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Sun, 25th June 2017

Anirudh Sethi Report

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Archives of “keynesian economics” 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:

Upcoming Week :Central banks in the spotlight

This week, it’s all about the central banks, and monetary policy-watchers will have their plates full with decisions on deck from the US, UK, Russia and Japan.

Here is what investors will be watching in the days ahead:

US Fed

The real focus will be on Fed chair Janet Yellen’s press conference following the meeting. She is likely to give some insight into how the Fed perceives the mixed bag of economic readings and whether that will knock the central bank off of its expected path for the year.

There could also be some adjustments on tap for the Fed’s inflation or unemployment projections in light of recent data. And, more importantly, Ms Yellen may offer some insight on the Fed’s plans for starting to reduce the size of its $4.5tn balance sheet, which bank officials have been teasing for several months now. The biggest question analysts are asking is whether that plan gets debuted at the September meeting or if central bankers would prefer to wait until December.

UBS economists offered this to help read the tea leaves next week:

Fitch Downgrades Italy To BBB From BBB+

Having largely disappeared from the market’s scope for the past 6 months, ever since Europe “bent” its rule allowing the bailout of Monte Paschi and several smaller banks despite Italy having the greatest amount of disclosed NPLs of any European nation, moments ago Fitch decided to drag Italy right back in the spotlight when it downgraded Italy to BBB from BBB+, citing “Italy’s persistent track record of fiscal slippage, back-loading of consolidation, weak economic growth, and resulting failure to bring down the very high level of general government debt has left it more exposed to potential adverse shocks. This is compounded by an increase in political risk, and ongoing weakness in the banking sector which has required planned public intervention in three banks since December.

And some more:

 Italy has missed successive targets for general government debt/GDP, which increased by 0.5pp in 2016 to 132.6%. This is 11.2% of GDP higher than the target in the Stability Programme of 2013, the year Fitch downgraded Italy’s Long-Term IDRs to ‘BBB+’, and compares with the current ‘BBB’ range median of 41.5% of GDP. Fitch forecasts general government debt to peak at 132.7% of GDP in 2017, falling only gradually to 129.3% in 2020 in our debt sensitivity projections.

 Fitch’s rating Outlook for the Italian banking sector is Negative, primarily reflecting the challenge of reducing the high level of un-provisioned non-performing loans (NPLs), alongside weak profitability and capital generation. The rate of new NPLs edged down to 2.3% in 4Q16, and there is some greater impetus for disposals and write-downs, which has slightly reduced total NPLs. However, sofferenze, the worst category of loans, increased to EUR203 billion in February, from EUR199 billion in October. Total NPLs amount to close to 17.5% of loans and 20% of GDP, and just over half are provided against.

 In our view, political risks have increased since Fitch’s previous rating review. Current polls point to a further hollowing out of support for more centrist parties and to a fragmented political landscape that could result in minority government. Risks of weak or unstable government have increased, as has the possibility of populist and eurosceptic parties influencing policy. Greater populism may dampen political appetite for reform, increase the pressure for fiscal loosening, and weigh on investor sentiment.

With France – and much of Europe – already on edge due to populist tensions, is Italian sovereign – and bank – risk about to make a grand reapparance? For the answer, check in when Europe opens on Monday.

Meanwhile, Italian CDS trades at 190bps, wider than Russia, Croatia and almost as wide as South Africa.

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%

“It Can Only Disappoint” – What Wall Street Expects From Friday’s Payrolls Report

Following Wednesday’s blowout ADP report, which printed some 40K jobs higher than the highest estimate, the only possibility for tomorrow’s nonfarm payroll report, the last major economic data point before the Fed’s March 15th rate hike announcement, is to disappoint, especially in terms of wages (which in light of the recent downward revision of Q1 GDP by the Atlanta Fed to 1.2% is not out of the question). That possibility, however, is slim to none if one looks at Wall Street’s forecasts, where virtually every sellside analyst boosted their NFP estimate in the hours after the ADP number. Still, with the market pricing in a 100% chance of a rate hike, only a very disappointing – think less than 100K – report will derail the Fed from hiking for the second time in three meetings.

Here are some of the more notable forecasts for tomorrow’s number::

  • Westpac 170K
  • Bank of America 185K
  • BNP 185K
  • Barclays 200K
  • Deutsche Bank 200K
  • Goldman Sachs 215K
  • Nomura 235K
  • Morgan Stanley 250K

Putting it all together, here is what Wall Street expects from the February payrolls report due out at 8:30am ET tomorrow morning:

  • Change in Nonfarm Payrolls: Exp. 193K (Prey. 227K, Dec. 157K)
  • Unemployment Rate Exp. 4.70% (Prey. 4.80%, Dec. 4.70%)
  • Average Hourly Earnings M/M Exp. 0.30% (Prey. 0.10%, Dec. 0.20%)

China’s State Budget Deficit to Amount to $346 Billion in 2017 – Draft Budget

According to the document, the deficit-to-GDP ratio is expected to be at the level of 3 percent, while the registered urban unemployment rate will reach 4.5 percent.

The GDP growth in China is expected to amount to 6.5 percent or more in 2017, which has been the worst indicator in the past 26 years.

“The GDP will grow by about 6.5 percent but in practice we will try to achieve better results,” according to the report by China’s National Development and Reform Commission (NDRC), published before the opening of the National People’s Congress.

On Saturday, China’s National People’s Congress (NPC) announced that Beijing will increase by around 7 percent this year, as compared to last year’s $146 billion.

According to China’s National Statistics Bureau, the GDP growth declined to 6.7 percent in 2016 from 6.9 percent in 2015, which has been the worst results in the past 26 years.

Next Week :Watch For China, US jobs, ECB

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.

China

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 budget

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.”

European Central Bank

Fed’s Yellen: Hike appropriate at one of its upcoming meetings

Fed’s Janet Yellen Humphrey Hawkins testimony 14 February 2017

  • Rate hike will likely be appropriate at one of its upcoming meetings if employment and inflation evolve in line with expectations
  • Reiterates the view that three hikes are possible in line with Fed forecasts
  • Repeats, waiting too long to tighten would be unwise
  • Gradual increases in Fed funds rate will likely be appropriate but mon pol is not on a set course
  • Hopes that fiscal policies will be consistent with putting the US on a sustainable trajectory
  • Incoming data suggests that the labour market continues to strengthen and inflation moving up to 2% in line with FOMC expectations

The buck has jumped on what is pretty much a repeat of the last FOMC meeting. USDJPY is up to 114.20 on this.

Traders have jumped on the “upcoming meeting” comment but that’s a straw clutch at best, as far as picking a date goes.

China Jan consumer inflation quickens to 2.5 percent, beating forecasts

China’s consumer inflation rate quickened to 2.5 percent in January from a year earlier, the highest since May 2014 and beating market expectations.

Analysts polled by Reuters had predicted the consumer price index (CPI) would rise 2.4 percent, the biggest gain in nearly three years, versus a 2.1 percent gain in December.

 The producer price inflation rate accelerated to 6.9 percent, the National Bureau of Statistics said on Tuesday, compared with the previous month’s rise of 5.5 percent.

The producer price index (PPI) rose the fastest since August 2011.

The market had expected producer prices to rise 6.3 percent on an annual basis.