June 15, 2017

Markets Today: Janet

The Fed this morning announced a hike in the Fed funds rate by ¼%, as entirely expected, lifting the Federal funds rate to 1.00-1.25%. But we walk in this morning with the big dollar having been pressured and the US Treasury curve lower. Another case of the usual “buy the rumour, sell the fact”?

The explanation comes only in part from a dovish Fed hike/as expected result, also with the Fed’s own rate projections in their “dot plot” rate forecasts hardly moved. The 2017 Fed median forecast still embodies one more rate hike this year, three more next year (again, as before), with the Fed funds by the end of 2019 getting to 2.9%, still effectively at the 3% still-expected  (You can see their rate and economic forecasts here.)

Selling of the USD (and lower Treasury yields) came after yet another downside surprise from the CPI that did the trick.  Headline US CPI for May eased 0.1% (flat expected) with core inflation also under-clubbing expectations at just +0.1%, bringing annual core CPI down to 1.7% y/y from 1.9% that was also the expectation.  As if the top line undershoot wasn’t telling enough, the detail of the low CPI looked to have more breadth in this report with more than just low cell phone charges at play (a reason why Yellen was at pains to point out the idiosyncratic factors at work in recent CPIs) but an array of soft price categories.  Apparel, owner occupied rent, autos, medical care, airfares, recreation and education were mentioned.  Pause for thought again.

Also released last night was the May US Retail Sales that was also lower than expected in May (partly low prices), but the sour taste from that neutralised by upward revisions to March and April.  That report, plus the low CPI saw the Atlanta Fed tweak up its Q2 GDPNow estimate to 3.2% from 3.0%.  (Higher nominal spending on net over recent months and lower CPI both help support real consumer spending and hence GDP.)

The Fed also outlined a plan under which it would begin to wind down the size of its balance sheet later this year, subject to the economy.  There would be a monthly cap on selling of US Treasuries and agency securities, a cap that would be progressively increased to a envisioned maximum.  The cap would start at $6bn/month for Treasuries and thereafter rise by $6bn/month until $30bn/m is reached.  The initial cap would by $4bn/m for agency/mortgage-backed securities, then by $4bn/m until $20bn/m is reached and continued.

Janet Yellen and the FOMC were unspecific on the timing of when this rundown would commence.  When asked in the presser, she initially stuck to her lines saying that it would be once normalization of fed funds is well under way but acknowledged it could be “relatively soon”.  So that time seems to approaching, perhaps at the September 21 meeting when the next set of Fed forecasts will be unveiled.

Market reaction saw the USD take a bath after the CPI but rallied after the Fed, though it looks to be again eking lower.  It was a not dissimilar intra-day saw tooth pattern for Treasuries, though yields remain measurably lower for the day, the USD less so.  AUD this morning trades just below 0.76, having tested above the figure on earlier USD weakness.  It will all play out with the numbers.  Oil had a bad night, WTI now with a 44 handle, also playing to the low inflation story, the CAD also an under-performer for the session.

Coming Up

Two key releases this morning, first, at 8.45 AEST is NZ’s Q1 GDP, followed by Aussie employment.  Last week, our colleagues at BNZ toned down their estimate for the quarter to 0.5% (2.4% y/y).  BNZ says “big-picture” it feels like Q1 GDP growth should be nearer 1.0%, with strong expansion in population and jobs, and robust business survey indicators in substantive support. However, the technical picture, including from the recent run of “partials”, is struggling to net much growth at all. Yesterday’s Q1 BoP report also added a degree of downside risk reservation over the GDP number.  The consensus as at the end of last week was 0.7%.

Then it’s all eyes on the Aussie jobs report at 11.30.  Leading indicators continue to point to good employment gains (ABS catching up to other labour demand indicators such as the NAB employment index and SEEK Job Ads).  That trend analysis suggests to us the tilt toward an above average just over 20K gain in employment and likely coming with an unchanged unemployment rate of 5.7%. (Sometime a good employment outcome comes with a rise in participation rate, neutralising the short term impact on the unemployment rate.) Of course, this is all subject to sampling variability, so we’ll see when the numbers are released at 11.30.  The consensus is for a rise of 10K.

BoJ Kuroda is speaking this afternoon at 16.30 AEST.  Another speech is one from RBA Deputy Governor Guy Debelle, speaking this evening at 5.40.  There’s no speech title as yet available.  It’s at a Thomson Reuters industry event.  Some other data and events on the cards to watch out for include UK Retail Sales, the BoE meeting, a smattering of US releases and, late in the session for Sterling watchers and a Mansion House speech from BoE Governor Mark Carney; it’s a private dinner but the text is being released.


On global stock markets, the S&P 500 was -0.10%. Bond markets saw US 10-years -8.53bp to 2.13%. In commodities, Brent crude oil -3.76% to $46.89, gold+0.6% to $1,273, iron ore +2.0% to $54.43, steam coal -0.4% to $80.50, met. coal +0.7% to $144.50. AUD is at 0.7591 and the range since yesterday 5pm Sydney time is 0.7533 to 0.7636.

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