Now that the US employment report is behind us, the new trading week will be dominated by central bank decisions (no the Fed decision is not one of them but it will be anticipated on Dec 14th).
ECB interest rate decision. Thursday December 8th at 7:45 AM ET/1245 GMT. The ECB is expected to keep their interest rates unchanged. However, they are expected to announce an extension of the QE program. ECB’s Draghi will have his usual press conference starting at 8:30 AM ET, 1330 GMT. You can expect that press conference to last one hour.
RBA interest rate decision. Monday December 5 at 10:30 PM ET/Tuesday December 6 at 0330 GMT. The Reserve Bank of Australia is expected to keep the rates unchanged at 1.5%. There has been more chatter recently, that the RBA may look to tighten in 2017. Goldman Sach recently said this, as did the OECD. However, Morgan Stanley was out with their trade recommendations that focused on shorting the AUD (see post here). So there is debate. The decision and statement will be eyed for any change in sentiment. The RBA last changed rates in July.
BOC interest rate decision. Wednesday, December 7th at 10 AM ET/1500 GMT. The Bank of Canada is expected to keep rates unchanged at 0.5%. Today the Canada employment report showed job gains of 10.7K vs -15K est. However, it was concentrated in part time jobs for the second consecutive month. The unemployment rate did fall to 6.8% from 7% (equaled the low for the year from June). This week, Gov. Poloz spoke cautiously saying:
All things being equal, need to have bigger shock when you’re in such a zone of uncertainty to prompt a move
At this stage too early to tell impact of Trump election; BOC won’t react to hypotheticals.
Big shock or accumulation of things, could change path
Canada has gone through downsizing phase and resources
Most of bad news for resources behind Canada
Capability may be more important than output gap
Uncertainty from Trumps victory
BOC does not make assumptions about US government policy
We have all the ingredients of divergence in monetary policy with US
If we hadn’t had oil price shock Canada and US economies will be in more similar situations
Bond yields have crept up in last few weeks.. That is something we have to build into calculus going forward
Sales by Canadian owned foreign affiliates are about the same size as total exports every year
Canada will set independent policy
4. Australia GDP QoQ. Tuesday December 6 at 7:30 PM ET/0030 GMT (Wednesday). The eestimate is for a gain of 0.2% vs +0.5% in Q2. The YoY is expected to rise by 2.5% vs 3.3% last.
On the heels of Jeff Gundlach’s “there’s going to be a buyer’s remorse period” warnings yesterday, the other ‘bond king’ has raised similar fears that the Trump rally is overdone (as are the prospects for growth behind it). Putting aside the book-talking as their bond portfolios suffer, Gross echoes Gundlach’s “Trump’s not the wizard of oz” comments, noting that the next president faces serious structural headwinds and warns investors “should move to cash,” as any fiscal stimulus gains will be temporary at best.
As we noted yesterday, speaking to Reuters, Gundlach, who went “maximum negative” on Treasuries on July 6 when the yield on the benchmark 10-year Treasury note hit 1.32 percent and bottom-ticked what may have been a generational low in rates, said that markets could reverse the recent momentum in equities, and at the very latest by U.S. President-elect Donald Trump’s Jan. 20, 2017 inauguration.
The “new bond king” said that the strong U.S. stock market rally, surge in Treasury yields and strength in the U.S. dollar since Trump’s surprising presidential victory more than three weeks ago look to be “losing steam,” Gundlach told Reuters in a telephone interview.
“The bar was so low on Trump to the point people were expecting markets will go down 80 percent and global depression – and now this guy is the Wizard of Oz and so expectations are high,” Gundlach said. “There’s no magic here.”
Gundlach had warned last month that federal programs take time to implement, rising mortgage rates and monthly payments are not positive for the “psyche of the middle class and broadly,” and supporters of defeated White House candidate Hillary Clinton are not in a mood to spend money.
Cash crunch post demonetisation is expected to slowdown India’s GDP growth to 6.5 per cent for the fourth quarter of 2016 and is likely to spill over into the first quarter of 2017, says a report. According to global financial services firm Nomura, the cash shortage is likely to last till January.
Nomura noted that even though the economy experienced a robust aggregate momentum before the demonetisation, its recovery was narrow-based due to weak investments and slow non-agriculture sectors with consumption serving as the only growth engine.
“We expect the cash shortage triggered by demonetisation to last until January and GDP growth to slow to 6.5 per cent in fourth quarter (October-December) and to remain subdued at 7 per cent in the first quarter 2017,” Nomura said.
“However, once the cash shortage eases, we expect a gradual recovery to take hold in the second half of 2017, owing to a boost to government fiscal finances and improved banking system liquidity,” it added.
The credit-deposit ratio (CDR) of the banking system, or the proportion of deposits deployed as loans, dropped 155 basis points to 72.7%, the lowest in six years, in the fortnight ended November 11, data released by the Reserve Bank of India (RBI) showed.
The non-food credit growth during the fortnight hit an at least four-year low of 8.25% on a year-on-year basis, while food credit fell 14.3%.
The last time the CDR had seen a sharper drop was during the fortnight ended April 29, when it fell by 1.65% from the fortnight ago to 75.93%.
The sharp fall in the ratio was primarily because of a jump in the denominator, or a sharp increase in deposits with the banking system, which negated a fall in the credit outgo. During the fortnight under review, total deposits with banks rose by Rs 1.3 lakh crore, or 1.3%, whereas bank credit declined 0.8% to Rs 73.53 lakh crore.
The cash in hand with banks rose nearly 275% from the end of the previous fortnight to Rs 2.47 lakh crore, the highest in at least seven years.
The money parked by banks with the RBI through reverse repo operations under the central bank’s liquidity adjustment facility hit a record high of Rs 4.3 lakh crore as on November 22.
The Bank of Japan last week offered to buy bonds at a fixed yield to curb rising interest rates, playing what was seen as an ultimate trump card far earlier than many expected.
The BOJ announced its first-ever fixed-rate purchase operation on the morning of Nov. 17 to counter mounting fears of an upswing in interest rates. Yields on 10-year Japanese government bonds had climbed steadily since the U.S. presidential election, rising as high as 0.035% the day ahead of the move. The fixed-rated option was introduced only two months ago as part of a monetary policy overhaul in late September that set a target of around zero for long-term yields.
A call went out for two- and five-year JGBs to address the rapid surge in short- and medium-term bond yields, according to the BOJ’s Financial Markets Department. There were no takers: The offered yields were higher than going market rates, meaning the offered prices were lower, sending wise traders elsewhere. But the conditions of the operation sent a strong signal as to how high the central bank will let rates go before stepping in. Yields slid across all maturities after the move was announced.
Since then, “interest rates’ upward climb has been weakened somewhat,” Takako Masai, a member of the bank’s policy board, told reporters after a speech Monday. “I get the sense that the purpose of fixed-rate operations has been well conveyed to markets.”
EM FX ended the week on a soft note, as higher US rates continue to take a toll. EM policymakers are getting more concerned about currency weakness, with Brazil, Malaysia, Korea, India, and Indonesia all taking action to help support their currencies. If the EM sell-off continues as we expect, more EM central banks are likely to act to slow the moves.
Several EM central banks (Hungary, Malaysia, South Africa, Turkey, and Colombia) meet. Most are struggling with sluggish growth, but FX weakness is likely to keep all of them on hold for now. We do not think individual country themes will be very important to investors in this current environment.
Korea reports trade data for the first 20 days of November on Monday. Both exports and imports continue to contract. While the external accounts have been worsening a bit in recent months, the current account surplus is still expected to end the year at around 8% of GDP. Yet the economy remains weak even as political tensions rise.
Thailand reports Q3 GDP Monday. Growth is expected to slow to 3.3% from 3.5% in Q2. For now, the central bank is likely to remain on hold, but low inflation should allow for easing next year if the economy slows further. Next policy meeting is December 21, no change seen then.
Even as the US breaks for Thanksgiving, there is much for investors to consider next week.
Here’s what to watch in the coming days.
The Federal Reserve in November said it would wait for “some further evidence” before raising interest rates. Since then, US labour market, GDP and retail sales data have all come in strong. Investors will now get to parse the minutes of the Fed’s meeting, even with federal fund futures currently implying a 100 per cent chance of a rate rise next month.
Moreover, the minutes of the meeting will be dated as more than a dozen Fed officials have delivered remarks this past week, including Fed chair Janet Yellen. Testifying before the Joint Economic Committee on Thursday, Ms Yellen said that an increase in short-term interest rates could “become appropriate relatively soon”. And on Friday, New York Fed president Bill Dudley said inflation expectations “certainly seem to be” well-anchored, helping cement expectations for a rate rise next month.
“That said, the balance of Committee members in favor of raising rates as soon as the next meeting will be closely watched,” analysts at TD Secirities said. “An overwhelming majority as well as more optimistic views over inflation should help further solidify December rate hike expectations.”
Federal fund futures — or the contracts that investors use to bet on interest rate movements — currently imply a 100 per cent chance of a rate rise next month, compared with 96 per cent on Thursday.
The move comes as New York Fed president Bill Dudley on Friday said that “inflation expectations are well anchored”, adding that “we should be increasingly optimistic that we will reach our inflation objectives over the next few years”.
His remarks arrived a day after Fed chair Janet Yellen said that an increase in short-term interest rates could “become appropriate relatively soon”.
The Federal Reserve could raise U.S. interest rates “relatively soon” if economic data keeps pointing to an improving labor market and rising inflation, Fed Chair Janet Yellen said on Thursday in a clear hint the U.S. central bank could hike next month.
Yellen said Fed policymakers at their meeting earlier in November judged that the case for a rate hike had strengthened.
“Such an increase could well become appropriate relatively soon,” Yellen said in prepared remarks that were her first public comments since the United States elected Republican Donald Trump to be the country’s next president.
Yellen, who was to deliver the remarks to lawmakers at 10 a.m. (1500 GMT) on Thursday, said the economy appeared on track to grow moderately, which would help bring about full employment and push inflation up and toward the Fed’s 2 percent target.
After taking a one day breather, the “Trumpflation” Rally returned with a vengeance as global government bonds tumbled and the dollar rose on renewed speculation the economic outlook is strong enough to allow the Federal Reserve to hike in December (odds are now 94%). Asian shares rose, industrial metals and crude oil fell, European shares and US equity futures were pressured.
As reported last night, the latest bond selloff started in Japan where JGB futures slid after a BOJ buying operation was poorly received, and yields on both the 2Y and 5Y rose to or above the BOJ’s -0.1% interest rate. 10 year Japanese yields have edged back above zero intra-day for the first time since September 21st and the market will at some stage focus on whether the BoJ will defend the zero level, especially if the global yield sell-off gathers pace over the coming weeks and months. It would be a strange decision to abandon the new policy so soon after announcing it so assuming global yields remain elevated they may be forced to buy more JGBs than they thought when the new scheme was announced.