The Week Ahead – Monetary Policy and Sovereignty

The Week Ahead – Monetary Policy and Sovereignty

Previous week: 12 June 2017 – 16 June 2017

UK CPI y/y—Tuesday 13 June 2017 4.30pm

Prices of consumer goods continue to rise at an increasing pace because of the weak British Pound caused by Brexit leading to higher prices of imported goods and services. UK’s CPI for the month of May rose +2.9% y/y on the expectation of +2.7%. April CPI was +2.7%. Wage growth at +2.1% continues to lag the pace of price increases which means real wages continue to be negative. The fact that inflation was getting up to pretty high level started to influence the interest rate decision by the Monetary Policy Committee (MPC). This week the MPC had two more voting members (1 to 3) that were in favour of raising interest rates by a quarter point (25 to 50 basis points).

https://tradingeconomics.com/united-kingdom/inflation-cpi

https://www.ft.com/content/9ce50e50-5013-11e7-bfb8-997009366969

https://www.theguardian.com/business/2017/jun/13/uk-inflation-rises-faster-than-expected-four-year-high

US CPI m/m—Wednesday 14 June 2017 8.30pm

Headline CPI m/m (May) stood at -0.1% on the expectation of +0.2% increase. April headline CPI m/m was +0.2%. Headline CPI y/y continues to fall and is now standing at +1.9%.

Core CPI m/m (May) stood at +0.1% on the expectation of +0.2% increase. April core CPI m/m was +0.1%. Core CPI y/y continues to fall and is now standing at +1.7%.

https://tradingeconomics.com/united-states/inflation-rate-mom

https://tradingeconomics.com/united-states/inflation-cpi

https://www.investing.com/economic-calendar/core-cpi-56

https://tradingeconomics.com/united-states/core-inflation-rate

US Retail Sales m/m—Wednesday 14 June 2017 8.30pm

Headline Retail Sales m/m (May) fell to -0.3% on the expectation of +0.1% increase. April headline retail sales m/m was +0.4%. Headline retail sales y/y continues to fall and is now standing at +3.8%.

Core Retail Sales (excluding automobiles) m/m (May) fell to -0.3% on the expectation of +0.2% increase. April core retail sales m/m was +0.3%.

https://tradingeconomics.com/united-states/retail-sales

https://tradingeconomics.com/united-states/retail-sales-annual

https://tradingeconomics.com/united-states/retail-sales-ex-autos

US Crude oil inventories—10.30pm 10 May 2017 Wednesday

US crude inventories decreased -1.66 million barrels on the expectation of -2.45 million drop. Baker Hughes US oil rig count rose another 6 from 741 to 747.

http://www.zerohedge.com/news/2017-06-14/wtirbob-tumble-after-unexpected-gasoline-inventory-build-production-rise

http://www.zerohedge.com/news/2017-06-16/shale-efficiency-has-peaked-now-rig-count-surges-22nd-straight-week

FOMC Statement + Federal Funds Rate + FOMC Economic Projections + FOMC Press Conference—Thursday 15 June 2017

In summary:

A dovish hike was what the market expected. However the FOMC delivered a hawkish hike.

  • Federal Funds rate was increased by 25 basis points as expected
  • Recognition that short term inflation will run under 2% mandate
  • Economic growth had rebounded from weak economic performance out of Q1. Q1, according to the Fed, was indeed “transitory”.
  • Janet Yellen during her prepared statement during the press conference said that “provided that the economy evolves broadly as the Committee anticipates, we currently expect to begin implementing a balance sheet normalization program this year.” This is in stark contrast to what they previously said. Fed deleted prior language that said it will keep existing reinvestment policy in place until normalization of fed funds rate “is well under way”; also removes reference to FOMC’s holdings of longer-term securities staying “at sizable levels”.

Key lines:

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.

The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal.

As I noted in our policy statement, we are continuing to maintain the size of our balance sheet by reinvesting proceeds from maturing Treasury securities and principal payments from agency debt and mortgage-backed securities. Provided that the economy evolves broadly as the Committee anticipates, we currently expect to begin implementing a balance sheet normalization program this year.

Summary from Bloomberg / Zerohedge:

RATES: Target range for fed funds rate was raised to 1%-1.25% from 0.75%-1%; decision included dissent from Minneapolis Fed’s Neel Kashkari; rate increase is third hike since December 2016

RATE OUTLOOK: Keeps reference to gradual pace of future rate increases, continues to say fed funds rates is likely to remain below expected long-run levels “for some time” and actual path of rate will depend on outlook

INFLATION: Says inflation on 12-month basis will stabilize around 2% over medium term, but is expected to stay somewhat below 2% in near term; said inflation excluding energy and food is running somewhat below 2%; Still says that FOMC will monitor inflation developments relative to its “symmetric goal”

ECONOMY: Fed now says economic activity has been rising moderately this year vs prior assessment that it has slowed; continues to say U.S. labor market has continued to strengthen and now calls solid job gains as having “moderated”. (Poor economic growth in Quarter 1 2017 was not mentioned)

REINVESTMENT POLICY: Fed deletes prior language that said it will keep existing reinvestment policy in place until normalization of fed funds rate “is well under way”; also removes reference to FOMC’s holdings of longer-term securities staying “at sizable levels”

RISKS: Near-term risks to outlook still appear “roughly balanced” as FOMC monitors inflation developments “closely”

FED’s Dot Plot (March vs June):

2017: June: 1.375% (range 1.125% to 1.625%); March: 1.375%

2018: June: 2.125% (range 1.125% to 3.125%); March: 2.125%

2019: June: 2.938% (range 1.125% to 4.125%); March: 3.000%

Economic Projections:

The key economic data points that the FOMC seemed to place most scrutiny were the headline and core PCE inflation projections. Their inflation expectations for the near term were revised downwards from 1.9% to 1.6% and 1.9% to 1.7% respectively.

Regarding Balance Sheet Normalisation from the FOMC:

For payments of principal that the Federal Reserve receives from maturing Treasury securities, the Committee anticipates that the cap will be $6 billion per month initially and will increase in steps of $6 billion at three-month intervals over 12 months until it reaches $30 billion per month.

For payments of principal that the Federal Reserve receives from its holdings of agency debt and mortgage-backed securities, the Committee anticipates that the cap will be $4 billion per month initially and will increase in steps of $4 billion at three-month intervals over 12 months until it reaches $20 billion per month.

The Committee also anticipates that the caps will remain in place once they reach their respective maximums so that the Federal Reserve’s securities holdings will continue to decline in a gradual and predictable manner until the Committee judges that the Federal Reserve is holding no more securities than necessary to implement monetary policy efficiently and effectively.

https://www.federalreserve.gov/newsevents/pressreleases/monetary20170614a.htm

https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20170614.pdf

https://www.federalreserve.gov/newsevents/pressreleases/monetary20170614c.htm

https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20170614.pdf

http://www.zerohedge.com/news/2017-06-14/fomc-delivers-dovish-hike-lays-out-plans-balance-sheet-unwind

http://www.zerohedge.com/news/2017-06-14/fed-reveals-balance-sheet-normalization-schedule-will-reduce-reinvestments-10bnmonth

 

MPC Official Bank Rate Votes + Monetary Policy Summary + Official Bank Rate—Thursday 15 June 2017 7pm

The Bank of England decided to keep their monetary policies unchanged. But in this meeting, there was a caveat, and quite a significant one. The vote to keep the Bank Rate at 0.25% was 5 to 3 (Kristin Forbes, Ian McCafferty, Michael Saunders) as compared to 7 to 1 (Kristin Forbes) in the previous meeting. With inflation in UK on an upward trajectory and coming very close to 3%, it may not take much for the vote to flip in favour for a rate hike in the next meeting. UK’s CPI was 2.9% in May and BOE’s inflation target is 2%.

Key paragraph from BOE:

“CPI inflation has been pushed above the 2% target by the impact of last year’s sterling depreciation.  It reached 2.9% in May, above the MPC’s expectation.  Inflation could rise above 3% by the autumn, and is likely to remain above the target for an extended period as sterling’s depreciation continues to feed through into the prices of consumer goods and services.  The 2½% fall in the exchange rate since the May Inflation Report, if sustained, will add to that imported inflationary impetus.”

http://www.bankofengland.co.uk/publications/minutes/Documents/mpc/mps/2017/mpsjun.pdf

http://www.zerohedge.com/news/2017-06-15/pound-spikes-boe-hawkish-vote-surprises-traders

Bank of Japan Policy Rate + Monetary Policy Statement + Press Conference—Friday 16 June

The Bank of Japan voted 7 to 2 to keep their monetary policies unchanged. The Bank of Japan really do care about artificially creating inflation through ultra-loose monetary policy and achieving their 2% core inflation target. A short except from the policy statement reiterating this point is as follows.

“The Bank will continue with “Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control,” aiming to achieve the price stability target of 2 percent, as long as it is necessary for maintaining that target in a stable manner. It will continue expanding the monetary base until the year-on-year rate of increase in the observed CPI (all items less fresh food) exceeds 2 percent and stays above the target in a stable manner.”

https://www.boj.or.jp/en/announcements/release_2017/k170616a.pdf

http://www.zerohedge.com/news/2017-06-15/bank-japan-leaves-policy-economic-outlook-unchanged

 

Coming week: 19 June 2017 – 23 June 2017

US Crude oil inventories—10.30 pm 21 June 2017 Wednesday

Reserve Bank of New Zealand (RBNZ) Rate Decision + Official Cash Rate—Thursday 22 June 2017 4pm

No change is expected out of the central bank of New Zealand.

 

Trade Ideas

Nasdaq-100 Long

Nasdaq-100 had corrected quite a bit from the recent swing high but it seemed to have taken support at 5690. The bull run is still in play despite hawkish hike out of the Fed last week.

FTSE-100 Long

Similar story as Nasdaq-100, FTSE-100 had corrected from its recent swing high and had taken support at 7400. If given the chance, going at 7420 will be nice. The bull run is not over until the market says so.

WTI short

WTI bullish trend line support seemed to have been broken to the downside this last week. If a short position on US OIL had not been placed last week at around $46, the opportunity to do so may have left already. Nevertheless, another opportunity may come by if and when it retraces back up. If indeed the trend line was broken, the weekly chart seemed to suggest that the next level of support would come in at $42 and then $40.

  • US continues its relentless increase in oil production and rig count
  • Qatar’s rift with its Middle Eastern neighbours threaten the stability of the OPEC’s production cut agreement.
  • Libya and Nigeria are two countries in the oil cartel that are exempted from production cuts. These two countries had been steadily increasing their oil output.

http://www.cnbc.com/2017/06/08/rising-oil-output-in-libya-and-nigeria-could-rein-in-surging-us-crude-exports-analyst-says.html

USD/CAD Long

The chart of USD/CAD showed that it is currently residing on the support trend line that was established since May 2015. Last week on the daily chart, a bullish pinbar was formed indicating buying interest at around 1.32 area which is where the trend line lies.

  1. Canadian economy relies heavily on its export of oil to the United States. Thus, a drop in crude prices as explained above would lead to the weakening of the Canadian Dollar.
  2. The Fed in the United States somewhat surprised the markets with their hawkish rate hike (explained above). The market was anticipating a dovish rate hike. Therefore, as the markets comes to grips to a hawkish Fed, US Dollar appreciation is to be expected in the near future. Although macroeconomic data out of the United States had been poor for quite some time, it is always unwise to fight against the Fed.

 

Food for Thought

“The Putin Interviews” by Oliver Stone

For most of our lives, we have been overwhelmed by the mainstream media pointing the blame for everything bad at Russia. The word “Russia” has become synonymous to anything corrupt, plutocratic, and authoritarian. This series of 4 episodes directed by Oliver Stone gives a rare but insightful counterargument to the narrative the mainstream media spouts out on a daily basis.

One of the recurring points that Putin reiterates was his view that the United States had been and will continue to use its Allies in the Western Bloc as “vassals” to solidify the US government’s power over the world. With the United States’ iron grip on its Allies, “few countries are truly sovereign.”

Notable quotes:

“Nowadays, NATO is a mere instrument of U.S. foreign policy. It has no allies, it has only vassals. When a country becomes a NATO member, it is very hard for it to resist pressure from a big country … like the United States.”

“Worldwide there are not so many countries that have the privilege of sovereignty.”

https://www.theguardian.com/tv-and-radio/2017/jun/13/the-putin-interviews-review-first-oliver-stone-loses-then-the-gloves-come-off

 

 

 

 

The Week Ahead - Silver, Sugar and Canadian Dollars