Previous week: 03 July 2017 – 07 July 2017
Reserve Bank of Australia Rate Statement—12.30 pm 04 July 2017 Tuesday
Key points from RBA’s statement:
- Headline inflation rates, having moved higher over the past year, have declined recently in response to lower oil prices.
- As expected, GDP growth slowed in the March quarter, partly reflecting temporary factors.
- Indicators of the labour market remain mixed.
Key paragraph: “The outlook continues to be supported by the low level of interest rates. The depreciation of the exchange rate since 2013 has also assisted the economy in its transition following the mining investment boom. An appreciating exchange rate would complicate this adjustment.”
RBA—through their statement—is saying that the time to tighten monetary policy has not arrived. Further improvements in labour, inflation, and economic growth are needed before they will begin to consider tightening their monetary policy.
The statement by the RBA shows that the writer has a good writing ability. Each paragraph emphasizes one point and that point is captured succinctly in the topic sentences of each paragraph. It makes for an easy read.
FOMC Meeting Minutes—2 am 06 July 2017 Thursday
Key points summarized by Zerohedge:
*FED OFFICIALS DIVIDED OVER WHEN TO START BALANCE-SHEET RUNOFF
*FED OFFICIALS REPEATED SUPPORT FOR GRADUAL INTEREST-RATE HIKES
*A FEW FED OFFICIALS SAW EQUITY PRICES HIGH ON STANDARD METRICS
*FED OFFICIALS NOTED FINANCIAL CONDITIONS EASED DESPITE HIKES
*A FEW OFFICIALS SAW LOW VOLATILITY STOKING RISKS TO STABILITY
*MOST FED OFFICIALS BLAMED SOFT PRICES ON IDIOSYNCRATIC FACTORS
*FED DEBATED PROS, CONS OF SUSTAINED UNEMPLOYMENT UNDERSHOOT
- FOMC unsure when to start Quantitative Tightening (QT). Some preferred QT to begin sooner while others preferred to wait for more economic data befire deciding.
“Participants expressed a range of views about the appropriate timing of a change in reinvestment policy. Several preferred to announce a start to the process within a couple of months; in support of this approach, it was noted that the Committee’s communications had helped prepare the public for such a step. However, some others emphasized that deferring the decision until later in the year would permit additional time to assess the outlook for economic activity and inflation.”
- “Data-dependent” FOMC gave a weak justification for the recent declining inflation while simultaneously giving itself an escape valve if and when their judgment turned out to be poor.
The blame was placed on “idiosyncratic factors” for the recent drop in inflation and that they will “have little bearing on inflation over the medium run”. However, they said that the “recent softness in inflation (caused by idiosyncratic factors) might persist”.
Despite inflation rate running under the Committee’s 2% longer-run inflation objective, the FOMC carried on with their monetary tightening plan nevertheless. This implies that they do not bother themselves completely with data when discussing policy which further translates to them not being data-dependent any more.
“Most participants viewed the recent softness in these price data as largely reflecting idiosyncratic factors, including sharp declines in prices of wireless telephone services and prescription drugs, and expected these developments to have little bearing on inflation over the medium run.”
“Several participants expressed concern that progress toward the Committee’s 2 percent longer-run inflation objective might have slowed and that the recent softness in inflation might persist.”
US Crude oil inventories—11pm 06 July 2017 Wednesday
US crude inventories decreased by a whopping -6.299 million barrels on the expectation of -2 million drop. Baker Hughes US oil rig count increased by 7 from 756 to 763. Oil production was 9338k barrels per day for week ending 30/06/2017, an increase from 9250k barrels per day in the previous week. The question now is whether the rig count will start to decline in lagged response to the drop in oil price from $55 to $44 a barrel. The next question is whether this reduction in rig count will depress the rate of oil production in These United States.
US non-farm employment change + unemployment rate + average hourly earnings m/ m—07 July 2017 Friday 8.30 pm
Slightly good June jobs report. Number of jobs created in June beat expectations and April and May had added another +47k jobs. However, the recurring theme recently had been wage growth. Wage growth had been tepid at best even when US is close to or at the natural rate of unemployment.
|Average hourly earnings m/m||+0.2% (technically +0.153%)||+0.3%||+0.2%|
|Non-farm employment change||222k||179k||138k|
|Labour force participation rate||62.8%||62.7%|
- May non-farm employment change: 138k to 152k
- April non-farm employment change: 174k to 207k
- May average hourly earnings m/m: +0.2% to +0.1%
Silver Flash Crash—some time in the morning on Friday 07.07.2017
The price of silver dropped 6% in a short space of time.
G20 meetings—starts on Friday 07.07.2017
The world’s most powerful man met with the second most powerful man.
Coming week: 10 July 2017 – 14 July 2017
Bank of Canada Overnight Rate + Rate Statement + Monetary Policy Report + Press Conference—10pm Wednesday 12 July 2017
Expectations is for an increase in overnight rate by the Bank of Canada by 25 basis points from 0.50%. The Canadian Dollar had strengthened significantly after members of the central bank dropped hints that they plan to tighten soon. Since raising rates by the BOC is now considered a foregone conclusion, reaction to the rate hike would be suppressed.
US Crude oil inventories—10.30 pm 06 July 2017 Thursday
Another draw in inventories and rise in production?
US CPI m/m—8.30pm Friday 14 July 2017
US headline CPI m/m for the month of June is expected to increase by +0.1%. It was -0.1% for the previous month.
US core CPI m/m for the month of June is expected to increase by +0.2%. It was +0.1% for the previous month.
US Retail Sales m/m—8.30pm Friday 14 July 2017
US headline retail sales m/m for the month of June is expected to increase by +0.2%. It was -0.3% for the previous month.
US core retail sales m/m for the month of June is expected to increase by +0.2%. It was -0.3% for the previous month.
Trade idea was written on the 1st of July 2017
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.
Every time (since 1995) the gold silver ratio comes up to 80 area, it sells off. The theory is that silver’s price is more volatile than gold. When precious metals is bearish, silver’s price drops more than gold. When precious metals are bullish, silver’s price rises more than gold. Since the gold silver ratio is at an important resistance level and if it starts to sell off, it may signal a start of a bull run in precious metals. Acknowledgements to goldprice.org for the charts.
EUR/USD to watch
EUR/USD is now testing the resistance level of the channel formation. Possible shorting opportunity if resistance holds.
TSLA to watch
TSLA is coming down to support zone at around 275. Interesting to see what the market thinks of Tesla given the fact that it had been on the news pretty frequently of late. Important for Tech And FANG’s in general for support to hold here.