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Fri, 26th May 2017

Anirudh Sethi Report

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Archives of “money supply” Tag

When Economists get news they don’t want to hear

The problem with predictions and ego

Pickup and economists research note from the past month and it’s likely to say the same thing — the Fed is going to hike in June.

Everyone is singing from the same hymnbook. The problem is that the Fed is the piano player and yesterday changed its tune. This is the line in the FOMC Minutes:

“Members generally judged that it would be prudent to await additional evidence indicating that the recent slowing in the pace of economic activity had been transitory before taking another step in removing accommodation.”

That can’t be misunderstood.

What it says is that if economic data continues to be soft, they’re not hiking in June.

That doesn’t mean that a hike is off the table but it certainly means that it’s not a sure thing.

Here are a few data points since the May 3 meeting:

  • Q1 nonfarm productivity -0.6% vs -0.1% exp
  • Factory orders +0.2% vs +0.4% exp
  • Nonfarm payrolls 211K vs 190K exp
  • Avg hourly earnings 2.5% vs 2.7% y/y exp
  • JOLTS 5743K vs 5725K exp
  • Core PPI +0.7% vs +0.2% exp
  • CPI +2.2% y/y vs +2.3% exp
  • Retail sales control group +0.2% vs +0.4%
  • Empire Fed -1.0 vs +7.5 exp
  • NAHB housing market index 70 vs 68 exp
  • Housing starts 1172K vs 1260K exp
  • Building permits 1229K vs 1270K exp
  • Industrial production +1.0% vs +0.4%

FOMC meeting minutes: Balance sheet plan would raise rolll off caps every 3 months

Tightening likely appropriate soon” most Fed officials said

Other comments:
  • Prudent to only evidence a slowdown is transitory
  • Fed officials still saw gradual tightening as appropriate
  • FOMC expected consumer spending to rebound in coming months
  • Fed staff outline plan for gradual phaseout of reinvestment
  • Most Fed officials: inflation data reflects transitory factors
  • Nearly all Fed officials favorite staff proposal on rolloff caps
  • risks from some elevated commercial property values
  • a few Fed officials concern progress on inflation goal slowed
  • jobless rate of 4.5% at or below Fed officials long run levels
  • almost all Fed officials favor starting to shrink assets in 2017
  • deregulation could raise financial risks according to several Fed officials

The meeting minutes can be found here….

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?”

Both ECB And BOJ Are Just Months Away From Running Out Of Bonds To Buy

With the Fed contemplating whether to hike again next month and start “normalizing ” its balance sheet before the end of 2017, the two other major central banks are facing far bigger problems.

* * *

Two months after the BOJ quietly started tapering its QE program, when it also hinted it may purchase 18% less bonds than planned…

… Governor Haruhiko Kuroda admitted last week that the Bank of Japan’s bond holdings are currently growing at an annualized pace of only ¥60 trillion ($527 billion), 25% below the bottom-end of its policy range, and confirming that without making any formal announcement, the BOJ has quietly followed the ECB in aggressively tapering its bond buying program.

US Student Debt Soars to $1.3 Trln, Hurting Household Purchasing Power

US student loans, having boomed in the past 8 years, surged to their all-time highest at an aggregated $1.3 trln, representing roughly 11 percent of total outstanding household debt in the US, with over 7 mln borrowers unable to serve their obligations.

The situation is significantly holding back the improvements in consumer sentiment, offsetting recent improvements in the labour market, and limiting the prospects of US economic growth.

With some 72 percent of the US GDP driven by consumer purchases, the mounting concerns over student loans, especially non-performing loans (NPLs), are becoming an increasingly prominent factor is assessing the prospects of any further economic acceleration. Particularly so, as the Federal Reserve is normalising the US monetary conditions with borrowing costs going up, the issuance of the debt and refinancing of existing loans is now more expensive, and the downside risks of the monetary policy are increasingly prominent in the projected dynamics of the broader GDP expansion.

According to the Federal Reserve Bank of New York, during the past 15 years, the burden of student loans in the US economy has increased from just 3.3 percent of overall household indebtedness in 2003 at $240.7 bln to the current $1.3 trln, or 10.6 percent of total household debt. About 44 mln Americans currently have a student loan to service, and about every sixth borrower has defaulted on their obligations.

Key Economic releases/events next week

For the week starting May 14th, 2017

Monday May 15, 2017
  • New Zealand Retail sales.
  • China Industrial Production
  • US Empire state Manufacturing index
Tuesday, May 16, 2017
  • Australia Monetary Policy Meeting minutes
  • UK CPI
  • ECB Notwotny speaks
  • ECB Coeure speaks
  • US Housing starts/building permits
  • US Capacity Utilization/Industrial Production
  • US Building permits
  • NZ Global Dairy Trading prices index
Wednesday, May 17, 2017
  • NZ PPI QoQ
  • UK Employment statistics
  • EU Final CPI YoY
  • Canada Manufacturing Sales
  • Crude oil inventories
Thursday, May 18, 2017
  • Japan Preliminary GDP
  • Australia Employment
  • UK Retail Sales
  • ECB Mersch speaks
  • US Unemployment claims
  • Feds Mester speaks on the economy/monetary Policy
Friday, May 19, 2017
  • ECB Constancio speaks
  • Canada CPI
  • Canada Retail Sales
  • Fed’s Bullard speaks on the economy and monetary policy

A Problem Emerges: Central Banks Injected A Record $1 Trillion In 2017… It’s Not Enough

Two weeks ago Bank of America caused a stir when it calculated that central banks (mostly the ECB & BoJ) have bought $1 trillion of financial assets just in the first four months of 2017, which amounts to $3.6 trillion annualized, “the largest CB buying on record.” 

 

Emerging Markets :An Update

  • Malaysia’s central bank said it will allow investors to fully hedge their currency exposure.
  • Egypt declared a 3-month state of emergency after two deadly church attacks.
  • South Africa’s parliamentary no confidence vote has been delayed
  • Argentina central bank surprised markets with a 150 bp hike to 26.25%.
  • Brazil central bank accelerated the easing cycle with a 100 bp cut in the Selic rate.
In the EM equity space as measured by MSCI, South Africa (+3.1%), Turkey (+2.5%), and the Philippines (+0.9%) have outperformed this week, while Russia (-3.9%), Peru (-3.4%), and Brazil (-2.6%) have underperformed.  To put this in better context, MSCI EM fell -0.3% this week while MSCI DM fell -0.7%.
 
In the EM local currency bond space, South Africa (10-year yield -18 bp), Poland (-8 bp), and Indonesia (-8 bp) have outperformed this week, while Brazil (10-year yield +11 bp), Peru (+9 bp), and Colombia (+9 bp) have underperformed.  To put this in better context, the 10-year UST yield fell 15 bp to 2.24%.
 
In the EM FX space, ZAR (+2.5% vs. USD), RUB (+1.9% vs. USD), and ARS (+1.2% vs. USD) have outperformed this week, while HUF (-0.9% vs. EUR), KRW (-0.5% vs. USD), and PLN (-0.5% vs. EUR) have underperformed.

WSJ on Yellen:”indicates era of extremely stimulative monetary policy is coming to an end”

The Wall Street Journal recap of Yellen’s speech and remarks earlier today

  • Ms. Yellen said the Fed was moving away from its efforts to revive a recession-scarred economy and focusing instead on maintaining the gains of the past few years
  • That will change the central bank’s policy-making stance, she said
  • Noting that Fed officials plan to continue gradually raising interest rates unless the economy begins to deteriorate
  • The Fed’s benchmark short-term interest rate will continue to move up to its long-term average, she said.
None of which comes a surprise, Fed communication efforts in past days have been on this message.

Hedge funds slash short 10-year Treasury future positions

Hedge funds have cut their short position in 10-year Treasury futures by nearly two-thirds from a one-year high set at the start of March, unwinding a popular trade as US sovereign debt has rallied.

Leveraged funds, a proxy for hedge funds, reduced their net short in 10-year Treasury futures by nearly 49,000 contracts in the week to April 4, data from the Commodity Futures Trading Commission showed on Friday. The net short totaled 136,322 contracts, down from 365,650 contracts on March 7.

Traditional asset managers, who have taken the opposite side of the trade, have also reduced their net long to 226,655 contracts, the lowest level since February.

The central bank’s perceived hawkishness, alongside a sell-off in Treasuries after the US election, sent yields on the 10-year Treasury to a high of 2.62 per cent in December. Yields on the note have since slid, as the so-called Trump trade fades.