Previous week: 25 September 2017 – 29 September 2017
Fed Chair Yellen Spoke—27 September 2017 Wednesday
Very hawkish statement by possibly outgoing Yellen.
Headlines via Zerohedge via Reuters:
- “A more important issue from a policy standpoint is that some key assumptions underlying the baseline outlook could be wrong in ways that imply that inflation will remain low for longer than currently projected.”
- YELLEN SEES ‘CONSIDERABLE’ ODDS THAT INFLATION WON’T STABILIZE AT 2-PCT OVER NEXT FEW YEARS
- FED’S YELLEN SAYS UNCERTAINTIES STRENGTHEN CASE FOR GRADUAL RATE HIKES
- YELLEN SAYS GRADUAL APPROACH TO RATE HIKES PARTICULARLY APPROPRIATE IN LIGHT OF SUBDUED INFLATION, LOW NEUTRAL RATE
- YELLEN SAYS THERE IS A RISK INFLATION EXPECTATIONS ARE NOT AS WELL-ANCHORED AS THEY APPEAR
- YELLEN SAYS DATA SUGGESTS LABOR MARKET IS HEALTHY, WITHOUT SUBSTANTIAL SLACK AND NOT OVERHEATED
- YELLEN SAYS EVIDENCE ON LABOR MARKET NOT DEFINITIVE, MUST BE ‘OPEN-MINDED’
- YELLEN SAYS WOULD BE IMPRUDENT TO LEAVE RATES ON HOLD UNTIL INFLATION REACHES 2 PCT
- YELLEN SAYS FED CAN STILL ACHIEVE 2-PCT INFLATION GOAL EVEN IF IT IS UNDERESTIMATING SLACK OR OVERESTIMATING INFLATION EXPECTATIONS
- FED’S YELLEN SAYS LOW INFLATION LIKELY DUE TO TRANSITORY FACTORS, SEES MANY UNCERTAINTIES
- YELLEN SAYS DOWNWARD PRESSURE ON INFLATION COULD PROVE UNEXPECTEDLY PERSISTENT
- YELLEN SAYS FED SHOULD BE `WARY OF MOVING TOO GRADUALLY’
- YELLEN SAYS WOULD BE IMPRUDENT TO LEAVE RATES ON HOLD UNTIL INFLATION REACHES 2 PCT
US Crude oil inventories—10.30 pm 27 September 2017 Wednesday
US crude inventories decreased by +1.85 million barrels on the expectation of +3.1 million increase. Baker Hughes US oil rig count increased by 6 from 744 to 750. Oil production was 9547 barrels per day for week ending 22/09/2017, an increase from 9510 barrels per day in the previous week.
RBNZ official cash rate, rate statement—4am Thursday 28 September 2017
No change in Official Cash rate (+1.75%).
- Global economic growth has continued to improve in recent quarters.
- However, inflation and wage outcomes remain subdued across the advanced economies and challenges remain with on-going surplus capacity.
- A lower New Zealand dollar would help to increase tradables inflation and deliver more balanced growth.
- Annual CPI inflation eased in the June quarter, but remains within the target range. Headline inflation is likely to decline in coming quarters, reflecting volatility in tradables inflation.
- Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain and policy may need to adjust accordingly.
2Q US GDP was revised upwards rom 3.0% to 3.1%. Congratulations, President Trump.
GDP was revised upward to 3.1 for last quarter. Many people thought it would be years before that happened. We have just begun!
— Donald J. Trump (@realDonaldTrump) September 29, 2017
Eurozone CPI—29 September 2017 Friday
|Name||Actual (September)||Forecast||Last (August)|
|Eurozone Core CPI yoy||1.5%||1.6%||1.5%|
|Eurozone Headline CPI yoy||1.1%||1.2%||1.2%|
Still some distance from the 2% inflation target.
US Personal Consumption Expenditure (PCE) Core yoy
US PCE Core for month of August was 1.3% which was lower than the expectation of 1.4%. July’s figure was 1.4%. Another month missing the Fed’s target of 2% and moving in the wrong direction.
Bank of Canada Governor Poloz speaks
Key paragraph from Governor Poloz’s speech:
“The economic progress we have seen tells us that the moves we took to ease policy in 2015 were the right thing to do. At a minimum, that additional stimulus is no longer needed. But there is no predetermined path for interest rates from here. Monetary policy will be particularly data dependent in these circumstances and, as always, we could still be surprised in either direction. We will continue to feel our way cautiously as we get closer to home, fostering economic growth and keeping our inflation target front and centre.”
The Grand Old Party failed to pass repeal and replace of Obamacare again
With control of both the legislative branch (House of Representatives and the Senate) and the Executive (Presidency), they still failed to fall in line and pass this major legislative bill. Tax reform / cut is up next. Probably another debacle from the Grand Old Party.
Donald says this, Jong-un says that
Donald called Jong-un a “rocket man” while Jong-un responded by calling Donald a “mentally deranged U.S. dotard”. Even though it is my opinion that nuclear war will not occur, it is undeniable that tensions between feuding parties have escalated and will continue to do so. North Korea is now threatening to detonate a hydrogen bomb in the Pacific Ocean. What if, in the off-chance, a mistake occurred and a nuclear warhead detonates over the sovereign land of Japan? The result of such a mistake will, without a shadow of a doubt, be a declaration of war.
Coming week: 02 October 2017 – 06 October 2017
Reserve Bank of Australia Rate Decision—3 October 2017 Tuesday
No change is expected. (+1.50%)
US Crude oil inventories—10.30 pm 05 October 2017 Thursday
Another draw in inventories?
Change in Non-farm Payrolls, Unemployment Rate, Average Hourly Earnings—Friday 06 October 2017
Labour market is strengthening.
GBP/USD long to watch
The British Pound had been in an uptrend since the start of the year and is now resting nicely on 1.34 support.
Stance of BOE MPE members:
The most dovish member of the BOE, Dr Gertjan Vlieghe and gave a hawkish speech. Quoting Dr Gertjan Vlieghe’s speech dated 15 September 2017:
- Until recently, I thought the appropriate response of monetary policy was to be patient, given modest growth and subdued underlying inflationary pressure. But the evolution of the data is increasingly suggesting that we are approaching the moment when Bank Rate may need to rise.
- First, despite a clear weakening of GDP growth in the first half of this year, the amount of economic slack continues to be eroded.
- Second, consumption growth generally held up better than I expected over the past year.
- The wider economic backdrop over the past year has been one of improving global growth, and in particular an improving outlook for Eurozone growth, which generally benefits UK external demand.
- But, acting in the other direction, is the continued uncertainty about the UK’s future trading relations with the EU and the rest of the world.
- If these data trends of reducing slack, rising pay pressure, strengthening household spending and robust global growth continue, the appropriate time for a rise in Bank Rate might be as early as in the coming months.
The boss, the dealmaker, the kingpin, Mark Carney, also said he is seeing interest rates to be raised in the “relatively near term”. Typing out Mark Carney words from the Youtube video: “If the economy continues on the track that it’s been on, and all indications are that it is, in the relatively near term can expect that interest rates can increase somewhat” and “We are in a circumstance globally and certainly here in the UK, given uncertainty, given other factors, is we are talking about to keep with the metaphor, just easing a bit off the accelerator, to keep with the speed limit of the economy. So interest rate increases, when they come, when and if they come, will be to a limited extent in a gradual.”
Andrew Haldane is also portraying a hawkish tone in his recent interview with Sky. From Sky News interview: “In the September minutes in particular, a majority of the committee – of which I am one – said that we could be nearing the point where a reduction in some degree of monetary stimulus might be warranted in the coming months.” “And let’s be clear here: for me that would be a good news story. This would be interest rates getting back to normal, even if the new normal is different to the old normal.” “This would be a sign of the economy healing, and therefore adjusting to that healing process. So rather than being a source of fear or trepidation, this ought to be a good news story about the economy proving resilient.”
There are nine members in the BOE MPC. With 3 doves coming out publicly saying that they are now hawkish, the whip count is now 5 members in favour for rate hike. This implies that a simple majority is now present to raise interest rates.
|Name||Voting Record||Dove/Hawk||Edmund’s Whip Count|
|Mark Carney||0 to increase, 46 to maintain, 1 to reduce||Dove||Raise|
|Ben Broadbent||0 to increase, 71 to maintain, 1 to reduce||Dove||?|
|Sir Jon Cunliffe||0 to increase, 42 to maintain, 1 to reduce||Dove||?|
|Sir David Ramsden||0 to increase, 1 to maintain, 0 to reduce||Dove||?|
|Andrew Haldane||0 to increase, 35 to maintain, 1 to reduce||Dove||Raise|
|Ian McCafferty||14 to increase, 42 to maintain, 1 to reduce||Hawk||Raise|
|Michael Saunders||3 to increase, 6 to maintain, 0 to reduce||Hawk||Raise|
|Silvana Tenreyro||BOE: 0 to increase, 2 to maintain, 0 to reduce
Bank of Mauritius: 0 to increase, 8 to maintain, 3 to reduce
|Dr Gertjan Vlieghe||0 to increase, 19 to maintain, 2 to reduce||Dove||Raise|
|Edmund’s prediction||5 to raise / 9|
Looking at the 10 year chart of UK’s inflation, is it not inconceivable that inflation will rise up to 5%? Quoting the Bank of England from monetary policy statement dated 14 September 2017: “Headline and core CPI inflation in August were slightly higher than anticipated. Twelve-month CPI inflation rose to 2.9% and is now expected to rise to above 3% in October.”
UK Wage growth:
Wage growth has been steady at around 2% for several years. However, in real terms, wages are shrinking because inflation is running at 2.9%, which is higher than the pace of wage growth.
The labour market gets tighter every month and is definitely getting very close to the natural rate of unemployment.
Annualised GDP growth rate had been steady at around 2% since 2010.
USD’s side of the argument:
- The Federal Reserve is far from reaching their 2% PCE core inflation target. It is currently at 1.3%.
- Donald Trump is (and had always been) a wild card. He (and the GOP) failed to repeal and replace of Obamacare. He may just fail to pass his tax cut / reform plan (which has much greater implications to corporate profitability).
- Donald’s beef with Kim. The ongoing escalation of tensions with DPRK led to buying of safe havens like US Treasuries, Japanese Yen, and Gold. Lowering of yields in US Treasuries will make it hard for the US Dollar to rally.
- The Federal Reserve is tightening their monetary policy (argument for USD strength).
Image of US core PCE year on year taken from Investing.com:
Catalonia’s Independence Referendum
1st of Ocober, Sunday. UK’s Brexit, US’s Trump, France’s Marine Le Pen, Germany’s AfD. Now, Catalonia’s exit from Spain. Taking full advantage of the populist movement.
As much as I would like to do a deep research into cryptocurrencies, I acknowledge that I am far from competent in this subject. A friend of mine works at Lykke and shared with me a report their firm wrote.