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Sun, 25th June 2017

Anirudh Sethi Report

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Archives of “interest rate” Tag

The FOMC statement for June meeting -Full Statement

June FOMC Statement

Information received since the Federal Open Market Committee met in May indicates that the labor market has continued to strengthen and that economic activity has been rising moderately so far this year. Job gains have moderated but have been solid, on average, since the beginning of the year, and the unemployment rate has declined. Household spending has picked up in recent months, and business fixed investment has continued to expand. On a 12-month basis, inflation has declined recently and, like the measure excluding food and energy prices, is running somewhat below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, and labor market conditions will strengthen somewhat further. Inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee’s 2 percent objective over the medium term. Near term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.

In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1 to 1-1/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.

Key economic releases this week

For week starting June 12, 2017

The week ahead will be highlighted by the FOMC meeting on Wednesday at 2:00 PM ET/1800 GMT.

The Federal Reserve is expected to raise rates by 0.25% basis points and target 1.25% to 1.50%. This would be the 4th increase in the unwind for the Fed.  The Fed will also give their projections on GDP, employment, inflation and the projection of rates going forward.   They may also give more detail on tapering QE. 

Other key events:

Tuesday:

UK CPI 4:30 AM ET/0830 GMT.  The expectation is for YoY to remain unchanged at 2.7%. The Core is expected to decline to 2.3% from 2.4%. MoM is expected to increase by 0.2%.

US PPI for May, 8:30 AM ET/1230 GMT. The US PPI is expected remain unchanged MoM and dip to 2.3% YoY (from 2.5% last).  Ex food and energy the MoM is expected to rise 0.2% vs 0.4% last and remain at 1.9% for the YoY

Wednesday:

UK employment statistics will be released at 4:30 AM ET/0830 GMT.  The employment change (3M/3M) is expected to rise by 125K vs 122K last month. The Unemployment rate is expected to remain unchanged at 4.6%.  Average hourly earnings are expected to remain unchanged at 2.4%. 

US CPI for May, 8:30 AM ET/1230 GMT.  US CPI for May is expected to remain unchanged at 0.0% (0.2% last month). Ex Food and energy expected to rise by 0.2%. YoY is expected to decline to 2.0% from 2.2% last month with Ex food and energy remaining unchanged at 1.9%.

US retail sales for May, 8:30 AM ET/1230 GMT.  US retail sales for May is expected to increase by 0.1% for the month (vs +0.4% last month).  The ex auto is expected to rise by 0.1% (vs 0.3%). The control group is expected to rise by 0.3% vs 0.2% last.

Thursday:

Japan’s central bank nearly doubles ETF holdings in one year

The Bank of Japan has stepped up purchases of exchange-traded funds as part of its monetary easing policy, with the balance surging to 15.93 trillion yen ($144 billion) as of March 31.

The total marks an 80% rise from a year earlier and more than a sevenfold increase since the central bank kicked off its quantitative and qualitative easing — adding riskier assets to its balance sheet — in April 2013. ETF purchases have gradually increased under the unconventional policy, expanding to 6 trillion yen a year in July 2016 from 3.3 trillion yen.

 The bank apparently buys frequently on days when the stock market dips in the morning, serving to stabilize share prices.

“The BOJ’s ETF purchases help provide resistance to selling pressure against Japanese stocks,” says Rieko Otsuka of the Mizuho Research Institute.

Should the current pace of buying continue, the BOJ’s ETF holdings would reach about 30 trillion yen in about two years. The market capitalization of the Tokyo Stock Exchange’s first-section companies comes to 550 trillion yen.

The bank’s growing market presence has raised concerns about the repercussions when the easing policy eventually winds down. When speculation of a BOJ exit grows, the anticipated cutbacks on ETF purchases would accelerate selling of Japanese stocks. As a precaution against a sharp market decline, “the BOJ many need to set aside provisions,” Otsuka says.

Six big events coming up on the economic calendar in the day ahead

1 )Japan jobs and consumers

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).

Four Numbers to Watch in Forex

The US dollar’s downside momentum faded today.  While one should not read much into it, it could be an early sign that the market has discounted the recent news stream,  which includes the fear that the political turmoil in the Washington will adversely impact the President’s economic program, and the continued above trend growth in the eurozone.
The Fed funds futures continue to discount a strong change of a June Fed hike.  Bloomberg puts the odds at 95% of a hike, while the CME’s model says it is about 83% discounted.  Our calculation puts it at 81%.  A June hike would put the Fed funds target range at 1.00%-1.25%.  
Although the two-year note is trading a few basis points through the top of the presumed new range, the odds that the Fed funds target range will be 1.25%-1.50% by the end of the year is also rising slowly.  Bloomberg sees a 45% chance, up from about 28% a month ago.  The CME sees the odds at 39% compared with about 30% a month ago.  
European growth remains above trend and the flash May PMIs today suggest another strong quarter. However, price pressures remain elusive.  Prices in the PMI fell for the first time in 15 months.    To suggest the ECB could hike rates if it weren’t for the low inflation , is like asking, “Besides that Mrs Lincoln, how was the play?”

Raghuram Rajan Warns “The Fundamental Problems Of The Financial Crisis Are Still With Us”

Raghuram Rajan, Professor of Finance at the University of Chicago and former governor of the Reserve Bank of India, warns of more turmoil ahead if the developed world fails to adapt to the fundamental forces of global change.

 

It is a pivotal moment on the eve of the financial crisis. In the late summer of 2005, the world’s most influential central bankers and economists gather in Jackson Hole at the foot of the Rocky Mountains. The atmosphere is carefree. Financial markets have nicely recovered from the bust of the dotcom bubble and the global economy is humming. Under the topic »Lessons for the Future» the presentations celebrate the era of Federal Reserve chairman Alan Greenspan, who has announced to resign in a few months. Since 1987 at the helm of the world’s most powerful central bank, he presided over a period of continuous growth and was one of the leading forces of deregulation in the financial sector.

 But when Raghuram Rajan steps to the podium the mood suddenly turns icy. At that time the chief economist at the International Monetary Fund, the native Indian warns that unpredictable risks are building up in the financial system and that the banks are not prepared for an emergency. His dry analysis draws spiteful remarks. »I exaggerate only a bit when I say I felt like an early Christian who had wandered into a convention of half-starved lions», he recollects.

 Soon, however, his prediction turns out to be correct. Less than one year later, the US housing boom runs out of steam which triggers the worst recession since the Great Depression. Today, Mr. Rajan who governed the Reserve Bank of India until last fall and now teaches finance at the University of Chicago, is reputed as one of the most distinguished economic thinkers on the planet. So what prompted him to voice his concerns at that time in Jackson Hole? Where does he think the world stands in the spring of 2017? And what is his outlook for the coming years?

Nigeria naira slides to 405 to dollar on black market

When it comes to Nigeria’s currency, mind the gap, again: the spread between the official and parallel market rates for the naira is widening once more.

During a more than two-week run, the naira strengthened to a six-month high of 390 per dollar on the black market – close to one of the multiple official exchange rates, but still far off the interbank rate of around 305 to the dollar.

However, the naira is weakening once more on the black market, slipping below 400 to the dollar, to 405 to the dollar on Monday, according to traders.

In the absence of adequate supplies of dollars in the official market, businesses and individuals have been forced to buy hard currency on the black market, stoking demand there and eventually weakening the naira to a record low of 520 in February. Analysts said the gap between the official rate of just over 300 to the dollar and the black market one indicated the scale of unmet demand for hard currency in Africa’s most populous nation.

Emerging Markets :An update

  • Reserve Bank of India surprised markets with the start of the tightening cycle.
  • The Czech National Bank (CNB) ended the EUR/CZK floor.
  • Israeli central bank said it won’t hike rates until Q2 2018.
  • Both S&P and Fitch cut South Africa’s rating one notch to sub-investment grade BB+.
  • Moody’s put South Africa’s Baa2 rating on review for a downgrade
  • S&P upgraded Argentina one notch to B with stable outlook.
  • Brazil’s government will water down its pension reform plan
  • Brazil’s central bank corrected some errors in its inflation report.

In the EM equity space as measured by MSCI, the Philippines (+3.8%), Chile (+3.5%), and Poland (+3.4%) have outperformed this week, while Korea (-0.7%), Turkey (-0.6%), and Peru (-0.5%) have underperformed.  To put this in better context, MSCI EM rose 0.3% this week while MSCI DM fell -0.5%. 

In the EM local currency bond space, Bulgaria (10-year yield -11 bp), Chile (-6 bp), and South Africa (-6 bp) have outperformed this week, while India (10-year yield +17 bp), Turkey (+12 bp), and Indonesia (+10 bp) have underperformed.  To put this in better context, the 10-year UST yield fell 6 bp to 2.33%. 
In the EM FX space, CZK (+1.7% vs. EUR), INR (+0.9% vs. USD), and EGP (+0.7% vs. USD) have outperformed this week, while ZAR (-3.0% vs. USD), TRY (-2.7% vs. USD), and RUB (-1.6% vs. USD) have underperformed.

Reserve Bank of India surprised markets with the start of the tightening cycle.  It hiked the reverse repo rate 25 bp to 6.0% but left the repo rate steady at 6.25%.  The decision was unanimous, and we expect further tightening as the year progresses.

Emerging Market :An Update

EM FX was mixed last week.  The rebound in oil helped some, such as COP, RUB, and MXN.  On the other hand, idiosyncratic political risks weighed on South Africa.   This week could pose a challenge to EM, with lots of Fed speakers, FOMC minutes, and US jobs data.

Thailand reports March CPI Monday, which is expected to rise 1.30% y/y vs. 1.44% in February.  If so, this would be moving closer to the bottom of the 1-4% target range.  BOT just left rates steady at 1.5% last week.  We expect inflation to pick up again, and so BOT should tilt more hawkish as the year progresses.  Next policy meeting is May 24, and we expect steady rates again.  

Indonesia reports March CPI Monday, which is expected to rise 3.80% y/y vs. 3.83% in February.   The target range is 3-5%, but Bank Indonesia has signaled that the easing cycle is over, and should lean more hawkish this year if inflation continues to rise.  Next policy meeting is April 20, we expect rates to be kept steady at 4.75%.
Turkey reports March CPI Monday, which is expected to rise 10.70% y/y vs. 10.13% in February.  Inflation is moving further above the 3-7% target range, and the central bank hiked the Late Liquidity Window lending rate 75 bp to 11.75% at its last policy meeting.  If price pressures continue to rise, the central bank may have to tighten again at its next policy meeting April 26.
Korea reports March CPI Tuesday, which is expected to rise 2.1% y/y vs. 1.9% in February.  The inflation target is 2%, and so BOK should tilt more hawkish if inflation continues to rise.  Next BOK meeting is April 13, and we expect rates to be kept steady at 1.25%.  Korea reports February current account data Wednesday.
Hungary reports February retail sales Tuesday, which are expected to rise 3.5% y/y vs. 3.8% in January.  It reports February IP Wednesday, which is expected to rise 3.0% y/y vs. 1.6% in January.  February trade will be reported Friday.  The economy remains robust, and yet the central bank just eased policy more than expected last week.  The cap on 3-month deposits was cut to HUF500 bln for end-Q2 from HUF750 bln for end-Q1.  

SNB leaves rates unchanged at March 2017 meeting

Swiss National Bank leaves rates unchanged at March 2017 monetary policy meeting

  • 3 month LIBOR lower target range -1.25%
  • 3 month LIBOR upper target range -0.25%
  • Sight deposit rate -0.75%

All as expected.

  • Will remain active in FX market as necessary
  • Swiss Franc significantly overvalued
  • Swiss forecasts is marked by considerable uncertainty from international risks
  • Raises 2017 CPI forecast to 0.3% vs 0.1% in Dec
  • 2018 CPI 0.4% vs 0.5% prior
  • 2019 CPI 1.1%
  • Maintains 2017 GDP at “roughly” 1.5%