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.
Gold imports by India, which competes with China for the role of world’s biggest consumer, are said to have risen almost three-fold in February from a year earlier as jewellers increased stockpiles before the festival and wedding period that starts next month.
Shipments jumped 175% to 96.4 metric tons in February from a year earlier, according to a person familiar with provisional data from the finance ministry, who asked not to be identified as the data aren’t public. Overseas purchases slid 32% to 595.5 tons in the 11 months to February. Ministry spokesman D. S. Malik declined to comment on the data.
After a lull in demand exacerbated by Prime Minister Narendra Modi’s move to withdraw high denomination currency notes, jewellers are building up inventories.
They expect to see some recovery in purchases ahead of India’s wedding season and on the auspicious Hindu gold-buying day of Akshaya Tritiya that falls toward the end of April this year.
China’s National People’s Congress gets underway this weekend, and investors will get an update on the health of the US labour market.
Here’s what to watch in the coming days.
Li Keqiang, China’s premier, delivers the country’s proposed economic targets on Sunday at the opening of the fifth session of the 12th National People’s Congress, the country’s top legislature.
While much of the discussion takes place in closed-door meetings, economists are paying attention to the Government Work Report and the 2017 growth target. Jian Chang, economist at Barclays, said their base case is for 6.5 per cent growth. He also expects the government to maintain the budget deficit at 3 per cent and inflation target at 3 per cent.
On the politics front, China-watchers will keep their eyes peeled for clues on who could make it to China’s 25-member Politburo and possibly the Politburo Standing Committee (PSC), following a reshuffle of some senior provincial and central government leaders, particularly with the 19th Party Congress scheduled for this fall.
UK chancellor Philip Hammond will present his first budget on Wednesday, and economists expect it to show a decline in gilt issuance.
“The UK economy has outperformed earlier forecasts, and so there should be a bit more revenue to play with, leading to the first decline in borrowing in 3 years,” strategists at TD Securities said. “But we see a cautious budget with few giveaways as the UK approaches Brexit.”
Following Yellen’s speech which did not throw any curve balls to this week’s sharply revised, hawkish narrative by her FOMC peers, a March rate hike – according to Goldman – appears to be in the books. In a note moments ago by Goldman’s Jan Hatzius, the investment bank said that the bottom line is that “Fed Chair Yellen said today that a rate increase at the March FOMC meeting “would likely be appropriate”, as long as incoming data continue to confirm officials’ outlook. We see this as a strong signal for action at the upcoming meeting, and have raised our subjective odds of a hike to 95%.”
Goldman’s key points:
1. In remarks this afternoon, Fed Chair Yellen indicated a readiness to raise the funds rate at the FOMC’s March 14-15 meeting in fairly explicit language. She said that as long as “employment and inflation are continuing to evolve in line with” officials’ expectations, “a further adjustment of the federal funds rate would likely be appropriate”. As a result, we now see a hike at the March meeting as close to a done deal, and have raised our subjective probability to 95%.
2. The remainder of Chair Yellen’s speech focused on the Fed’s post-crisis monetary policy strategy in general, and did not discuss incoming data in much detail. However, given constructive comments about current economic conditions from many Fed officials this week—including from Vice Chair Fischer at today’s US Monetary Policy Forum—we think committee members will see recent news as consistent with their outlook, and therefore supportive of further tightening. At this stage, the February employment report—to be released next Friday—may have more bearing on the committee’s guidance about action after the March meeting than on its decision whether to hike this month.
While in recent weeks there has been a material increase in Fed balance sheet normalization chatter, according to a new report from Deutsche Bank analysts, it may all be for nothing for one simple reason: should the US encounter a recession in the next several years, the most likely reaction by the Fed would be another $1 trillion in QE, delaying indefinitely any expectations for a return to a “normal” balance sheet.
As a reminder, as of this month, the duration of the latest expansionary cycle – as defined by the NBER – has reached 93 months, surpassing the 92 months of the 1982-1990 cycle, and is now the third longest in history. Should the cycle persist for another 27 months, or just under two and a half years, it would be the longest period of “economic growth” in history.
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.
The dollar hit its highest level in more than six weeks on Wednesday morning, amid a sharp increase in bets that the US Federal Reserve will raise interest rates this month.
The dollar index hit 101.78 on Wednesday morning, its strongest level since January 12th and a 0.3 per cent rise on the day, following hawkish comments from an influential member of the Federal Reserve’s policy-setting board.
The probability that rates will rise when the Federal Reserve meets this month shot up from 50 per cent to 80 per cent yesterday after William Dudley, head of the New York Federal Reserve, said that the prospects for adding to the December 2016 rate increase had become “a lot more compelling”.
His comments helped the dollar to overcome a lacklustre reaction to President Donald Trump’s first speech to Congress last night, which outlined plans to ask for $1tn in infrastructure spending – which would be a boost to the US economy – but was lacking in detail some investors had hoped for.
The rise in the dollar sent the pound to its weakest level in more than three weeks at $1.2348. The US currency was up 0.7 per cent against the Japanese yen at Y113.5 while the euro fell 0.3 per cent to €1.0544.
John Williams, president of the Federal Reserve Bank of San Francisco, says that an interest-rate increase is “very much on the table for serious consideration” by the central bank at its upcoming meeting in March.
The remarks — which came in the text of a speech set to be delivered on Tuesday to business leaders in California — sent investors’ expectations climbing. Fed funds futures signalled that investors are now pricing in a 56 per cent chance of an increase at March, up from 52 per cent earlier on Tuesday, and 36 per cent a week ago, according to Bloomberg calculations.
Mr Williams cited a strong outlook for the economy, which he said was in its eighth year of expansion with the workforce at full employment and inflation zeroing in on the Fed’s 2 per cent target. A rate increase would be one tool Fed policymakers could consider to help keep that momentum going, he said, according to a text of his prepared remarks.
Mr Williams is an alternate voting member of the rate-setting Federal Open Markets Committee, he has recently taken a hawkish tone in his public appearances, arguing that gradual increases in rates could help keep mitigate the hazards of an overheating economy, particularly given employment levels.
While Bank of Japan officials see no grounds for Donald Trump’s accusation of currency devaluation, they still worry that the bank’s unique measure to control long-term rates could become the next target as the president continues his rhetorical battles.
“I have no idea what he is saying,” said one baffled BOJ official after learning about the criticism Trump leveled against the central bank.
Bond investors seem similarly perturbed. Yields on 10-year Japanese government bonds temporarily rose 0.025 percentage point Thursday, hitting 0.115% — the highest since the BOJ announcement of negative interest rates Jan. 29, 2016. The climb also reflects market anxiety over whether the central bank will continue buying up JGBs at the current pace.
BOJ Gov. Haruhiko Kuroda refuted Trump’s accusation in the Diet on Wednesday, saying Japan’s monetary policy is designed to defeat persistent deflation and not to keep the yen weak. “We discuss monetary policy every time Group of 20 finance ministers and central bankers meet,” he said. “It is understood among other central banks that [Japan] is pursuing monetary easing for price stability.”
In fact, U.S. monetary policy is chiefly responsible for the yen’s depreciation against the dollar. The Federal Reserve in 2015 switched to a tightening mode after keeping interest rates near zero for years, judging quantitative easing to have worked its expansionary magic on the economy. The gap between American and Japanese rates is now the widest it has been in around seven years, encouraging heavier buying of the dollar — the higher-yielding currency — than the yen.