The Week Ahead – The end of days

The Week Ahead – The end of days

Previous week: 04 December 2017 – 08 December 2017

RBA cash rate and rate statement—11.30am 05 December 2017 Tuesday

No change in cash rate of +1.50% occurred. RBA’s statement was mostly nothing. Less talk on weak inflation though.

http://www.rba.gov.au/media-releases/2017/mr-17-25.html

Bank of Canada overnight rate and rate statement—11 pm 06 December 2017 Wednesday

Bank of Canada kept interest rates unchanged at 1.00%. Considerable uncertainties tepid inflation.

Key sentences:

  • International Uncertainties: Growth has firmed in other advanced economies. Meanwhile, oil prices have moved higher and financial conditions have eased. The global outlook remains subject to considerable uncertainty, notably about geopolitical developments and trade policies.
  • Domestic Growth: Growth to moderate while remaining above potential in the second half of 2017.
  • Domestic Inflation: Inflation has been slightly higher than anticipated and will continue to be boosted in the short term by temporary factors, particularly gasoline prices. Measures of core inflation have edged up in recent months, reflecting the continued absorption of economic slack.
  • Domestic labour market: Meanwhile, despite rising employment and participation rates, other indicators point to ongoing­ – albeit diminishing – slack in the labour market.

http://www.bankofcanada.ca/wp-content/uploads/2017/12/fad-press-release-2017-12-06.pdf

US Crude oil inventories—11.30 pm 06 December 2017 Wednesday

US crude inventories decreased by -5.61 million barrels on the expectation of -2.5 million decrease. Baker Hughes US oil rig count increased by 2 from 749 to 751. Oil production was 9707k barrels per day for week ending 01/12/2017, an increase from 9682k barrels per day in the previous week, pushing all time high production rate higher. The rise in rig count seemed to be attributed to the strong correlation to the price of oil. Oil production in US is now at an all-time high. The head on battle between US and OPEC continues.

http://www.zerohedge.com/news/2017-12-06/wtirbob-extend-losses-biggest-gasoline-build-11-months-record-crude-production

https://www.investing.com/economic-calendar/baker-hughes-u.s.-rig-count-1652

https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=WCRFPUS2&f=W

US non-farm employment change, average hourly earnings, participation rate, unemployment rate—Friday 08 December 2017 9:30pm

Strong jobs report but wage growth still lags. President Donald John Trump, the self-declared “greatest jobs president that God ever created” delivered in the month of November.

Name Actual (Nov) Expectation Last
Non farm employment change +228K +195K Oct: Revised from +261K to +244K (-17K)

Sept: Revised from +18K to +38K (+20K)

Net revision: +3k

Unemployment rate 4.1% 4.1% 4.1%
Average hourly wage m/m +0.2% +0.3% Oct: Revised from +0.0% to -0.1%
Average hourly wage y/y +2.5% +2.7% +2.3%
Participation rate 62.7% 62.7%

Image of Average hourly wage y/y from Zerohedge:

http://www.zerohedge.com/news/2017-12-08/november-payrolls-jump-228k-beat-expectations-wage-growth-disappoints

President Trump’s Israel – Palestine ONE STATE SOLUTION

President Trump: “After more than two decades of waivers, we are no closer to a lasting peace agreement between Israel and the Palestinians. It would be folly to assume that repeating the exact same formula would now produce a different or better result. Therefore, I have determined that it is time to officially recognize Jerusalem as the capital of Israel. While previous presidents have made this a major campaign promise, they failed to deliver. Today, I am delivering. I’ve judged this course of action to be in the best interests of the United States of America and the pursuit of peace between Israel and the Palestinians. This is a long overdue step to advance the peace process. And to work towards a lasting agreement.”

President Trump: “That is why consistent with the Jerusalem embassy act, I am also directing the State Department to begin preparation to move the American embassy from Tel Aviv to Jerusalem. This will immediately begin the process of hiring architects, engineers and planners so that a new embassy, when completed, will be a magnificent tribute to peace.”

Both Israel and Palestine say that Jerusalem is their capital. Now that President Trump says that Jerusalem is Israel’s capital, he is implying that Jerusalem is NOT Palestine’s capital. Hence, the end of the two state solution whereby both Israel and Palestine can coexist simultaneously and essentially unwinding decades of peace talks. Well, the writing’s on the wall for some time. The number of Jewish Israeli’s living in illegal settlements in Palestinian land has been steadily increasing over the decades, chipping away at Palestinian’s sovereignty one house and plot of land at a time. In 2014, according to Wikipedia, the number of illegal settlers was greater than 700k. Uprooting these illegal settlers and making them resettle back in Israel is next to impossible given their sheer size.

Image from Wikipedia:

https://en.wikipedia.org/wiki/Israeli_settlement

The leader of Hamas called for a third Intifada (Uprising). Religion, like sport, is able to unite people. A third Intifada is definitely possible which will further increase tensions in the already tangled mess called the Middle East.

A press release issued by Hamas on the Intifada across occupied Palestine:

To our great Palestinian people who have stood up to face tyranny and aggression. To our people who have recorded history today in defense of Jerusalem and Al Aqsa. Your voices have been heard today. Your uprising has let the world know that Jerusalem is the eternal capital of Palestine. We salute your courageous spirits through which you have taught the whole world lessons on valor, and sent a message that our people are willing to sacrifice their precious souls for the sake of Jerusalem.

The sacrifices which our people have made today in every Palestinian city and town shall ignite the raging anger once again and fuel the coming period.

In light of what happened today in the outbreak of this Intifada, we confirm the following:
1. We call upon all the Palestinian people in all factions to continue with this holy Intifada until all our just demands are met.

  1. Our power lies within our unity, especially in the field. Thus, we urge everyone to stand behind the resistance.
  2. We call upon all our great people to engage with the Israeli occupation soldiers and settlers everywhere.
  3. We confirm that this holy Intifada has reignited and nothing can stop it until all our people’s rights are regained. We call upon the Arab and Islamic Ummah and the free people of the world to support our people and to reveal the ugly face of the Israeli occupation and its ally, the USA.

The Islamic Resistance Movement Hamas

December 8, 2017

http://hamas.ps/en/post/1098/a-press-release-issued-by-hamas-on-the-intifada-across-occupied-palestine

North Korea via KCNA released the following statement:

Pyongyang, December 9 (KCNA) — A spokesperson of the Ministry of Foreign Affairs of the Democratic People’s Republic of Korea gave the following answer to a question raised by KCNA Saturday over the U.S.’s decision to recognize Kuds as the capital of Israel:

The decision by U.S. president Trump to recognize Kuds as the capital of Israel and to move the U.S. embassy there well deserves a global condemnation and rejection as it is an open defiance of and an insult to the international legitimacy and to a unanimous will of the international society.

The status of Kuds remains so sensitive that it, for sure, should be solved fairly by means of regaining the national rights of the Palestinian people and striking a comprehensive and lasting solution to the Middle East problem.

This decision of the U.S. is not so surprising as it came from a dotard who had cried out for “total destruction” of a sovereign state at a sacred UN forum. But, through it, the world will be able to well discern about who is really a wrecker of the world peace and security and who is a gang of hooligans of the international society.

Some countries, which still count on the U.S., would become conscious of the true colors of the U.S.

The U.S. should bear full responsibility for all the consequences of tension and instability that will be entailed in the Middle East region owing to its reckless and highhanded act.

We, out of our external ideas of independence, peace and friendship, condemn strongly the U.S. action this time and express our firm support and solidarity with the Palestinians and other Arabian people in their just cause to regain their legitimate rights.

http://kcna.kp/kcna.user.article.retrieveNewsViewInfoList.kcmsf

Donald and his plan to cut taxes just overcame its second hurdle (ongoing till end of year)

Passage of tax bill step 1: The House of Representatives passed its tax bill with 227 yeas and 205 nays.

Passage of tax bill step 2: The real battle all along resides in the upper chamber; the Senate. The Senate passed the Tax Cuts and Jobs Act with 51 Yeas and 49 Nays, almost along party lines. The only nay vote from the republicans came from Bob Cockster Cocker Corker from the Great State of Tennessee.

Donald John Trump is happy.

 

https://www.nytimes.com/interactive/2017/12/01/us/politics/senate-tax-bill-vote.html?smid=tw-nytimes&smtyp=cur

Passage of tax bill step 3: Now that both houses of congress have passed their version of the tax bill, the two tax bills will now need to be reconciled and the final bill will probably be on President Donald John Trump’s desk by Christmas. Great article titled “Tax Bill Reconciliation: What Are the Likely Outcomes?” by an unknown author in The Wharton School, University of Pennsylvania.

Tax Bill Reconciliation: What Are the Likely Outcomes?

//The betting market thinks that corporate tax cut will be done by 2017. PredictIt is putting the odds at 65% of it happening.

https://www.predictit.org/Contract/4396/Will-the-corporate-tax-rate-be-cut-by-the-end-of-2017#data

//The betting market thinks that individual tax cut will be done by 2017. PredictIt is putting the odds at 55% of it happening.

https://www.predictit.org/Contract/4395/Will-the-individual-tax-rate-be-cut-by-the-end-of-2017#data

Coming week: 11 December 2017 – 15 December 2017

UK CPI—5.30pm Tuesday 12 December 2017

3.0% is the consensus figure. With CPI currently at BOE’s hard ceiling, any sustained increase in inflation will lead to increased urgency by the BOE to hike rates further.

US CPI—9.30 pm 13 December 2017 Wednesday

Headline CPI y/y is expected to be 2.2% for November (Oct: 2.0%). Core CPI y/y is expected to be 1.8% for November (Oct: 1.8%).

US Crude oil inventories—11.30 pm 13 December 2017 Wednesday

Another draw in inventories?

FOMC economic projections, statement, Federal Funds rate, press conference—3am 14 December 2017 Thursday

The overwhelming expectation is for the Fed to hike another 25 basis points to 1.25% – 1.50%. The capital markets, in my opinion, believes that the Fed will discredit its inflation target and hike rates automatically. I am not so confident to call a hike a foregone conclusion. This is because core PCE, the Fed’s main inflation gauge, is trending in the wrong direction and is currently very far away from their 2% target. The market is pricing in 90.2% for one 0.25% rate hike and 9.8% for two 0.25% rate hikes.

http://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html/

https://www.investing.com/economic-calendar/core-pce-price-index-905

BOE MPC Official Bank Rate Votes, monetary policy summary, official bank rate—8pm 14 December 2017 Thursday

The expectation is for all 9 members of the MPC to vote to MAINTAIN the official bank rate at 0.50%. In the words of Mark Carney, the BOE is to “ease our foot off the accelerator”.

ECB minimum bid rate, press conference—9.30pm 14 December 2017 Thursday

Recapping what the ECB announced in their previous meeting dated 26th October 2017:

(1) The interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.40% respectively. The Governing Council continues to expect the key ECB interest rates to remain at their present levels for an extended period of time, and well past the horizon of the net asset purchases.

(2) As regards non-standard monetary policy measures, purchases under the asset purchase programme (APP) will continue at the current monthly pace of €60 billion until the end of December 2017. From January 2018 the net asset purchases are intended to continue at a monthly pace of €30 billion until the end of September 2018, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim. If the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, the Governing Council stands ready to increase the APP in terms of size and/or duration.

(3) The Eurosystem will reinvest the principal payments from maturing securities purchased under the APP for an extended period of time after the end of its net asset purchases, and in any case for as long as necessary. This will contribute both to favourable liquidity conditions and to an appropriate monetary policy stance.

https://www.ecb.europa.eu/press/pr/date/2017/html/ecb.mp171026.en.html

A great article written by Bloomberg with regards to what respondents to their survey expect the ECB’s exit plan to be.

https://www.bloomberg.com/news/articles/2017-12-08/ecb-seen-topping-up-qe-once-more-with-short-taper-in-late-2018

US Retail Sales—9.30pm 14 December 2017 Thursday

Expectation for m/m increase in retail sales to be +0.3%.

Trade Ideas

USD/JPY short

114 is a very strong resistance level for USD/JPY.

JPY’s side of the argument:

The members of the Bank of Japan (excluding uber-dove Mr Kataoka) are now more confident that their policies will succeed in generating inflation and meeting their 2% target by FY 2019. The probability of further loosening of monetary policy will be pretty slim. No change in monetary policy is expected for the foreseeable future.

//When digging deeper and comparing the estimates made by BOJ members in July and October 2017, it is noteworthy that fewer members now see downside risk to inflation, implying that they are more confident that their policies will be successful in increasing inflation to 2%.

CPI y/y FY 2017 (July v Oct) FY 2018 (July v Oct) FY 2019 (July v Oct)
Downside risks 5-4 6-2 8-6
Upside risks 0-1 0-1 0-0
Risks are balanced 4-4 3-6 1-3

BOJ’s October CPI dot plot: https://www.boj.or.jp/en/mopo/outlook/gor1710b.pdf

BOJ’s July CPI dot plot: https://www.boj.or.jp/en/mopo/outlook/gor1707b.pdf

Mr Kuroda, the governor of the Bank of Japan, is striking an increasingly hawkish tone in his speeches.

  • Speech in University of Zurich in Switzerland on 13 November 2017

https://www.boj.or.jp/en/announcements/press/koen_2017/ko171114a.htm/

Kuroda for the first time speaks of “reversal rate”. “This refers to the possibility that if the central bank lowers interest rates too far, the banking sector’s capital constraint tightens through the decline in net interest margins, impairing financial institutions’ intermediation function, so that the effects of monetary easing on the economy reverses and becomes contractionary.” By mentioning the term “reversal rate”, he is implicitly saying that interest rates may have already be at a floor such that if the central bank attempts to lower nominal interest rate further, the effect will be contractionary.

  • Speech on 7 December 2017 from Reuters (with I cannot find on BOJ’s site)

https://www.reuters.com/article/us-japan-economy-boj/boj-chief-signals-chance-of-rate-hikes-warns-of-risks-of-easing-idUSKBN1E10CG?il=0

“When considering our future communication with markets, an exit from quantitative and qualitative easing would be quite an important topic,” he told a seminar in a sign the BOJ’s next step would be to withdraw, not ramp up, stimulus.

Haruhiko Kuroda also said the Bank of Japan was “very mindful” of the health of regional banks hurt by its ultra-loose monetary policy, in his first such acknowledgment that the measures of recent years could jeopardize financial stability.

Kuroda mentioned that the BOJ is “very mindful” that its policies may be hurtful to the banks. This reiterates on the same point regarding “reversal rate” when he spoke in Zurich. He is also now talking about exiting its QQE by withdrawing and not ramping up stimulus.

USD’s side of the argument:

  • The Federal Reserve is very far from reaching their 2% PCE core inflation target. It is currently at 1.4% and moving away from the 2% target. The 100% rate hike probability for December’s meeting seemed to totally dismiss any concerns by the Fed for the lack of inflation.
  • 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). However, I am still of the opinion that Republicans will fall in line and support the tax cut bill.
  • 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:

https://www.investing.com/economic-calendar/core-pce-price-index-905

Image of corporate tax cut odds by PredictIt:

Fed’s rate hike odds is now at 100% (125 – 150 bps 91.5% and 150 – 175 bps 8.5%) for December’s meeting. Basically a rate hike in December has already been priced in. But, the issue is whether there is a chance of a surprise from the Fed by them choosing to stand pat and not hiking in December. This is especially so when September’s CPI was another miss and also when the Fed mentioned that low inflation may be due to persistent factors too.

To emphasise on my opinion that the market is assuming a December hike is a foregone conclusion which it ought to be, I will direct your attention to the minutes of the supposedly inconsequential FOMC November meeting.

https://www.federalreserve.gov/monetarypolicy/fomcminutes20171101.htm

Main sentences:

  • With core inflation readings continuing to surprise on the downside, however, many participants observed that there was some likelihood that inflation might remain below 2 percent for longer than they currently expected

This is an admission that “many” members think that low inflation is not transitory.

  • several participants expressed concern that the persistently weak inflation data could lead to a decline in longer-term inflation expectations or may have done so already

If inflation remains weak for too long, it could become permanent if it not already permanent. There is a hint of urgency (to raise inflation as soon as possible) implied from this sentence.

  • Many participants observed, however, that continued low readings on inflation, which had occurred even as the labor market tightened, might reflect not only transitory factors, but also the influence of developments that could prove more persistent.

Re-emphasising the point that “many” members think that there are permanent factors (Jeff Besoz?) at play that have been causing inflation to be weak, not just transitory factors.

  • A number of these participants were worried that a decline in longer-term inflation expectations would make it more challenging for the Committee to promote a return of inflation to 2 percent over the medium term.

A reverse from point 2 but still hammers home the point that an extended duration of weak inflation would make their job that much harder in generating inflation in the future. And hence there is an implied urgency to attempt to raise inflation as soon as possible.

  • Consistent with their expectation that a gradual removal of monetary policy accommodation would be appropriate, many participants thought that another increase in the target range for the federal funds rate was likely to be warranted in the near term if incoming information left the medium-term outlook broadly unchanged.

Well, core PCE for the months of September and October were both 1.4% which fits the criterion set by “many participants” that “incoming information left the medium-term outlook broadly unchanged”. And hence will it be accurate to say that “many participants” will vote for a hike in December given that it is considered “near term” since November the first? In essence, if “many participants” will vote to hike in the “near term” anyway, it basically discredits everything they said above.

Taken from Minutes of FOMC 31 October – 1 November 2017:

Gasoline prices rose in the aftermath of the hurricanes, boosting overall inflation in September. Still, on a 12month basis, PCE price inflation in September, at 1.6 percent, remained below the Committee’s longer-run objective; core PCE price inflation, which excludes consumer food and energy prices, was only 1.3 percent. Many participants judged that much of the recent softness in core inflation reflected temporary or idiosyncratic factors and that inflation would begin to rise once the influence of these factors began to wane. Most participants continued to think that the cyclical pressures associated with a tightening labor market were likely to show through to higher inflation over the medium term.

With core inflation readings continuing to surprise on the downside, however, many participants observed that there was some likelihood that inflation might remain below 2 percent for longer than they currently expected, and they discussed possible reasons for the recent shortfall. Several participants pointed to a diminished responsiveness of inflation to resource utilization, to the possibility that the degree of labor market tightness was less than currently estimated, or to lags in the response of inflation to greater resource utilization as plausible explanations for the continued soft readings on inflation. A few noted that secular influences, such as the effect of technological innovation in disrupting existing business models, were likely offsetting cyclical upward pressure on inflation and contributing to below-target inflation.

In discussing the implications of these developments, several participants expressed concern that the persistently weak inflation data could lead to a decline in longer-term inflation expectations or may have done so already; they pointed to low market-based measures of inflation compensation, declines in some survey measures of inflation expectations, or evidence from statistical models suggesting that the underlying trend in inflation had fallen in recent years. In addition, the possibility was raised that monetary policy actions or communications over the past couple of years, while inflation was below the Committee’s 2 percent objective, may have contributed to a decline in longer-run inflation expectations below a level consistent with that objective. Some other participants, however, noted that measures of inflation expectations had remained stable this year despite the low readings on inflation and judged that this stability should support the return of inflation to the Committee’s objective.

Many participants observed, however, that continued low readings on inflation, which had occurred even as the labor market tightened, might reflect not only transitory factors, but also the influence of developments that could prove more persistent. A number of these participants were worried that a decline in longer-term inflation expectations would make it more challenging for the Committee to promote a return of inflation to 2 percent over the medium term. These participants’ concerns were sharpened by the apparently weak responsiveness of inflation to resource utilization and the low level of the neutral interest rate, and such considerations suggested that the removal of policy accommodation should be quite gradual. In contrast, some other participants were concerned about upside risks to inflation in an environment in which the economy had reached full employment and the labor market was projected to tighten further, or about still very accommodative financial conditions. They cautioned that waiting too long to remove accommodation, or removing accommodation too slowly, could result in a substantial overshoot of the maximum sustainable level of employment that would likely be costly to reverse or could lead to increased risks to financial stability. A few of these participants emphasized that the lags in the response of inflation to tightening resource utilization implied that there could be increasing upside risks to inflation as the labor market tightened further.

Participants agreed that they would continue to monitor closely and assess incoming data before making any further adjustment to the target range for the federal funds rate. Consistent with their expectation that a gradual removal of monetary policy accommodation would be appropriate, many participants thought that another increase in the target range for the federal funds rate was likely to be warranted in the near term if incoming information left the medium-term outlook broadly unchanged. Several participants indicated that their decision about whether to increase the target range in the near term would depend importantly on whether the upcoming economic data boosted their confidence that inflation was headed toward the Committee’s objective. A few other participants thought that additional policy firming should be deferred until incoming information confirmed that inflation was clearly on a path toward the Committee’s symmetric 2 percent objective. A few participants cautioned that further increases in the target range for the federal funds rate while inflation remained persistently below 2 percent could unduly depress inflation expectations or lead the public to question the Committee’s commitment to its longer-run inflation objective.

https://www.federalreserve.gov/monetarypolicy/fomcminutes20171101.htm

http://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html

 

 

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