in a row), it was the swing back to a build in gasoline that is most notable…

Sea of Japan the next target for Chinese military

A growing Chinese military presence in the Sea of Japan is becoming an issue that Tokyo cannot overlook. 

On Jan. 5, three Chinese naval vessels sailed through the Tsugaru Strait between Japan’s main island and the northernmost island of Hokkaido into the Sea of Japan. Four days later, a Chinese air force fleet entered the sea by flying over the waters between the southern Japanese island of Kyushu and the Korean Peninsula.

 According to the Joint Staff of the Japanese Defense Ministry, the fleet consisted of six bombers, which are capable of carrying cruise missiles, an early warning aircraft and an intelligence-gathering plane. With an additional fighter jet as an escort and a refueling aircraft, the fleet could have been ready to bomb ground targets.

An even more consequential move by the Chinese military took place in February last year. A Japanese Maritime Self-Defense Force patrol aircraft and an escort vessel spotted an unidentified submarine sailing underwater in the contiguous zone between Japan and South Korea and emerging in the East China Sea. The submarine was widely believed to be Chinese, although Japan’s Defense Ministry did not confirm its country of origin. Sailing in a contiguous zone does not contravene international law as the area lies outside a country’s territorial waters. Still, the ministry published the information in order to let the vessel’s proprietor know it was being watched.

China has been busy placing military installations on reclaimed land around reefs and shoals in the South China Sea. In the East China Sea, Beijing is now able to put military pressure on Japan’s Coast Guard and Maritime and Air Self-Defense Forces more frequently. An advance into the Sea of Japan may be part of a new objective: to deploy submarine-launched ballistic missiles there.

China has been using part of Rason Port in North Korea on the Sea of Japan for commercial purposes. © AP

Traders Throw In The Towel On March Rate Hike

As we previously noted, while speculatrs had been reducing their shorts in Treasury futures, they had added to Eurodollar shorts – pushing their bets on Fed rate hikes to record highs. However, as Bloomberg notes, signals are starting to emerge that traders who built up that heavy short, or hawkish, eurodollar base since the start of 2016 could be starting to throw in the towel on a March Fed rate hike.

CME confirmed that Wednesday saw record volume in fed fund futures of 658.7k contracts, beating the previous record of 613k on Nov. 9, the day after the U.S. presidential election. Over the course of Wednesday’s session, a total of 283k Apr fed funds futures contracts traded, largest single-day volume seen in the contract. Open interest in the contract rose by 109k, suggesting some short covering before the minutes and potential new longs after the minutes.

Dollar Extends Longest Winning Streak Since 2012 As March Rate Hike Odds Surge

Following this morning’s soaring inflationary and retail sales data, and following Yellen’s hawkish tone yesterday, March rate-hike odds have soared from below 25% to over 40%. The Dollar Index is extending its recent winning streak on this move – now up 11 days in a row, the longest streak since May 2012.

Rate hike odds are ripping higher as The Fed gets its way of pricing in a March rate hike…

And The Dollar Index continues to rise…

This is the longest USD win streak since May 2012.

  • July 1975 – 11 days in a row
  • Sept 1975 – 11 days in a row
  • May 2012 – 14 days in a row
  • Feb 2017 – 11 days in a row

And notably, if extends to 12 days tomorrow, will be the second longest winning streak in dollar history.

Next Week :Yellen testimony, US data, Netanyahu visit

Federal Reserve Chair Janet Yellen’s semiannual testimony takes the spotlight next week as investors watch for clues on US monetary policy and her take on the current political climate.

Here’s what to watch in the coming days.

Yellen testimony

The Fed has signalled three interest rate rises this year. Sticking to its mantra that all meetings are ‘live’, investors will watch for closely watch “how forceful she is in promoting the notion that March is still on the table,” said Tom Porcelli of RBC Capital Markets.

Indeed, federal fund futures currently imply a 13.3 per cent chance of a rate rise next month, according to CME data.

“Given the uncertainty of timing on the fiscal agenda and the relatively modest uptick in inflation thus far this year, we think it will be difficult for the committee to get enough members on board for a hike in March (not to mention that the French election in late April/early May looms large as a potential catalyst for global volatility),” Mr Porcelli said. “But Yellen could certainly move the “perception” needle on this.”

In the Q&A session, Ms Yellen will likely be grilled on Fed independence, the central bank’s economic outlook and its view on Mr Trump’s planned proposals.

US data

Trump’s ‘phenomenal’ tax plan

Trump will reveal tax plan in 2-3 weeks

Today Trump talked about a tax plan that will be “incentive-based policy, much more so than we have right now.”

Details are beginning to leak out and the most important one is that former Goldman Sachs CEO Gary Cohn is writing the plan. He stepped down from the investment bank to join Trump’s team.

The thinking is that Cohn will be kind to the financial industry.

Cohn said cutting corporate and individual taxes were the two main goals and he told Fox Business that he was focusing on tax cuts for low earnings.

“We’re not spending a lot of time with the high earners,” Cohn said during that interview.

You can be sure that the loophole that allowed another Goldman CEO (Henry Paulson) to avoid $200 million in taxes when he joined the Treasury will also be left in by Cohn, who will have chased in nearly $300m in his Goldman departure to join Trump’s team.

A big question is how likely it is to be implemented. Trump said that Senate and House leaders were being consulted but they may see that as a slight. Paul Ryan and Mitch McConnell have floated their own plans in the past and they won’t want to be dictated something by Trump.

After the details are released, look for initial enthusiasm but it could be tempered quickly if it doesn’t have the support of Congress.