The Week Ahead – Sterling and Yen

The Week Ahead – Sterling and Yen

Previous week: 09 October 2017 – 13 October 2017

FOMC Meeting Minutes—3am 12 October 2017 Thursday

This FOMC minutes was for September’s Fed meeting where they decided to initiate Quantitative Tightening. The Fed for the first time admitted that the low inflation that was experienced in 2017 was not caused solely from transitory factors but from factors that were more persistent. Hence, patience is needed when tightening monetary policy while monitoring the inflation trends.

Main point from the Statement, with emphasis on the word “MANY”:

“Nevertheless, many participants expressed concern that the low inflation readings this year might reflect not only transitory factors, but also the influence of developments that could prove more persistent, and it was noted that some patience in removing policy accommodation while assessing trends in inflation was warranted.”

Other points from the statement:

“Several others noted that, in light of the uncertainty around their outlook for inflation, their decision on whether to take such a policy action would depend importantly on whether the economic data in coming months increased their confidence that inflation was moving up toward the Committee’s objective. A few participants thought that additional increases in the federal funds rate should be deferred until incoming information confirmed that the low readings on inflation this year were not likely to persist and that inflation was clearly on a path toward the Committee’s symmetric 2 percent objective over the medium term.”

Some other participants, however, were more worried about upside risks to inflation arising from a labor market that had already reached full employment and was projected to tighten further. Their concerns were heightened by the apparent easing in financial conditions that had developed since the Committee’s policy normalization process was initiated in December 2015. These participants cautioned that an unduly slow pace in removing policy accommodation could result in an overshoot of the Committee’s inflation objective in the medium term that would likely be costly to reverse or could lead to an intensification of financial stability risks or to other imbalances that might prove difficult to unwind.

https://www.federalreserve.gov/monetarypolicy/files/fomcminutes20170920.pdf

Other points summarized by Zerohedge:

  1. All participants thought it would be appropriate for the Committee to maintain the current target range for the federal funds rate
  2. Many participants expressed concern that the low inflation readings this year might reflect not only transitory factors
  3. Overall, the available information suggested that, although the storms would likely affect the quarterly pattern of changes in real GDP at least through the second half of the year:
  4. Members judged that storm-related disruptions and rebuilding would affect economic activity in the near term, but past experience suggested that the hurricanes were unlikely to materially alter the course of the national economy over the medium term
  5. Higher prices for gasoline and some other items in the aftermath of the hurricanes would likely boost inflation temporarily
  6. Interpreting the next few inflation reports would likely be complicated by the temporary run-up in energy costs and in the prices of other items affected by storm-related disruptions and rebuilding
  7. A few participants thought that additional increases in the federal funds rate should be deferred until incoming information confirmed that the low readings on inflation this year were not likely to persist
  8. A couple of those participants expressed concern that the persistence of highly accommodative financial conditions could, over time, pose risks to financial stability.
  9. It was noted that some patience in removing policy accommodation while assessing trends in inflation was warranted
  10. All agreed that they would closely monitor and assess incoming data before making any further adjustment to the federal funds rate
  11. Many participants continued to believe that the cyclical pressures associated with a tightening labor market or an economy operating above its potential were likely to show through to higher inflation over the medium term
  12. Most participants had not assumed enactment of a fiscal stimulus package in their economic projections or had marked down the expected magnitude of any stimulus

http://www.zerohedge.com/news/2017-10-11/fomc-minutes-show-schizophrenic-fed-fears-low-inflation-here-stay-push-another-rate-

US Crude oil inventories—12 midnight 13 October 2017 Friday

US crude inventories decreased by -2.75 million barrels on the expectation of -2.4 million decrease. Baker Hughes US oil rig count decreased by 5 from 748 to 743. Oil production was 9480 barrels per day for week ending 06/10/2017, a decrease from 9561 barrels per day in the previous week. Expansion in fracking may be losing its momentum.

http://www.zerohedge.com/news/2017-10-12/rbob-sinks-after-surprise-build-wti-bounces-biggest-production-drop-2-years

http://www.marketwatch.com/story/baker-hughes-reports-a-second-straight-weekly-decline-in-us-oil-rig-count-2017-10-13

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

US CPI—9.30pm 13 October 2017 Friday

Name Actual Consensus Previous
Headline CPI m/m +0.5% +0.6% +0.4%
Headline CPI y/y +2.2% +2.3% +1.9%
Core CPI m/m +0.1% +0.2% +0.2%
Core CPI y/y +1.7% +1.8% +1.7%

Core CPI y/y is now under the Fed’s 2% mandate for 6 straight months.

http://www.zerohedge.com/news/2017-10-13/core-cpi-stays-below-fed-mandate-6th-straight-month

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

US Retail Sales—9.30pm 13 October 2017 Friday

Name Actual Consensus Previous
Headline Retail Sales m/m +1.6% +1.7% -0.1% (from -0.2%)
Headline Retail Sales y/y +4.4% +3.2%
Core Retail Sales m/m +1.0% +0.9% +0.5% (from +0.2%)

http://www.zerohedge.com/news/2017-10-13/storm-impacted-retail-sales-disappoint-despite-biggest-spike-march-2015

Donald single-handedly repealing Obamacare

Great article by the “failing New York Times” in explaining the consequences of Donald’s removal of subsidies to insurance providers. He is basically going to raise the price of insurance which puts an ever tightening noose around the American citizens’ neck. American citizens will then be used as hostage to get Republican senators John McCain, Lisa Murkowski, and Susan Collins to fall in line to vote in favour for a repeal and replacement of Obama care.

Donald says this, Jong-un says that, The Donald Decertifies Iran Nuclear Deal

The Donald decertifies the Iran Nuclear Deal which in essence means the United States is pulling out of the Joint Comprehensive Plan of Action (JCPOA). The United States, though hands down the most powerful nation militarily, will now be in direct conflict between 2 potentially nuclear nations: Iran and North Korea.

From Wikipedia: “The Joint Comprehensive Plan of Action (JCPOA; known commonly as the Iran deal or Iran nuclear deal, is an international agreement on the nuclear program of Iran reached in Vienna on 14 July 2015 between Iran, the P5+1 (the five permanent members of the United Nations Security Council—China, France, Russia, United Kingdom, United States—plus Germany), and the European Union.”

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

 

Coming week: 02 October 2017 – 06 October 2017

RBA Monetary Policy Meeting Minutes—9.30am 17 October 2017

UK CPI y/y—5.30pm 17 October 2017

The expectation will be for inflation to hit 3%. It was 2.9% in the month of September. Rising inflation will increase pressure on the BOE to raise the bank rates.

US Crude oil inventories—10.30 pm 05 October 2017 Thursday

Another draw in inventories?

Trade Ideas

USD/JPY short?

A big bearish pinbar was formed at 113. However it is not at any resistance level.

Trump continues to keep tensions around the world high with frequent comments on Iran and North Korea. Just last week he said “Calm before the storm” without clarifying what the storm was meant to refer to.

Inflation may have just have come round in Japan. In August, core CPI rose another two tenths of one percent to a new cycle high of +0.7%. Though 0.7% is still pretty far from the 2% target, it is still progress made by the central bank.

https://tradingeconomics.com/japan/core-inflation-rate

US core CPI y/y was 1.7% in September, 6 consecutive months where inflation was under the Fed’s 2% mandate.

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

Fed’s rate hike odds is now at 81.7%, down from 89.2% last week. 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.

“Nevertheless, many participants expressed concern that the low inflation readings this year might reflect not only transitory factors, but also the influence of developments that could prove more persistent, and it was noted that some patience in removing policy accommodation while assessing trends in inflation was warranted.”

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

GBP/USD long to watch and wait

The British Pound had been in an uptrend since the start of the year.

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

Dove ?
​Dr Gertjan Vlieghe 0 to increase, 19 to maintain, 2 to reduce Dove Raise
Edmund’s prediction 5 to raise / 9

UK Inflation:

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.

UK Unemployment:

The labour market gets tighter every month and is definitely getting very close to the natural rate of unemployment.

UK GDP:

Annualised GDP growth rate had been steady at around 2% since 2010.

USD’s side of the argument:

  • The Federal Reserve is very far from reaching their 2% PCE core inflation target. It is currently at 1.3% and moving away from the 2% target. The 89.2% 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).
  • 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

Fed’s rate hike odds is now at 81.7%, down from 89.2% last week. 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.

“Nevertheless, many participants expressed concern that the low inflation readings this year might reflect not only transitory factors, but also the influence of developments that could prove more persistent, and it was noted that some patience in removing policy accommodation while assessing trends in inflation was warranted.”

 

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

Counterargument:

Short sterling is pricing in around 80+% of a rate increase by the Bank of England by December 2017, but not completely.

https://www.theice.com/products/37650330/Three-Month-Sterling-Short-Sterling-Future/data

 

 

 

The Week Ahead - Trump tax cuts and UK inflation The Week Ahead - Yen , Inflation and Cable