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”
Previews of the Federal Reserve interest rate decision from 15 firms
Overall, the consensus seems to expect the Fed to deliver a dovish hike with few see a hawkish hike and only one (Danske Research) sees the Fed skipping hiking at today’s meeting.
TD Research: We think the market is underestimating a hawkish hike from the Fed. This is because the median dot-plot should remain unchanged to confirm 3 total hikes this year and another 3 next, which is well above current pricing. Further, we think the risk of an acute discussion of balance sheet normalization could surface this week. The combination of both should compel a hawkish re-pricing in the Fed outlook.
Credit Suisse Research: With the market 90% priced for a 25bp rate hike, we do not expect much USD upside from such an outcome alone. Rather, we would need to see a statement, forecast changes or a Q&A with Fed chief Yellen that allows room for the market to fully price in another hike for 2017 H2.
Credit Agricole Research: We expect the FOMC to raise the fed funds rate by 25bp: the hike is fully priced in and doing otherwise would trigger market volatility that the Fed would be keen to avoid…There should not be any formal announcements with respect to the balance sheet policy but that could come as soon as the September meeting. Indeed, the risk is that the Fed could hint at an earlier balance sheet exit than the market is currently expecting. Coupled with an unchanged dot plot this could be enough for the US yields and the USD to move higher after the Fed.
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).
Gold prices have retraced most of their losses since the election, but strategists at UBS are now lowering their outlook on the precious metal.
Joni Teves, an analyst at UBS, lowered her gold price forecasts to an average of $1,300 a troy ounce this year, from their previous estimates of $1,350 and also knocked her projections for next year to an average of $1,325 a troy ounce, down sharply from $1,450 previously.
While she maintains her broadly positive narrative surrounding the precious metal, she cites three key reasons for re-calibrating her gold outlook.
Firstly, she argued that a pick-up in gold interest in the first quarter was slower than expected. While gold prices have recovered by about 9 per cent since the start of the year, most investors are interested in gold not as an investment in itself but rather as a portfolio diversifier.
“Conviction levels have remained low and investors continue to hesitate to take more meaningful positions despite an underlying positive bias, especially as gold hovers below key psychological and technical levels,” she said.
We can now close the case on who leaked that confidential, market-moving data to Medley global back in 2012: it was Richmond Fed’s Jeffrey Lacker, who previously was expected to retire in October, and is resigning immediately.
In a statement, Lacker confirms he revealed confidential FOMC information to Medley Global and that he lied to the Fed’s general counsel on at least two occasions. His full statement is below:
Statement Of Dr. Jeffrey Lacker
During the past 13 years it has been my privilege to serve as President of the Federal Reserve Bank of Richmond. It has also been an honor to contribute to the development of our nation’s monetary policy as a member of the Federal Reserve’s Federal Open Market Committee (“FOMC”).
While transparency of the monetary policy process is important, equally important are the confidentiality policies that protect the internal deliberations of the FOMC and ensure the integrity of our financial markets. The Federal Reserve’s confidentiality policies seek to guide participants in maintaining the balance between transparency and confidentiality. The FOMC has had in place for many years two specific policies relating to confidentiality. the FOMC Policy on External Communications of Committee Participants (the “External Communications Policy-) and the Program for Security of FOMC Information (the “Information Security Policy”).
In 2012, my conduct was inconsistent with those important confidentiality policies. Specifically, on October 2, 2012, I spoke by phone with an analyst (“the Analyst”) concerning the September 2012 meeting of the FOMC. The Analyst authors reports on Federal Reserve matters on behalf of Medley Global Advisors (“Medley’). Medley publishes macro-economic policy intelligence for institutions such as hedge funds and asset managers and is owned by the Financial Times Limited.
The stage is set for the first official summit between two of the world’s most powerful leaders as China’s president Xi Jinping travels to Florida to meet his US counterpart Donald Trump next week.
Also competing for investors’ attention will be minutes from the Federal Reserve’s March 14-15 meeting, the second televised debate of the French presidential election and the release of the closely watched US jobs report.
Here is what to watch in the week ahead:
Xi, meet Trump
The leaders of the world’s first- and second-largest economies will meet at Mr Trump’s Florida retreat, Mar-a-Lago, April 6 and 7. According to the official White House release, the agenda will include “global, regional, and bilateral issues of mutual concern”.
That vague description belies the complex backdrop against which the two men will meet. Mr Trump pledged during the presidential campaign to label China a currency manipulator, and within weeks of his election prompted a formal protest from China after his phone call with Taiwan’s leader (Mr Trump has since said he will back the ‘One China’ policy to ease tensions.)
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.
While the Federal Reserve decided to raise interest rates for the third time since the financial crisis, chair Janet Yellen reiterated that the pace of rate rises would be gradual and the so-called dot plot continued to signal just two additional rate rises this year. The move was interpreted by some as a dovish hike and Fed speakers could get the chance to refute that next week.
“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.
The fed hike case is built on a strong consumer led recovery. That’s good when people have money to spend, and when wages give them that money to spend. The wages (average hourly earnings) in the jobs reports report showed pay running at a decent 2.8% y/y. Today we get the inflation adjusted wage numbers in the CPI report and they don’t look as hot.
Last month, year on year real average weekly wages dropped for the first time since the start of 2014.
US real average weekly wages y/y
That’s not good news for the supposedly strong consumer and rate hikes won’t make the situation any better.
I’m quite surprised that the Fed will be raising so quickly after the Dec hike instead of letting that hike filter through, and monitoring the effects. To me that suggests that behind the scenes there’s something they are worried about. If they’re willing to hike in a moment when their whole basis for hikes (the consumer) might start finding things tougher, there’s something amiss.
It’s a straw clutch to try and find anything that could derail the hike tonight but there’s plenty of evidence in why they might throw in some additional caution about future hikes, and the wages numbers today may aid that sentiment.
Bringing forward expectations of a Fed hike from May-June to March was worth something for the dollar, but to get more now, the market may need to recognize the risk of three (or more) hikes this year. With the strong February jobs growth and a 2.8% year-over-year increase in hourly earnings, rarely does the market’s confidence in an event surpass current expectations for a hike on March 15.
However, the market sees around a one-in-three or a one-in-four chance of a third hike this year.The risks for the updated forecasts from the Federal Reserve seem asymmetrically tilted higher, more rate hikes than fewer by more members. The hawkishness of regional presidents may be underestimated. The data and the global climate are conducive for expediting the normalization process. The hawks will likely feel vindicated by recent developments and may press their case with more vigor.
The focus of the Fed has arguably shifted. Previously, the issue was whether the data would confirm that the economy was evolving toward the Fed’s targets. It did. Rather than focus on the data points per se, officials appear more confident of the direction and resilience of the economy and prices. They now are looking for opportunities, which helps explain the campaign to prepare the market for the March 15 move.
Still, the dollar’s technical tone has deteriorated, and the risk is on the downside over the next several sessions. Our working hypothesis is that the dollar’s recovery that began in early February against most of the majors ended and a correction has begun, For the Dollar Index, this means potential toward 100.75 and possibly 100.40. The former is the 50% retracement of that rally and coincides with the 100-day average (~100.80). The latter is the 61.8% retracement. Alternatively, if the Dollar Index has carved out a double top near 102.25, the neckline is around 101.20 (38.2% of the rally is ~101.10). On a break of the neckline, the measuring objective is 100.
The euro’s pre-weekend rally saw it surpass the 50% retracement objective of its decline from the February 2 high near $1.0830. That retracement was around $1.0660, and the 61.8% retracement is closer to $1.0700. The euro’s five-day moving average crossed above the 20-day average for the first time in a month. The single currency may be tracing out a double bottom at $1.05 The neckline is $1.0630. The measuring objective is around $1.0760.