Sun, 28th August 2016

Anirudh Sethi Report


Archives of “interest rate” Tag

Why The Fed Expects 2018 Rates To Be Between 0% And 4.5%

While the debate rages whether Yellen was “hawkishly dovish“, hiking in September just to unleash trillions more in QE once the curve inverts even more as a recent Fed staffer paper suggested, or “dovishly hawkish“, waiting until December or even next year, before making another policy error, there was at least some clarity provided by the Chairwoman’s speech, at regard to the Fed’s forecast for where the Fed Funds rate will be over the next two years.

This is what she said:

as ever, the economic outlook is uncertain, and so monetary policy is not on a preset course. Our ability to predict how the federal funds rate will evolve over time is quite limited because monetary policy will need to respond to whatever disturbances may buffet the economy. In addition, the level of short-term interest rates consistent with the dual mandate varies over time in response to shifts in underlying economic conditions that are often evident only in hindsight. For these reasons, the range of reasonably likely outcomes for the federal funds rate is quite wide–a point illustrated by figure 1 in your handout. The line in the center is the median path for the federal funds rate based on the FOMC’s Summary of Economic Projections in June.

So where does the Fed expect US rates to be in two years?

“The shaded region, which is based on the historical accuracy of private and government forecasters, shows a 70 percent probability that the federal funds rate will be between 0 and 3-1/4 percent at the end of next year and between 0 and 4-1/2 percent at the end of 2018.”

Jackson Hole Conference Schedule And List Of Attendees Released

The Kansas City Fed has released the schedule of its two day Jackson Hole symposium which, officially kicked off with dinner on Thursday night, hosted by dissident regional Fed president, and dissenter, Esther George (she voted against Yellen’s decision to keep rates unchanged in March, April and July). The highlight is tomorrow’s 10am ET Janet Yellen speech titled “The Federal Reserve’s Monetary Policy Toolkit.”

The speech is important because no matter what Yellen says, the market is virtually assured to surge as Citadel’s momentum ignition algos are greenlighted by the NY Fed trading desk.

Note the symbolic bear in the glass cage on the photo below.

Key highlights: Chair Yellen to give speech Friday morning; panel discussion Saturday with Bank of Japan Governor Haruhiko Kuroda, European Central Bank Executive Board Member Benoit Coeure and Bank of Mexico Governor Agustin Carstens

Outline of the program (all times Eastern): 


8 p.m. – Opening Reception and Dinner


  • 10 a.m. – Fed Chair Janet Yellen delivers opening remarks on “The Federal Reserve’s Monetary Policy Toolkit”
  • 10:30 a.m. – Adapting to Change in Financial Market Landscape: authors Darrell Duffie and Arvind Krishnamurthy (Stanford), discussant Minouche Shafik, deputy governor at Bank of England
  • 11:55 a.m. – Negative Nominal Interest Rates: author Marvin Goodfriend (Carnegie Mellon), discussant Marianne Nessen, head of monetary policy at Sweden’s Riksbank
  • 12:55 p.m. – Evaluating Alternative Monetary Frameworks: author Ulrich Bindseil, director of general market operations at European Central Bank, discussant Jean- Pierre Danthine (Paris School of Economics) and Simon Potter, executive vice president at Federal Reserve Bank of New York
  • 3 p.m. – Luncheon address by Christopher Sims (Princeton)
  • 4 p.m. – Conference adjourns for the day

Overnight US Market :Dow closed -33 points

U.S. stocks ended lower Thursday as investors await a key speech on monetary policy tomorrow from the head of the U.S. Federal Reserve.

The Dow Jones industrial average ended down 33 points, or 0.2%. The broader Standard & Poor’s 500 stock index lost 0.1% lower and the Nasdaq composite finished down 0.1%.

Low rates have been a key underpinning of the bullish thesis for stocks — which continue to hover near all-time highs. Wall Street will be closely listening Friday to Fed Chair Janet Yellen’s comments related to the timetable for coming interest rate hikes at a high-profile symposium in Jackson Hole, Wyo. The Fed has held interest rates steady this year, after hiking rates off zero in December for the first time in nearly a decade.

All three major U.S. stock indexes remain within striking distance of their record closing highs set earlier this month.

The yield on the 10-year U.S. Treasury note ticked up to 1.57% in early trading from 1.56% Wednesday ahead of Yellen’s key speech on monetary policy tomorrow.

In economic news, durable goods orders for long-lasting products like refrigerators and commercial aircraft, jumped 4.4% in July, topping expectations.

Reserve Bank unlikely to reduce rates before April 2017, says EIU

RBI is unlikely to cut rates before April 2017, according to the Economist Intelligence Unit (EIU), which has said outgoing Governor Raghuram Rajan has tamed inflation by refusing to bow to the government’s desire for lower rates.

EIU has also said Rajan’s determination has boosted real income for households and made policy-making more predictable for investors.

“… inflation has been tamed, owing to Rajan’s refusal to bow to the government’s desire for lower interest rates,” EIU Chief Economist Simon Baptist has said.

RBI Deputy Governor Urjit Patel will be succeeding Rajan, whose term ends on September 4.

“Assuming that he (Patel) does not veer off from past views, this means that RBI will accord a high priority to meeting the inflation target, set at 2-6 per cent. His promotion means that broad policy continuity should be maintained with little operative disruption,” EIU said in a note.

“Based on past statements by Patel, the chances of another interest rate cut during the remainder of 2016 have dimmed.”

PBOC sets yuan reference rate for today at 6.6602 (vs. yesterday at 6.6420)

PBOC inject 140bn yuan through 7-day reverse repos in open market operations (OMOs) today

And for 14-day reverse repos, PBOC injects 80bn yuan 
Some quite large injections of yuan into money markets …. and a weak yuan … PBOC monetary stimulus continues
Also, come comments from PBOC deputy Governor Chen Yulu on the wires :
  • China to keep prudent monetary policy
(If an official there ever says “China to make imprudent monetary policy ” I’ll be more likely to make a fuss 😀 )
And more:
  • China will continue differentiated RRR policy

ALERT-Turkish central bank cuts lending rate

Turkey’s central bank has cut its lending rate again, continuing on the path it has trodden since March, but left its benchmark repo rate on hold.

Policymakers cut the country’s overnight lending rate by 25 basis points (0.25 percentage points), from 8.75 per cent to 8.5 per cent – a move that was predicted in a poll of economists surveyed by Bloomberg.

The central bank’s two other rates – its overnight borrowing rate and benchmark repurchase rate – remained unchanged at 7.25 per cent and 7.5 per cent respectively. The decision left the lira little changed at TRY2.9333 to the dollar.

In a separate release earlier on Tuesday, Turkish consumers held up in the wake of a failed military coup which has been followed by a fierce crackdown on suspected rebels in the judiciary, military and public sector. August’s consumer confidence index rose to 74.4 from the 67 hit in July.

Don’t hold your breath on Jackson Hole hike guidance say Royal Bank of Scotland

Royal Bank of Scotland out with a client note on USD 22 August 2016

The minutes from the July FOMC meeting were less hawkish than the market feared as the Committee was divided on the need for another interest rate hike. It’s important to remember that the decision to act will ultimately rest with Yellen and that there will be no rate hike until she believes a rate hike is warranted.

As our economic desk strategists not some participants stressed that the Committee needed to consider the constraints on the conduct of monetary policy associated with proximity to the effective lower bound on short-term interest rates. In their view, the “some” participants noted above almost certainly includes Yellen. She seems to be sticking to her risk management policy approach and feels little urgency to raise rates.

However, the Minutes pre-date the strong July US employment report. Dudley appeared to want to stress this in his comments this week.

So could Yellen reinforce Dudley’s comments at Jackson-Hole on Friday? We think not. It’s an academic conference that concentrates on long-term themes and has in recent years moved away from short-term policy signals. The tone may therefore reflect recent comments from Powell/Williams about low productivity growth and low neutral rates. But Yellen talking about lower long-term rates isn’t the same as dampening expectations of a near-term rate increase.

We therefore still believe risk/reward favours USD upside against the EUR, GBP and JPY. Discussions about lower terminal rates should ensure that EM FX out-performs the G4 currencies.

ECB Warns of Fresh Financial Woes Due to Post-Brexit Blowback

The European Central Bank (ECB) has warned that the shock decision of the UK to exit the EU has meant that the Eurozone faces damaging “new headwinds.”

ECB policymakers acknowledged that economic “downside risks had clearly increased,” in minutes from a European Central Bank July meeting released on Thursday. It added that shaken investors acting more cautiously following the UK’s shock June referendum result, has resulted in “a significant decline in government bond yields.”

“The uncertainty following the UK referendum was, in large part, of a political nature and due to the lack of clarity about the new relationship between the UK and rest of the EU.

“The uncertainty of the situation itself could affect the global economy in deeper and less predictable ways.”

RBI Governor need not be a ‘rock star’ to be successful: Fitch

RBI Governor need not have a rock star status to be successful and India’s ratings would depend on its policies and not any specific personality, Fitch Ratings today said.

Fitch’s comment comes in the backdrop of government elevating RBI Deputy Governor Urjit Patel as the Governor of the Reserve Bank.

“A central bank governor does not need to have a rock star status to be successful in reigning in inflation or cleaning up the banking sector,” Fitch Ratings Director, Asia-Pacific Sovereigns Group, Thomas Rookmaaker said.

US-based rating agencies Moody’s and Fitch also said that Patel as the next RBI Governor signals a likelihood of policy continuity.

“We assume continuity of the RBI’s policies under the new Governor, Patel,” Moody’s Investors Service SVP, Sovereign Risk Group Marie Diron said.

Fitch said outgoing Governor Raghuram Rajan has set in positive transformation starting with recognition of high inflation and weak bank balance sheets problems.

Echoing  similar views, Rookmaaker said: “Patel’s appointment as the next RBI governor signals a strong likelihood of policy continuity.”

From rating perspective, policies are more important than personalities, he added.

Pound slips to 3 year low against the euro

Some summertime woes for British holidaymakers in Europe.

The pound has fallen to a three-year low against the single currency as the expectation of diverging monetary policy in the UK and Europe puts pressure on sterling.

The euro is up 0.13 per cent against the pound to £0.865 on Monday and has gained 14 per cent since the UK voted to leave the EU on June 23 – pushing it up to its strongest level since August 2013.

Investors will be keeping a keen eye on a slew of fresh UK economic data this week as we get the the first major releases on the state of inflation, unemployment, retail sales and the public finances in the first whole calendar month after the referendum.

The Bank of England has said it stands ready to make further interest rate cuts should the economy show further signs of deterioration this year. Markets are pricing in a 33 per cent implied probability of a lowering of Bank rate before the year is out.