Previous week: 26 June 2017 – 30 June 2017
BOE’s Mark Carney spoke again—27 June 2017 Wednesday
Mark Carnage went to bed for a week. When he awoke, he was in a sore mood because his pillow were not set right. There was a nagging pain in his neck and so he decided to change his stance on interest rates.
He recently said this. “some removal of monetary stimulus is likely to become necessary if the trade-off facing the [Monetary Policy Committee] continues to lessen and the policy decision accordingly becomes more conventional”.
Mark Carney says “now is not the time” to increase rates. Andy Haldane says “Provided the data are still on track, I do think that beginning the process of withdrawing some of the incremental stimulus provided last August would be prudent moving into the second half of the year.” From Business Insider’s breakdown of the leanings of each MPC voting member, holding rates unchanged seemed to be the more likely result in the next meeting in August.
Business Insider’s breakdown on each MPC voting member stance
Mark Carney — Hold, confirmed in speech on Tuesday.
Jon Cunliffe — Voted to hold in June, likely to do the same in August.
Ben Broadbent — Voted to hold in June, likely to do the same in August.
Andy Haldane — Voted to hold in June, but has indicated he could back a hike in August in speech on Wednesday.
Ian McCafferty — Hike, likely to do the same in August.
Michael Saunders — Hike, likely to do the same in August.
Gertjan Vlieghe — The MPC’s most dovish member, unlikely to vote anything other than a hold.
Kristin Forbes (outgoing) — Voted to hike in June, will not vote again.
Silvana Tenreyro (incoming) — Unknown as yet to vote, likely to back a hold.
Unknown incoming member — Charlotte Hogg’s replacement is likely to be a BoE insider.
ECB Mario Draghi spoke and misspoke—27 June 2017 Wednesday
Super Mario had a lumpy mattress last week and so when he awoke he was grouchy. He chose to not abide by the dovish narrative and decided to give a hawkish speech.
“Speaking at the ECB’s annual policy forum, Draghi highlighted a recovering euro zone economy that “the threat of deflation is gone and reflationary forces are at play” and that that the effects that keep inflation subdued are temporary and won’t let inflation deviate from its trend over the medium term. but added that stimulus in the form of the ECB’s monetary support was still needed.”
And so he subordinate had to correct the blunder made by Super Mario.
“Following the euro’s biggest daily jump in over a year, in what could be interpreted as verbal intervention, ECB’s Constancio said that market reactions aren’t always understandable and that Draghi didn’t say anything new in regards to recent ECB policy. Mario Draghi’s speech in Sintra on Tuesday was “totally” in line with recent ECB policy, ECB Vice President Vitor Constancio said in an interview on CNBC.”
BOC Poloz and Patterson spoke—28 June 2017 Wednesday
Both the Governor and Deputy Governor of the Bank of Canada stuck to the script that higher interest rates will be coming soon.
Patterson said “Two years later, it is our view that these cuts have helped facilitate the economy’s adjustment to the oil price shock and that the economic drag from lower prices is largely behind us.”
Poloz main points from CNBC:
- Bank of Canada Governor Stephen Poloz told CNBC that the country’s economic growth will moderate after a strong showing in the first quarter.
- But growth will still be “above potential”, in line with a broad economic pick-up globally, he said.
- Coming NAFTA re-negotiation is a potential headwind, but impact is hard to quantify now, Poloz said.
- Poloz said those cuts appeared to have “done their job.”
US Crude oil inventories—10.30pm 28 June 2017 Wednesday
US crude inventories increased +118k barrels on the expectation of -2.25 million drop. Baker Hughes US oil rig count dropped by 2 from 758 to 756. Oil production was 9250k barrels per day for week ending 16/06/2017, a decrease from 9350k barrels per day in the previous week.
Coming week: 19 June 2017 – 23 June 2017
Reserve Bank of Australia Rate Statement—12.30 pm 04 July 2017 Tuesday
FOMC Meeting Minutes—2 am 06 July 2017 Thursday
The Federal Open Market Committee voted to raise Federal Funds Rate by a quarter percentage points 3 weeks ago. It will be important to see the reasons for their decision to hike rates and initiate Quantitative Tightening by end of 2017. This is especially so when the macroeconomic data that came out prior to the Fed meeting was poor and deteriorating. One such example was inflation year on year was under the Fed’s 2% target. Let us see how the “data dependent” Fed justifies hiking rates when data proves otherwise.
US Crude oil inventories—11 pm 06 July 2017 Thursday
Is US oil production about to/had already peaked?
US non-farm employment change + unemployment rate + average hourly earnings m/ m—07 July 2017 Friday 8.30 pm
NZD/USD is coming up to the resistance zone at 0.73 to 0.74 on the weekly chart. On the daily chart, it seemed that the bullish momentum had been weakening. This is seen from the gradient of ascent of price becoming less steep as it approaches 0.73 to 0.74 resistance zone. Next strong support on the weekly chart comes in at 0.69.
There is a divergence in the stance of monetary policy between the Reserve Bank of New Zealand and the Federal Reserve. The RBNZ intends to keep monetary policy accommodative for a considerable period. In stark contrast, the Federal Reserve wants to continue to hike rates and embark on Quantitative Tightening this year (reducing the size of their enormous balance sheet).
Written on 25th of June 2017 about RBNZ’s monetary policy:
RBNZ’s Official Cash Rate was kept unchanged at 1.75%. The key sentences in the statement by Governor Wheeler are as follows.
- The trade-weighted exchange rate has increased by around 3 percent since May, partly in response to higher export prices. A lower New Zealand dollar would help rebalance the growth outlook towards the tradables sector.
- Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain and policy may need to adjust accordingly.
Written 17th of June 2017 about the Fed’s monetary policy
A dovish hike was what the market expected. However the FOMC delivered a hawkish hike.
1) Federal Funds rate was increased by 25 basis points as expected
2) Recognition that short term inflation will run under 2% mandate
3) Economic growth had rebounded from weak economic performance out of Q1. Q1, according to the Fed, was indeed “transitory”.
4) 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”.
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%
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.
USD/JPY long (speculative)
Since the start of the year (2017), 112 had been an important number for USD/JPY. It had acted as support and resistance several times. At the moment, it does show signs that it is taking support at 112.
The case for USD strength was explained above. The data dependent Federal Reserve is at this moment preferring to ignore economic data (which had been poor) so as to carry out their tightening policies.
The Bank of Japan’s Governor Kuroda vowed to do “whatever it takes” to boost (core) inflation to reach their 2% target. Try as Peter Pan might, even at +0.4% core CPI print in May, it is still extremely far from their 2% target. This is despite the fact that short term interest rate is at -0.1%, 10 year JGB yield target of around 0%, and printing money via QQE at 80 trillion yen ++ annually. Though not a consensus opinion, I am still of the opinion that the BOJ will not tighten any time soon and may even loosen monetary policy further to achieve their inflation target.
The Bank of Japan have got two mandates. They are “maintaining financial stability” and “price stability”. They do not target unemployment rate, retail spending, gross domestic product, etc. It seemed pretty apparent that if the always sanguine Peter Pan is really serious of reaching the 2% core inflation target, he needs to do much more than 80 trillion yen a year. Try 160?