With President Donald Trump’s litany of executive orders grabbing the limelight, investors turn their attention back to central banks and economic data next week.
Here’s what to watch in the coming days.
The minutes of the Federal Reserve’s December monetary policy meeting showed that the central bank could be forced to lift rates higher than expected if Congress passes Donald Trump’s economy-boosting tax cuts. So, when the Fed meets next week investors will be watching the Federal Open Market Committee’s statement for the Fed’s view on the US economy and inflation.
Economists widely expect the central bank will leave interest rates unchanged, noting that the absence of a press conference with Fed chair Janet Yellen leaves little room for major shifts in policy. “The February FOMC meeting should come and go with little market implications,” Tom Porcelli, economist at RBC Capital Markets, said. “The Fed is likely to continue to strike a positive tone on the economy and they may upgrade their inflation characterization toward a slightly more hawkish slant in the wake of headline CPI now breaching 2%.”
Meanwhile, the Bank of Japan’s meeting next week marks the one-year anniversary of its adoption of negative interest rate policy. The central bank is not expected to change its policy but it will provide updates on economic growth and inflation.
“Next week’s BoJ meeting should reveal a resolute central bank in its yield curve control framework,” Mazen Issa at TD Securities, said. “We expect the BoJ to be side-lined on all fronts. Speculative ‘taper talk’ is premature though we think this dynamic will need to be reassessed in the coming months.”
Elsewhere, the Bank of England is also expected to leave policy unchanged and update its forecasts as it unveils the inflation report. Economists expect the BoE to maintain a neutral stance on policy.
South African finance minister Pravin Gordhan has called on the US Federal Reserve to remain mindful of the impact of its decisions on emerging markets as it continues with a programme of raising interest rates.
Speakng at the World Economic Forum in Davos, Mr Gordhan said the so-called ‘taper tantrum’ of 2013 reminded investors and policymakers of the strong links between global financial markets
“The Fed has shown a new kind of sensitivity to their decisions and the impact on emerging markets and we hope that will continue,” he said.
Now, he says pootential impacts on South Africa will ikely be limited, thanks in part to limits on foreign-currency debt levels. But he noted that other African countries have suffered greatly from the cost of servicing dollar debt along with depressed commodity prices.
He also noted that the Fed will be operating in an unusual environment under President Trump.
“The new administration has a particular political outlook, to put it politely, and the Fed has another. That will have implications.”
Stocks climbed Wednesday as Wall Street posted a second straight day of gains in the new year and the Dow once again approached the 20,000 milestone.
The Dow Jones industrial average ended up 60 points, or 0.3%, to 19,942.16. The blue-chip index rose has come close to topping 20,000 several times in recent weeks but each time it gets near has pulled back. The Standard & Poor’s 500 index rose 0.6% and the Nasdaq composite index gained 0.9%. Both the S&P 500 and Nasdaq are near their record closing highs.
Stocks maintained their gains following the release of the minutes from the latest Federal Reserve meeting that provided clues to why policymakers raised interest rates in December for only the second time since 2006 and forecast three rate hikes in 2017 instead of the two moves previously anticipated.
Fed officials said they might have to raise interest rates faster than anticipated to prevent rapidly falling unemployment and President-elect Donald Trump’s proposed fiscal stimulus from fueling excessive inflation, according to minutes of the Fed’s December 13-14 meeting.
Benchmark U.S. crude was up 1.8% to $53.24 a barrel in New York. It lost $1.39 on Tuesday.
The jolly chaps and chapesses at Danske Bank have the euro all mapped out for next year
Danske see EURUSD bottoming at 1.0200 in their 1 month forecast.
“In the short term, on the one hand there will be downward pressure on the US monetary base from the higher federal funds target and from the impact of new banking regulation with US banks set to be required to have an LCR of 100% by 1 January 2017. On the other hand, deposits on the US treasury account may fall at the beginning of next year after a resuspension of the debt ceiling, which will tend to increase the monetary base. Overall, this is likely to be marginally positive for USD and weigh on USD FX forward points vis- à-vis EUR and the Scandinavian currencies on top of the impact of the repricing of the path of Federal Reserve rate hikes, e.g. keeping the 3M EUR/USD basis spread around the present 70-80bp, and thus maintaining a significant negative carry on short USD positions.”
In 12m they see the euro at 1.1200.
Mainland China has lost its status as the largest overseas holder of the US debt to Japan as the recent decline in the renminbi’s FX rate and the strengthening yen have affected the value of the two nations’ respective Treasury note portfolios.
The yen’s status as safe haven asset as fiscal stimulus effort have attracted investment capital to Japan, resulting in stronger yen, whilst China, struggling with low factory-gate inflation and weak international demand for manufactured goods, had to decrease its holdings of the US debt. Japan, now the biggest foreign holder of US Treasury debt, held $1.13 trln worth of US bonds in October, whilst China’s holdings shrank to their six-year lowest at $1.12 trln, according to the data from the US Department of the Treasury. Beijing has been selling US bonds in order to alleviate the downward pressure on the renminbi’s FX rate stemming from lingering economic turmoil. Mainland China uses the dollars obtained from selling the Treasuries to buyback the renminbi, currently at its 8-year lowest in offshore trading.
Japan, however, had been selling Treasuries in early autumn, too, due to the uncertainty surrounding the US presidential election. The subsequent developments in the form of the election of Donald Trump and the plunge in Treasury bond value accompanied by the rising benchmark 10-year yield have proven selling Treasuries the right move, but the yen’s ongoing appreciation has made Japan the largest international US bond holder.
Stocks lost steam Friday as the Dow failed in another attempt at topping the 20,000 mark for the first time ever.
The Dow Jones industrial average lost less than 0.1%, down 8 points to finish at 19,843.41. The S&P 500 fell 0.2%, while the Nasdaq composite shed 0.4%.
After an initial jolt from the Fed’s interest rate hike decision this week, markets adjusted to the prospect of more increases that policymakers signaled were in store as they move to “normalize” interest rates. The Fed raised rates for only the second time in a decade and hinted three more hikes are on the way in 2017, rattling markets used to ultralow borrowing costs that have fueled a multiyear stock boom. The Fed’s move now shifts the focus from central bank policy to economic growth as the driver of stock market performance.
Bond yields gave up some of their big gains from the last few days.The yield on the 10-year Treasury fell to 2.58% from 2.60% late Thursday, putting at least a temporary halt to its strong rally since last month’s presidential election.
ANZ with the latest Global Macro Insight, focusing on the Federal Reserve’s FOMC announcement on Wednesday
In brief from the document:
- The FOMC was upbeat and more hawkish than anticipated
- After an extended period of downgrades to the dot plot, the FOMC modestly tweaks up the profile. Three 25 bps hikes are now expected in2017 up from two.
ANZ on the market implications (bolding is mone):
- This announcement should have a persistent impact on the USD.
- While the tilt was not overly hawkish, with the Fed adding just one hike to the entire profile, it did mark the first time that the Fed has hiked rates without the accompanying message being dovish.
- As such, the reaction function in FX markets was a bit different to previous moves and upside to the USD could be more lasting.
- While the JPY has still underperformed, the AUD and NZD are also significantly weaker on the day. We also note that the equity market has softened on the announcement, and this marks a change in the recent behaviour of markets where the USD and equities were rallying together. This likely reflects a renewed focus on the rising cost of funds, and the fact that markets now need to weigh the balance between better growth prospects, and the policy response to that improvement. As such, looking ahead, the risk that the AUD and NZD begin under-perform other G10 currencies is rising.
The trek to Dow 20,000 continues.
It’s taken nearly 120 years to get close to this point as the Dow Jones industrial average came within 47 points Tuesday of its biggest milestone yet.
The race to 20,000 for the blue chip stock index, which began way back in 1896, picked up speed after Election Day on hopes that president-elect Donald Trump’s policies will stoke growth.
At its afternoon intraday record peak, the Dow was up more than 155 points, or 0.8%, to a high of 19,953.75, before pulling back slightly to close up 114.78 points, or 0.6%, to close at 19,911.21.
Since Election Day the Dow has surged about 9%, from around 18,300 . The Dow made history back during the Internet stock boom in 1999 when it first crossed the 10,000 mark.
Since then, the Dow has suffered through two brutal bear markets, the first in 2000-2002 following the dot-com stock crash and then 2007-2009 during the Great Recession.