Earlier today, NY Fed president Bill Dudley sparked a hawkish storm in the markets, when in a bizarre statement he doubled down on the Yellen’s “hawkish hike” rhetoric, and made it seem that easing is now perceived by the Fed as a bad thing:
FED’S DUDLEY: HALTING TIGHTENING CYCLE NOW WOULD IMPERIL ECONOMY
Then moments ago, today’s second Fed speaker of the day, Chicago Fed’s dovish, FOMC voter Charles Evans delivered a Dr. Jekyll and Mr. Hyde statement, where first, in his prepared remarks and during the subsequent Q&A in New York he sounded rather hawkish, while speaking to reporters after the event he flipped at emerged as his usual old dovish self.
First, here are the highlights from the dovish Evans:
“I think where we are with the funds rate right now is kind of in line with my outlook.”
“US fundamentals are good, no reason this won’t continue”
Evans sees a “high threshold to change the Fed’s balance sheet unwind plan”
Evans said there are only “small differences” in whether the FOMC hiked rates 2, 3, or 4 times in 2017.
Evans says he didn’t dissent last week because “we’re at a point where the real economy is really doing quite well”
Evans agreed with Yellen and others that the reductions in the balance sheet should gradual and like “watching paint dry”.
“I can’t just sort of say, it’s without risk to continue with very accommodative low interest rates”
“Beginning to adjust the balance sheet is one of the easier, more natural things to do, soon, sometime this year”
The week ahead will be highlighted by the FOMC meeting on Wednesday at 2:00 PM ET/1800 GMT.
The Federal Reserve is expected to raise rates by 0.25% basis points and target 1.25% to 1.50%. This would be the 4th increase in the unwind for the Fed. The Fed will also give their projections on GDP, employment, inflation and the projection of rates going forward. They may also give more detail on tapering QE.
Other key events:
UK CPI 4:30 AM ET/0830 GMT. The expectation is for YoY to remain unchanged at 2.7%. The Core is expected to decline to 2.3% from 2.4%. MoM is expected to increase by 0.2%.
US PPI for May, 8:30 AM ET/1230 GMT. The US PPI is expected remain unchanged MoM and dip to 2.3% YoY (from 2.5% last). Ex food and energy the MoM is expected to rise 0.2% vs 0.4% last and remain at 1.9% for the YoY
UK employment statistics will be released at 4:30 AM ET/0830 GMT. The employment change (3M/3M) is expected to rise by 125K vs 122K last month. The Unemployment rate is expected to remain unchanged at 4.6%. Average hourly earnings are expected to remain unchanged at 2.4%.
US CPI for May, 8:30 AM ET/1230 GMT. US CPI for May is expected to remain unchanged at 0.0% (0.2% last month). Ex Food and energy expected to rise by 0.2%. YoY is expected to decline to 2.0% from 2.2% last month with Ex food and energy remaining unchanged at 1.9%.
US retail sales for May, 8:30 AM ET/1230 GMT. US retail sales for May is expected to increase by 0.1% for the month (vs +0.4% last month). The ex auto is expected to rise by 0.1% (vs 0.3%). The control group is expected to rise by 0.3% vs 0.2% last.
The Nikkei Stock Average has regained 20,000 points and Japan’s jobs-to-applicants ratio is improving, yet Prime Minister Shinzo Abe’s reluctance to tackle reforms needed for the country’s growth raises questions about the leader’s commitment to his signature economic policy.
“In order for Japan’s economy to achieve more than a recovery and continue stable, long-term growth after that, it is essential to strengthen Japan’s growth potential,” proclaimed a key economic and fiscal policy plan finalized in June 2013, about six months after Abe took office as prime minister for a second time.
The three “arrows” of Abenomics — aggressive monetary policy, flexible fiscal policy and a growth strategy that promotes investment — grabbed the market’s attention and drew investors to Japan.
Two of out three arrows
That was four years ago, and the government approved the fifth iteration of the plan Friday. But the country’s potential growth rate now stands at 0.69%, according to the Bank of Japan, compared with 0.84% in the second half of fiscal 2014 — a sobering take on what Abenomics has actually accomplished.
The government and the central bank have focused on the first two arrows. The BOJ’s total assets have topped 500 trillion yen ($4.53 trillion), while long-term interest rates remain around zero. In terms of fiscal policy, Japan has passed seven supplementary budgets in just five years, spending about 25 trillion yen in the process.
“Extreme fiscal spending and other measures have led to a distorted allocation of resources in the economy and reduced productivity,” said Ryutaro Kono, chief Japan economist at BNP Paribas. Monetary and fiscal tools were only supposed to serve as a Band-Aid until growth ignited. But by relying too heavily on them, Japan neglected to lay out an effective growth strategy.
will run QE until inflation path has sustainably adjusted
stands ready to increase size duration of QE if needed
net purchases will be made alongside reinvestments
EURUSD dipped to 1.1221 on the rate hold news but found some support on the headline here as it omits guidance on rate cut.
At today’s meeting, which was held in Tallinn, the Governing Council of the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.40% respectively. The Governing Council expects the key ECB interest rates to remain at their present levels for an extended period of time, and well past the horizon of the net asset purchases.
Regarding non-standard monetary policy measures, the Governing Council confirms that the net asset purchases, at the current monthly pace of €60 billion, are intended to run until the end of December 2017, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim.
The net purchases will be made alongside reinvestments of the principal payments from maturing securities purchased under the asset purchase programme. If the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, the Governing Council stands ready to increase the programme in terms of size and/or duration.
The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 14:30 CET today.
The Bank of Japan has stepped up purchases of exchange-traded funds as part of its monetary easing policy, with the balance surging to 15.93 trillion yen ($144 billion) as of March 31.
The total marks an 80% rise from a year earlier and more than a sevenfold increase since the central bank kicked off its quantitative and qualitative easing — adding riskier assets to its balance sheet — in April 2013. ETF purchases have gradually increased under the unconventional policy, expanding to 6 trillion yen a year in July 2016 from 3.3 trillion yen.
The bank apparently buys frequently on days when the stock market dips in the morning, serving to stabilize share prices.
“The BOJ’s ETF purchases help provide resistance to selling pressure against Japanese stocks,” says Rieko Otsuka of the Mizuho Research Institute.
Should the current pace of buying continue, the BOJ’s ETF holdings would reach about 30 trillion yen in about two years. The market capitalization of the Tokyo Stock Exchange’s first-section companies comes to 550 trillion yen.
The bank’s growing market presence has raised concerns about the repercussions when the easing policy eventually winds down. When speculation of a BOJ exit grows, the anticipated cutbacks on ETF purchases would accelerate selling of Japanese stocks. As a precaution against a sharp market decline, “the BOJ many need to set aside provisions,” Otsuka says.
Two weeks ago we asked a question: maybe behind all the rhetoric and constant (ab)use of sophisticated terms like “gamma”, “vega”, CTAs, risk-parity, vol-neutral, central bank vol-suppression, (inverse) VIX ETFs and so forth to explain why despite the surging political uncertainty in recent years, and especially since the US election…
… global equity volatility, both implied and realized, has tumbled to record lows, sliding below levels not even seen before the 2008 financial crisis, there was a far simpler reason for the plunge in vol: trading was slowly grinding to a halt.
That’s what Goldman Sachs found when looking at 13F filings in Q1, when it emerged that the gross portfolio turnover of hedge funds had retreated to a record low of just 28%. In other words, few if any of the “smart money” was actually trading in size.
Japan releases April jobs numbers and retail sales at 02330 GMT. Economic data in Japan still doesn’t move the market much but if the improvements from early this year can continue, a big conversation about the BOJ will have to take place. Keep a close eye on retail sales.
2) French GDP
The second look at Q1 French GDP is due at 0645 GMT. No change from the +0.3% q/q and +0.8%. An uptick would add to the optimism that we heard from Draghi earlier today.
3) German inflation
The German regional CPI numbers will begin to trickle out at 0700 GMT, starting with Saxony. After they’re all in, the national numbers will be released. However, in terms of trading, the market has it all figured out before the national number at 1200 GMT, so watch the regional figures for the trend.
4) US PCE
This one is huge. The Fed hasn’t made up its mind about a June 14 hike and inflation is a big reason why. If PCE head and core numbers miss, there will be a major rethink about what’s coming in two weeks. The y/y deflator is expected at 1.7% with core forecast at 1.5%. The data is due at 8:30 am ET (1230 GMT)
5) Consumer confidence
Sentiment surveys have been great since the US election but it hasn’t been the best month for faith in the new administration. Could that make consumers think again? Probably not but we’ll find out when the numbers are released at 10 am ET (1400 GMT).
6) Fed’s Brainard Part 3
We heard from Brainard twice late last week but she never really dove into the monetary policy debate. At both appearances, however, she alluded to worries about soft inflation. Maybe she was just waiting to get the latest PCE data before sending a signal. We’ll find out at 1 pm ET (1700 GMT).
Hedge funds have cut their short position in 10-year Treasury futures by nearly two-thirds from a one-year high set at the start of March, unwinding a popular trade as US sovereign debt has rallied.
Leveraged funds, a proxy for hedge funds, reduced their net short in 10-year Treasury futures by nearly 49,000 contracts in the week to April 4, data from the Commodity Futures Trading Commission showed on Friday. The net short totaled 136,322 contracts, down from 365,650 contracts on March 7.
Traditional asset managers, who have taken the opposite side of the trade, have also reduced their net long to 226,655 contracts, the lowest level since February.
The divide has represented in part a difference of opinion on the likely path of interest rates in the US. It widened markedly after the Federal Reserve signalled last year that it would tighten policy by at least three quarter-point rate rises in 2017.
The central bank’s perceived hawkishness, alongside a sell-off in Treasuries after the US election, sent yields on the 10-year Treasury to a high of 2.62 per cent in December. Yields on the note have since slid, as the so-called Trump trade fades.
One week after we observed the biggest monthly short squeeze in 10Y TSYs in history, it was a relatively calm week in the longer-end of the Treasury curve.
According to the latest CFTC data, spec net shorts in aggregate Treasury futures was little changed from the previous week at 612K contracts in TY equivalents. While, they continued to pare net shorts in TU and TY by 18K and 14K contracts, respectively, they increased their net shorts in FV and TN by 35K contracts and 6K contracts, respectively. Spec net shorts as share of open interest was unchanged at -5.8% over the week and was at about -2.0 standard deviations away from neutral.
While net Treasury futures shorts are now back to the lowest levels since early December 2016, traders continued to pile into the short-end betting massively on further rate hikes as Eurodollar shorts push on beyond $3 trillion: in the last week specs sold another 73K contracts in Eurodollar futures, taking their net shorts to the seventh successive week of record high of -3,129K contracts.