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Tue, 17th January 2017

Anirudh Sethi Report

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Archives of “reserve currency” Tag

Overnight US Market :Dow closed -43 points.

Stocks ended mixed Thursday as retailers dominated the news with Macy’s and Kohl’s both plunging following weak holiday-season reports that led the chains to cut their profit forecasts.

Still, the Nasdaq composite’s modest gain of 11 points, or 0.2%, was enough to notch a new all-time high. Settling at at 5487.94, it topped the old record by half a point.

The Dow Jones industrial average finished down 43 points, a 0.2% decline to 19,899.29. Losing 0.1% was the S&P 500, which settled at 2269 even.

nvestors were also focusing on upcoming U.S. jobs data following the publication of the minutes to the Federal Reserve’s last board meeting.

Private U.S. companies added 153,000 jobs in December, according to payroll processor ADP. That total was a bit lower than analysts expected and slightly slower than the pace of hiring for the rest of 2016. The government will issue its own hiring report on Friday.

Overnight US Market :Dow closed + 60 points.Now 58 points away to kiss 20k

Stocks climbed Wednesday as Wall Street posted a second straight day of gains in the new year and the Dow once again approached the 20,000 milestone.

The Dow Jones industrial average ended up 60 points, or 0.3%, to 19,942.16. The blue-chip index rose has come close to topping 20,000 several times in recent weeks but each time it gets near has pulled back. The Standard & Poor’s 500 index rose 0.6% and the Nasdaq composite index gained 0.9%. Both the S&P 500 and Nasdaq are near their record closing highs.

Stocks maintained their gains following the release of the minutes from the latest Federal Reserve meeting that provided clues to why policymakers raised interest rates in December for only the second time since 2006 and forecast three rate hikes in 2017 instead of the two moves previously anticipated.

Fed officials said they might have to raise interest rates faster than anticipated to prevent rapidly falling unemployment and President-elect Donald Trump’s proposed fiscal stimulus from fueling excessive inflation, according to minutes of the Fed’s December 13-14 meeting.

Benchmark U.S. crude was up 1.8% to $53.24 a barrel in New York. It lost $1.39 on Tuesday.

Preview: What’s priced in for the Federal Reserve ahead of the FOMC Minutes

The FOMC Minutes are due today at 2 pm ET (1900 GMT)

The economic calendar is light today so it’s all about flows to start the year and the FOMC Minutes later in the day.

In general, the Minutes are a release that always gets more attention than deserved. It’s rare the report moves the market and the initial move is often reversed.

But that might not be the case this time because the FOMC hiked rates at the December meeting and left the timing on subsequent rate moves ambiguous. The big market driver was the change in the dot plot.

Here is September compared to December:

Meanwhile, in the press conference Yellen emphasized that the thinking at the Fed hadn’t changed much.

“The shifts that you see here are really very tiny,” she said about the dot plot.

The life of EURUSD in 2017 by Danske Bank

The jolly chaps and chapesses at Danske Bank have the euro all mapped out for next year

Danske see EURUSD bottoming at 1.0200 in their 1 month forecast.

“In the short term, on the one hand there will be downward pressure on the US monetary base from the higher federal funds target and from the impact of new banking regulation with US banks set to be required to have an LCR of 100% by 1 January 2017. On the other hand, deposits on the US treasury account may fall at the beginning of next year after a resuspension of the debt ceiling, which will tend to increase the monetary base. Overall, this is likely to be marginally positive for USD and weigh on USD FX forward points vis- à-vis EUR and the Scandinavian currencies on top of the impact of the repricing of the path of Federal Reserve rate hikes, e.g. keeping the 3M EUR/USD basis spread around the present 70-80bp, and thus maintaining a significant negative carry on short USD positions.”

In 12m they see the euro at 1.1200.

Japan Overtakes China as Biggest Overseas US Debt Holder as Renminbi Drops

Mainland China has lost its status as the largest overseas holder of the US debt to Japan as the recent decline in the renminbi’s FX rate and the strengthening yen have affected the value of the two nations’ respective Treasury note portfolios.

The yen’s status as safe haven asset as fiscal stimulus effort have attracted investment capital to Japan, resulting in stronger yen, whilst China, struggling with low factory-gate inflation and weak international demand for manufactured goods, had to decrease its holdings of the US debt. Japan, now the biggest foreign holder of US Treasury debt, held $1.13 trln worth of US bonds in October, whilst China’s holdings shrank to their six-year lowest at $1.12 trln, according to the data from the US Department of the Treasury. Beijing has been selling US bonds in order to alleviate the downward pressure on the renminbi’s FX rate stemming from lingering economic turmoil. Mainland China uses the dollars obtained from selling the Treasuries to buyback the renminbi, currently at its 8-year lowest in offshore trading.

Japan, however, had been selling Treasuries in early autumn, too, due to the uncertainty surrounding the US presidential election. The subsequent developments in the form of the election of Donald Trump and the plunge in Treasury bond value accompanied by the rising benchmark 10-year yield have proven selling Treasuries the right move, but the yen’s ongoing appreciation has made Japan the largest international US bond holder.

World braces as US monetary policy turns

Wednesday’s U.S. rate hike has caused ripples through global markets, as investors began to contemplate the impact of American monetary tightening and beefed-up fiscal spending under a President Donald Trump.  

Turning point

 Many traders at a stock brokerage here described comments by Federal Reserve Chair Janet Yellen Wednesday as more hawkish than expected.

A 25-basis-point increase in the federal funds rate was announced at 2 p.m., following a two-day meeting of the Federal Open Market Committee. The first hike in a year, which lifted the benchmark rate to a range of 0.5% and 0.75%, was largely expected. But Yellen also revealed that the Fed was now looking at raising the rate three times in 2017, instead of the two hikes that had been indicated before.

Yellen also cautioned against guessing President-elect Donald Trump’s intentions regarding fiscal spending. “We’re operating under a cloud of uncertainty at the moment and we have time to wait and see what changes occur and factor those into our decision-making as we gain greater clarity.”

Fed watchers took this as an indication that the pace of rate hikes could hasten to more than the three estimated for 2017 as Trump’s policies are implemented.

Fed Revises Reverse Repo Terms: This Is How It Will Implement The Rate Hike

As expected, in addition to raising the Fed Funds rate by 25 bps, the Fed similarly noted that it would revise the mechanics behind its reverse repo operations, raising the rate it charges on reverse repos by 25 bps to 0.5%, the actual means by which the Fed will hike rates for most market participants.

Here is the statement that the Fed released regarding the change in overnight reverse repos: 

During its meeting on December 13-14, 2016, the Federal Open Market Committee (FOMC) directed the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York (New York Fed), effective December 15, 2016, to undertake open market operations as necessary to maintain the federal funds rate in a target range of ½ to ¾ percent, including overnight reverse repurchase operations (ON RRPs) at an offering rate of 0.50 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account (SOMA) that are available for such operations and by a per-counterparty limit of $30 billion per day.

To determine the value of Treasury securities available for ON RRP operations, several factors need to be taken into account, as not all Treasury securities held outright in the SOMA will be available for use in such operations. First, some of the Treasury securities held outright in the SOMA are needed to conduct reverse repurchase agreements with foreign official and international accounts.1 Second, some Treasury securities are needed to support the securities lending operations conducted by the Desk. Additionally, buffers are needed to provide for possible changes in demand for these activities and for possible changes in the market value of the SOMA’s holdings of Treasury securities.

Taking these factors into account, the Desk anticipates that around $2 trillion of Treasury securities will be available for ON RRP operations to fulfill the FOMC’s domestic policy directive. In the highly unlikely event that the value of bids received in an ON RRP operation exceeds the amount of available securities, the Desk will allocate awards using a single-price auction based on the stop-out rate at which the overall size limit is reached, with all bids below this rate awarded in full at the stop-out rate and all bids at this rate awarded on a pro rata basis at the stop-out rate.

These ON RRP operations will be open to all eligible RRP counterparties, will settle same-day, and will have an overnight tenor unless a longer term is warranted to accommodate weekend, holiday, and other similar trading conventions. Each eligible counterparty is permitted to submit one proposition for each ON RRP operation, in a size not to exceed $30 billion and at a rate not to exceed the specified offering rate. The operations will take place from 12:45 p.m. to 1:15 p.m. (Eastern Time). Any changes to these terms will be announced with at least one business day’s prior notice on the New York Fed’s website.

The results of these operations will be posted on the New York Fed’s website. The outstanding amounts of RRPs are reported on the Federal Reserve’s H.4.1 statistical release as a factor absorbing reserves in Table 1 and as a liability item in Tables 5 and 6.

Responses to the Fed’s FOMC: ‘upbeat and more hawkish than anticipated’

ANZ with the latest Global Macro Insight, focusing on the Federal Reserve’s FOMC announcement on Wednesday

In brief from the document:
  • The FOMC was upbeat and more hawkish than anticipated
  • After an extended period of downgrades to the dot plot, the FOMC modestly tweaks up the profile. Three 25 bps hikes are now expected in2017 up from two.
ANZ on the market implications (bolding is mone):
  • This announcement should have a persistent impact on the USD.
  • While the tilt was not overly hawkish, with the Fed adding just one hike to the entire profile, it did mark the first time that the Fed has hiked rates without the accompanying message being dovish.
  • As such, the reaction function in FX markets was a bit different to previous moves and upside to the USD could be more lasting.
  • While the JPY has still underperformed, the AUD and NZD are also significantly weaker on the day. We also note that the equity market has softened on the announcement, and this marks a change in the recent behaviour of markets where the USD and equities were rallying together. This likely reflects a renewed focus on the rising cost of funds, and the fact that markets now need to weigh the balance between better growth prospects, and the policy response to that improvement. As such, looking ahead, the risk that the AUD and NZD begin under-perform other G10 currencies is rising.

FOMC hikes rates by 25 basis points, as expected

Federal Reserve interest rate decision December 14, 2016 highlights

  • Fed hikes to range of 0.50%-0.75%
  • All 103 economists surveyed by Bloomberg forecasted a hike

Highlights of the statement:

  • Repeats gradual policy path plan
  • Policy supporting ‘some further strengthening’ on goals
  • Votes were unanimous
  • Stance of monetary policy remains accommodative
  • Officials see three 2017 hikes versus two in Sept dots

What the FOMC Says may be More Important than What it Does

Provided that the Federal Reserve delivers the widely tipped and expected 25 bp hike in the Fed funds target range, the key to investors’ reaction will be a function of the FOMC statement and forecasts.  The FOMC meeting is the last big event of the year for investors.  The Bank of England, the Swiss National Bank, and Norway’s Norges Bank hold policy meetings, none are likely to alter policy. Several emerging market central banks meet this week, and Mexico is the only one that will likely move.  Many expect a 25 bp hike, but there is some risk of a 50 bp move.  The Bank of Japan meets the following week, and it too is unlikely to take fresh measures.   
A failure of the Federal Reserve to raise interest rates would be a significant shock and spur a dollar sell-off, a Treasury rally, and probably an equity market sell-off.  The likelihood of this scenario is so low that it is not worth much time discussing.  Similarly, 50 bp move also is highly unlikely.  It would go against everything the Fed has been saying about gradual moves.  It would be an admission of getting behind the curve, and there is no evidence that this is their assessment. 
Since the FOMC last met, the US dollar has strengthened, interest rates have risen sharply, and the unemployment rate has fallen further.  Investors will learn what the central bank makes of these developments.  Officials that have spoken since the election have generally agreed that it is premature to make any judgments of changes in fiscal policy or economic policy more broadly.   And for good reasons.  It is far from clear the policies of the new Administration.   
There seems to be a broad sense that probably near midyear there will some tax cuts and spending increases, alongside a tougher, perhaps more mercantilist trade policy.  The details are vague, and how this sits with fiscal conservative wing of the Republican Party is not clear.    While the intentions and signals of the President-elect have spurred a sizable reaction in the capital markets, more concrete details are needed to begin contemplating the impact on monetary policy.