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Thu, 29th June 2017

Anirudh Sethi Report

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Archives of “Federal Reserve Bank of San Francisco” Tag

Yellen: “I Don’t Believe We Will See Another Crisis In Our Lifetime”

If there was any confusion why the Fed intends to keep hiking rates, even in the face of negative economic data and disappearing inflation, it was put to rest over the past 2 days when not one, not two , not three, but four Fed speakers, including the three most important ones, made it clear that the Fed’s only intention at this point is to burst the asset bubble.

First there was SF Fed president John Williams who said that “there seems to be a priced-to-perfection attitude out there” and that the stock market rally “still seems to be running very much on fumes.” Speaking to Australian TV, Williams added that “we are seeing some reach for yield, and some, maybe, excess risk-taking in the financial system with very low rates. As we move interest rates back to more-normal, I think that that will, people will pull back on that,

Then it was Fed vice chairman Stan Fischer’s turn, who while somewhat more diplomatic, delivered the same message: “the increase in prices of risky assets in most asset markets over the past six months points to a notable uptick in risk appetites…. Measures of earnings strength, such as the return on assets, continue to approach pre-crisis levels at most banks, although with interest rates being so low, the return on assets might be expected to have declined relative to their pre-crisis levels–and that fact is also a cause for concern.”

 Fischer then also said that the corporate sector is “notably leveraged”, that it would be foolish to think that all risks have been eliminated, and called for “close monitoring” of rising risk appetites.

Analysts debate possible September start for Fed balance sheet run-off

Federal Reserve chair Janet Yellen said on Wednesday that the central bank could begin shrinking its $4.5tn balance sheet “relatively soon“, and while she demurred on a specific date, some analysts have now pegged that announcement for September — although others aren’t so sure.

Over the past few months, analysts have tried to piece together a clearer picture of the Fed’s timing for moving on the three expected interest-rate increases this year, as well as when it intends to start the process of unwinding its massive balance sheet.

On Wednesday, the Fed moved forward with its second rate rise of 2017 and unveiled some details of its plan to shrink the balance sheet that has grown to a massive size in the wake of the financial crisis. That has left analysts to ponder when to expect the Fed’s next moves at its four remaining meetings of the year. 

In a note following today’s announcement, Bank of America Merrill Lynch analysts said in a report that they now expect the balance sheet normalisation to begin in September, with the third rate increase of 2017 penciled in for December:

Trump just set some kind of record for reversing rhetoric

Four election promises/statements reversed within an hour

Trump just reversed his position on NATO.

“NATO is not obsolete,” he said at a press conference today.

  1. He had previously said: “I said a long time ago that NATO had problems,” Trump said during the interview with the Times of London and Germany’s Bild. “Number
    one, it was obsolete, because it was designed many, many years
    ago. Number two, the countries weren’t paying what they’re supposed to
    pay.”
  2. Yellen is ‘toast’, he had said.  He railed against Yellen and Federal Reserve in one of the debates but now he’s having second thoughts, saying he likes Yellen and is open to extender her term.
  3. Low rate policy. “They’re not doing their jobs,” by keeping rates low at the Fed, he said in the debate. Today: “I like low rate policy.”
  4. “China isn’t manipulating it’s currency,” he said today. That’s a 180-degree turn from what he was saying in the final weeks of the campaign, when he promised to label China a currency manipulator.

To top it off, he just said “Right now we’re not getting along with Russia at all. We may be at an all-time low” in the relationship. He also said that going it alone against North Korea means going at it with other nations. “Going it alone means going it with lots of other nations.”

Fed to make sequential hikes until ‘something breaks’: Jeffrey Gundlach

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Jeffrey Gundlach, chief executive officer at DoubleLine Capital, said on Tuesday he expects the Federal Reserve to begin a campaign this month of “old school” sequential interest rate hikes until “something breaks,” such as a U.S. recession.

Gundlach, who oversees more than $101 billion at Los Angeles-based DoubleLine, said U.S. economic data support a rate increase as soon as the next Fed policy meeting on March 14-15, and further rises this year, after a series of false starts in 2015 and 2016.

“Confidence in the Fed has really changed a lot,” Gundlach said on an investor webcast. “The Fed has gotten a lot of respect with the bond market listening to the Fed” now that economic data support the tough rhetoric from Fed officials.

New York Fed President William Dudley, whose branch of the U.S. central bank serves as its eyes and ears on Wall Street and who generally spends a couple of hours a week planning policy with Fed Chair Janet Yellen, played a key role in orchestrating the messaging of a March rate hike.

What’s priced in for the March 15 FOMC meeting and beyond

Fed hike odds near 100%

The odds of a March hike rose to 94% on Friday compared to 35% on Feb 23. A concerted, coordinated effort from the Fed to push up the probability was clear by the end of the week.

If she didn’t intend to stoke hike optimism, then she badly misplayed her hand. The newspaper headlines today were:

  • Set to Lift Interest Rate, Fed Embraces Investors’ Optimism – NYT
  • Yellen points to March rate hike as Fed signals end of easy money – Reuters
  • Yellen signals another Fed interest rate hike – PBS
  • Janet Yellen Indicates Federal Reserve’s Rate Rise Coming This Month – Forbes

What would it take for the Fed not to hike? How about a +50K non-farm payrolls report with weak wage growth. That would definitely make things interesting.

Barring something like that, the debate will shift to future meetings. At the moment, there’s a 10% chance priced in of a second hike on May 3. That rises to 45% by the June 14 meeting. Three hikes by year-end are about a 50/50 probability.

Why You Should Be Nervous About Janet Yellen’s Speech Today

While virtually all prominent market commentators, most recently Bloomberg’s Mark Cudmore, now seem convinced that the Fed will hike by 25bps on March 15, when just as recently as a week ago the question was June or September, some are still skeptical. One among them is Vincent Cignarella, FX strategist who writes for Bloomberg, who in his daily Marco View piece writes that “March is far from a slam dunk even if officials collectively see three hikes this”, and that the key clue will come tomorrow at 1pm when Janet Yellen speaks, and very well may stun markets who have sent the probability of a March hike up to 90% following recent hawkish comments from uber-doves Dudley and Brainard.

Here is Cignarella explaining why You Should Be Nervous About Janet Yellen’s Speech”

Foreign-exchange and Treasuries traders may have gotten ahead of themselves.

While it seems obvious based on recent economic data that the Federal Reserve will eventually need to raise rates, Chair Janet Yellen could walk back market expectations on Friday to create padding for risk events ahead of the March 15 decision.

If so, markets appear precariously perched. Dollar-yen has risen around 2.5 percent and the U.S. 10-year yield has climbed more than 16 basis points in just three days.

Short positioning in eurodollars, which are highly sensitive to the path of Fed rate hikes, is near record levels with both real and fast money extending hawkish bets, according to the latest CFTC data.

These moves have been driven by Fed speakers saying this week that rates will need to rise soon. First Fed dated overnight-interest-rate contracts have priced in close to 80 percent odds of a March increase, based on Fed effective rate of 0.66 percent. Other measures of market-implied probability approach 90 percent.

 

Libor Spikes Most In 15 Months To 8 Year Highs

The cost of funding for your average joe, average corporation, and average swaps trader, surged overnight. 3M Libor rose by the most since Dec 2015 (Fed rate hike) to the highest level since April 2009.

Biggest jump since the fed rate hike in Dec 2015…

As Reuters reports, the cost for banks to borrow funds in U.S. dollars surged by the most since December 2015 on Wednesday, a day after a series of Federal Reserve officials jolted short-term interest rate markets with talk of a near-term rate rise.

 U.S. 3-month Libor was set near an eight-year high early on Wednesday at 1.09278 percent compared with 1.064 percent on Tuesday. The 2.878 basis point rise was the largest since Dec 17, 2015, the day after the Fed’s first rate hike following the financial crisis and the Great Recession.

The jump comes as short-term rate markets are rapidly repricing the risk that the U.S. central bank may deliver another rate increase as early as mid-March, when its monetary policy committee next meets.

In recent days a clutch of Fed policymakers have spoken about the case for a near-term rate hike becoming more compelling in the aftermath of the election of Donald Trump as president and a Republican-controlled Congress intent on pursuing an aggressive pro-growth economic agenda.

The latest voices to argue that case came on Tuesday, when both the influential heads of the New York and San Francisco Federal Reserve banks signaled they are concerned about waiting too long to press rates higher.

Next Week -Watch out :Week ahead: Greece, Fed minutes, Buffett letter

Don’t be fooled by the the holiday-shortened trading week in the US. Next week promises to give investors plenty to watch, including the Greek bailout, minutes of the Federal Reserve’s last meeting, Bank of England governor Mark Carney’s testimony, retail earnings and Warren Buffett’s annual letter.

Here’s what to look for in the coming days.

Greece

The meeting has also gained additional significance, as the last major one slated before European elections begin next month, starting with the Dutch.

“With the two largest eurozone economies facing elections this year, we believe it is in
their policymakers’ interests to contain any potential risks from Greek disruption,” said economists at Nomura. “We therefore expect some transitory agreement to be reached at least at the eurozone level, with the IMF decision on programme participation likely to be delayed even further”.

Carney testimony

Following Federal Reserve chair Janet Yellen’s semi-annual testimony to Congress, investors get to hear from her UK counterpart when Mark Carney testifies before the UK parliament’s Treasury Committee on Tuesday. Mr Carney’s testimony comes after the BoE upgraded its economic forecast, while leaving its inflation forecast and interest-rate policy on hold.

“Since the inflation report was published two weeks ago, we’ve seen downside surprises to wage growth, inflation, and retail sales,” said strategists at TD Securities. “So even after the IR was more dovish than markets expected, we may see a further dovish tone with the IR testimony given the soft tone of the recent data releases.”

Fed minutes

The Federal Reserve will release the minutes of its last monetary policy meeting on Wednesday, though they may seem dated since investors have just heard from Ms Yellen. In her testimony to Congress this week, she painted an upbeat view of the US economy and warned that it would be “unwise” to wait too long before raising interest rates.

Bank of America economists say they believe the minutes will reflect “a great deal of focus on both upside and downside risks,” even as Fed officials “become increasingly constructive on the outlook for the economy.”

Moreover, any discussion on the Fed’s balance sheet is likely to garner interest. “Yellen reiterated the view that the primary tool remains rates and that the balance sheet will only be addressed once the normalization of the fed funds rate is well under way,” said the folks at Bank of America. “We expect the minutes to reinforce this view, but there might be some discussion among members on the issue.”

Overnight US Market :Dow closed up 107 points.Crosses 20600.S&P 500 -Nasdaq Hitting New High

Stocks jumped to new record highs and the Dow shot past 20,600 on Wednesday after more reports showed the U.S. economy continues to strengthen.

The Dow Jones industrial average climbed 107 points, up 0.5% to a new closing high of 20,611.86.

Also building upon their record highs set in the previous session were the S&P 500 and Nasdaq composite, up 0.5% to 2349.25 and 0.6% to 5819.44, respectively.

The encouraging data could push the Federal Reserve to raise interest rates more aggressively from the record lows marked during the Great Recession.

Wednesday’s economic reports give the Federal Reserve more encouragement to raise interest rates, and economists said the possibility is increasing that it may happen at the central bank’s next meeting in March. Retailers had stronger sales in January than economists expected, and inflation at the consumer level was the highest in years. Consumer prices rose 2.5% in January from a year earlier, the highest rate since March 2012.

Fed Chair Janet Yellen said in testimony before a Congressional committee that the strengthening job market and a modest move higher in inflation should warrant continued, gradual increases in interest rates, echoing her comments from a day earlier. The central bank raised rates in December for just the second time in a decade, after keeping rates at nearly zero to help lift the economy out of the Great Recession.

Federal Reserve Chair Yellen is speaking Monday in the US

Janet Yellen is Chair of the Federal Reserve System. The big boss.

  • She is speaking Monday 19 December 2016
  • 1.30PM NY time
  • 1830GMT
  • Topic is The State of the Job Market
  • Speaking at the University of Baltimore 2016 Midyear Commencement, Baltimore, Maryland