In a press conference following today’s FOMC statement, Federal Reserve Chairman Ben Bernanke said it appears that US economic growth will be less than previously forecast. Bernanke said that for the current year, he expected growth to be between 3.1 percent and 3.3 percent compared to 3.4 to 3.9 percent as noted earlier. Bernanke also hinted that the Fed would not conduct further quantitative easing once the current round of stimulus spending wraps up in June.
Source:
Federal Reserve policy makers said the economy is recovering at a “moderate pace” and a pickup in inflation is likely to be temporary, as they agreed to finish $600 billion of bond purchases on schedule in June. “The economic recovery is proceeding at a moderate pace and overall conditions in the labor market are improving gradually,” the FOMC said in its statement after a two-day meeting in Washington. “Increases in the prices of energy and other commodities have pushed up inflation in recent months,” and the Fed expects “these effects to be transitory,” the statement said.
Bloomberg
Little in the way of change is expected in this morning’s FOMC statement with most economists suggesting the Fed will commit to the completion of the “QEII” round of stimulus ending in June as originally planned. No change is expected in the 0.25 percent Federal Funds cap but there is a growing belief that the Fed is ready to abandon its use of “extended period” when describing the long-term interest rate outlook.
Since late 2010, Fed Chairman Ben Bernanke has relied on the phrase whenever discussing how long we can expect interest rates to remain at the historical low. However, there is a growing sense that the Fed is about to lay the groundwork for its stimulus exit plan and interest rate increases will certainly be foremost on the agenda.
Source: Bloomberg
The latest growth figures show a reduced likelihood of the UK economy slipping back into recession with a weak but positive expansion of 0.5 percent for the first quarter of the year. This follows the contraction of half a percent in the second half of 2010.
Still, the UK is not out of the woods and with the impact of planned government spending cuts to reduce the deficit still to be accounted for, many questions remain.
“These figures were mixed and well below the Office for Budget Responsibility prediction that the economy would grow by 0.8% in the quarter,” noted David Kern, the chief economist at the British Chambers of Commerce. “Given the fragility of the recovery, it is vital for the government to persevere with policies that support growth, and remove the obstacles that prevent businesses from creating jobs and exporting.”
Source: BBC News
Today all eyes and ears are on the FOMC meeting and the new “format”, where Fed Chairman Bernanke will hold a Q&A session after the release of the interest rate decision. So make not of the time changes, as the rate decision has been moved up to 12:30 EST, with the press conference to follow at 2:15 EST, which was the old rate decision time.
It will be extremely interesting to say the least to see how this goes and whether or not Bernanke is a better salesman than the market believes. It is no secret that QE2 has been wildly unpopular with the public and that indeed it has been responsible for higher commodities prices despite the intellectual dishonesty surrounding that fact.
However, what QE2 has also done is help stabilize asset prices so that the economy did not become over-ridden by deflation. Bernanke is essentially acting alone to help the economy from a monetary policy perspective, as politicians in Washington have done virtually nothing on the fiscal policy side. Considering this, perhaps Bernanke is under-appreciated and the scape-goat in the whole sordid mess.
Overnight in the UK, GDP figures came in as expected with strength in the services sector showing promise that the economy is improving, and all but erasing last quarter’s contraction.
In Australia, CPI data came in hotter than expected and even thought the RBA said they wouldn’t raise rates despite inflation, they may be forced to re-think that policy.
So the markets are in mild risk-taking mode ahead of the FOMC meeting today, with both stocks and commodities higher to start the day.
In the forex market:
Aussie (AUD): The Aussie is higher across the board as CPI data came in hotter than expected, showing a gain of 3.3% vs. an expectation of 3%, with the quarterly figure gaining 1.6% vs. an expected 1.2%. While it is no secret that there is inflation in Australia, this figure may cause the RBA to re-think it stance that it wouldn’t raise despite inflation concerns. (Click chart to enlarge)
Kiwi (NZD): The Kiwi is also higher against all but the Aussie as risk appetite has increased. In addition, both business confidence and activity outlook figures came in better than expected. The RBNZ rate decision is due out later this afternoon.
Loonie (CAD): The Loonie is mostly lower despite higher oil prices as it appears as though rate differential expectations are somewhat muted between the commodity currencies.
Euro (EUR): The Euro is mostly higher as Dollar weakness is driving markets ahead of today’s FOMC. With relatively little news today, the Euro should continue to trade opposite the Dollar.
Pound (GBP): The Pound is higher across the board as GDP figures came in as expected, showing a gain of .5% for the first quarter which essentially negated last quarter’s contraction. The YoY GDP grew at 1.8% as expected, but the highlight of today’s data may have been the increase in the Index of Services which grew at the largest clip in nearly 5 years and represents underlying strength in the UK economy. (Click chart to enlarge)
Dollar (USD): The Dollar is mostly lower ahead of today’s FOMC meeting. While volatility is expected as the market weighs in on every word spoken by Bernanke, he will try to stick to the script as much as possible.
Yen (JPY): The Yen is weaker across the board as retail sales figures came in lower than expected, showing a decline of 7.7% vs. an expected decline of 4.7%. While the effects of the natural disaster are largely to blame, S&P decided to pile on and downgraded the Japanese debt outlook to negative.
Yesterday I wrote about the transparency vs. honesty debate going on today with regard to monetary policy and how Bernanke is basically doing all he can despite no help from the fiscal policy side of the equation.
This doesn’t change the fact that current monetary policy is responsible for commodity inflation not just here but around the globe and that the US economy is not nearly as healthy as some would like you to believe. As better than expected stock earnings continue to pour in, the overall malaise affecting the economy cannot be discounted.
This new format for the Fed could be either a blessing or a disappointment, depending upon how honest the Fed Chairman decides to be. My guess is that while volatility surrounding the press conference is expected, it could end up being much ado about nothing.
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The market is focused on what Ben is going to say, but they should be alert to the release of the forecasts which come first. The Fed’s projections of ‘central tendency’ for GDP, unemployment, and inflation will be released at the beginning of the press conference (2.15 EST) and could be the actual market mover rather than Ben’s performance during question and answers.
The recent rally in US Treasuries suggests that the market is priced for a dovish FOMC. The press conference is expected to touch upon several topics, including the timing of the withdrawal of liquidity and the impact of commodity prices on the FOMC’s economic outlook.
Elsewhere, Cable has found support after a solid UK GDP release this morning (+0.5%), even the Euro-zone’s industrial orders rising +0.9% on the month and +21.3% on the year is supporting the single currency short term as capital markets shift their attention to the FOMC.
The US$ is weaker in the O/N trading session. Currently, it is lower against 15 of the 16 most actively traded currencies in a ‘volatile’ session.
US data releases did little for the dollar yesterday, despite being somewhat more positive. Consumer’s current assessment of economic prosperity, fueled by job prospects, edged up +1.6 points this month to 65.4 from March’s unrevised print of 63.4. It failed to recapture all of last month’s loss which plummeted on consumer’s pessimism of the six-month outlook (-16.2 points). This month’s present expectations category was again outpaced by future-expectations. Digging deeper, the present situation rose +2.1 points to 39.6 on the belief ‘jobs were plentiful’, while the six-month outlook advanced +1.3 points to 82.6. It seems that higher energy prices are again weighing on expectations.
February’s S&P/Case-Shiller House Price Index printed a -3.3%, y/y, decline, meeting market expectations, deteriorating from a -3.1%, y/y, decline in January. On a monthly basis, the seasonally adjusted (10 and 20-city index’s) felly by -0.2%, compared to a -0.3% fall in January. It was the smallest seasonally adjusted monthly fall in over a year.
The USD is lower against the EUR +0.21%, GBP +0.51%, CHF +0.07% and higher against JPY -0.36%. The commodity currencies are mixed this morning, CAD +0.00% and AUD +0.39%.
Investors seem to collectively dislike the dollar, otherwise the loonie should have traded much lower yesterday as commodities came under pressure. It seems that the consumers ‘disgust for US monetary and fiscal policy’ had the ‘small’ positive CAD carry overcome this drop in commodity prices.
Fundamental reason have aided the CAD rise of late, but the speed of its rise has been somewhat over zealous, requiring a pull back from its four-year high print of last week that occurred after the stronger than expected domestic inflation data. The market has been pricing in a tightening bias for the July BoC meeting.
Expect investors to covet the loonie as an alternative to the EUR and the dollar, assuming risk appetite remains the same and Bernanke gives the market no more surprises (0.9525).
The AUD has rallied to a post-1983 float high above 1.08 overnight after higher-than-expected Australian CPI-inflation in the first quarter has increassed expectations of further RBA rate hikes. Inflation rose +1.6%, q/q, far higher than the consensus forecast of +1.2%, pushing the year-on-year rate to +3.3% from +2.7% in the fourth quarter. It seems that flood related food price spikes and higher oil prices drove the headline. However, the underlying inflation was also high, rising +0.9%, q/q to +2.3% from +2.2%, y/y in the fourth-quarter.
Currently, the RBA seem comfortable with interest rates as highlighted in the released minutes earlier this month. The Governor viewed his policy setting as appropriate, saying they will ‘look through’ higher inflation and slower growth stemming from natural disasters. It’s expected that Governor Stevens will want to see more data that’s not so distorted by weather, which may take some time to come through, before moving on rates again.
Australian yields are still the highest in the G10 and do look attractive. The expected mix of trade surpluses and rising capital inflows should provide support for the currency on any pullbacks as the currency marches towards 1.10 outright(1.0825).
Crude is little changed in the O/N session ($112.35 +14c). Oil prices remain range bound, despite the dollar underperforming and MENA unrest. Even comments from the Saudi’s about the impact of high oil prices on the global economy have been unable to provide sustainable pressure on the commodity just yet. Investors are waiting for the potential of ‘a signal of a change in monetary policy from the Fed’ this afternoon.
To a certain extent, last week’s EIA report has provided a level of support for crude. Supplies of commodity fell -2.32m barrels while the market had forecasted a stock increase of +1.3m. Gas inventories fared no better, falling -1.58m barrels. Stocks were expected to decline by -1.75m barrels. Year-to-date, crude has rallied +20%.
The IEA said it maintains its 2011 global oil demand growth forecast but noted that the high oil prices are beginning to dent demand growth based on its preliminary data for January and February. Both the IEA and IMF have said that prices above the $100 watermark are beginning to hurt the global economy.
Recent price movements are being dictated by the value of the dollar and on speculators pushing prices to extremes. Even OPEC sides with the other agencies and added that they are unlikely to alter output targets when it meets in June as there is ‘no shortage of oil anywhere in the world’ even after supply curtailments in MENA.
Gold came under pressure yesterday from investor uncertainty over the likely course of Bernanke and company’s monetary policy and tomorrows USD GDP release. Some investors were happy booking profits on event risk despite the dollar remaining under pressure.
It seems that gold’s usual inverse relation to the dollar has been weakening over the last few trading sessions. To date, the rally has been strong and it’s not surprising to see some profit-taking ahead of the FOMC meeting and Ben’s first public appearance post-rate announcement.
On these pullbacks, prices remain supported on speculation that record-low interest rates will encourage demand for an inflation hedge amid expectations that the Fed will maintain its accommodative monetary policy. Gold, as a non-yielding asset, has a higher opportunity cost when interest rates rise.
The precious metal has become the currency of choice, rallying +30.5% in the past year. At the moment, any price pullbacks are viewed as favorable opportunities for investors to continue to diversify into safe-haven assets, especially metal being used as a store-of-value ($1,508 +$4.70c).
The Nikkei closed at 9,691 up+133. The DAX index in Europe was at 7,399 up+43; the FTSE (UK) currently is 6,064 down-6. The early call for the open of key US indices is higher. The US 10-year eased 3bp yesterday (3.35%) and is little changed in the O/N session.
Ten year product yields have fallen to a new-month low on speculation that the Fed will keep overnight lending rates accommodative and consider steps to stop yields from rising as the end of QE2 approaches.
With the auctions also this week, it’s difficult for the market to set up to take down the product. That’s probably why, even with equities rallying, dealers are keeping things close to their chest.
Yesterday’s $35b 2-year auction was fair, printing a yield of +0.673% that was 3.06 times subscribed versus the four-auction average of 3.34. Indirect bidders took +37.9%, while direct took down +13.4%. Dealers will now change their focus to today’s $35b 5-years and tomorrows $29b 7’s. Now we wait for Ben’s first post-FOMC announcement appearance.
The dollar continued its week-long slide against the euro just one day before the next Federal Open Market Committee statement and investors are strongly of the belief that the FOMC will maintain the current low interest rate policy capping the Federal Funds rate at just 0.25 percent.
A low interest rate tends to devalue a currency; this is because lower interest rates mean weaker yields for investors. As a result, investors will sell lower-yielding currencies for currencies providing higher returns and this exactly what has been happening with the dollar. Looking ahead, the dollar sell-off will likely increase as the interest rate gap between the U.S. and other countries continues to widen with rate increases in Australia, Canada, and most recently the Eurozone, taking the shine off the greenback.
Geithner Pledges Support for Strong Dollar
Regardless of the high probability that the Fed will maintain the historical low Federal Funds rate – an action that continues to encourage a weaker currency – U.S. Treasury Secretary Timothy Geithner today repeated his earlier mantra that the Treasury believes in promoting a strong U.S. dollar.
“Our policy has been and will always be, as long as I will be in office, that a strong dollar is in the interest of the country,” Geithner said at a New York conference earlier today. “ We will never embrace a strategy to weaken the dollar.”
Based on Geithner’s comments, it is clear that the Fed and the Treasury Department are not – publically at least – reading from the same playbook. In fairness, the Fed is “independent” of the government with a mandate to ensure full employment while promoting sustainable growth and it is the Fed’s ability to set interest rates that makes it possible for the Fed to achieve these goals.
Nowhere does it say that the Fed is responsible for maintaining the value of the dollar. In fact, considering its actions in the wake of the last recession, it appears a weaker dollar is exactly what the Fed is working towards.
Not that this is necessarily a bad thing at this time. A weaker dollar is beneficial for exporting companies as it helps make products made in America more affordable for foreign buyers. For example, recent earnings reports from large multinationals such as IBM and Intel were bolstered by surging global demand for their products. Certainly, these companies make good products, but so do other manufacturers but having a discounted dollar has helped foreign sales. If demand continues to grow, this could translate into employment gains for American workers.
So, while Geithner continues to pledge his allegiance to a strong dollar, look to Bernanke and tomorrow’s statement from the Fed for a realistic picture of America’s real fiscal policy. Also, keep in mind that Geithner is more politician than economist and it would not be very politically astute for him to announce publicly that a weak dollar is his objective. Bernanke has proven he has no such qualms.
Greece’s deficit for 2010 was a higher-than-expected 10.5 percent for 2010 surpassing the projected 9.4 percent shortfall by more than a full percentage point. The news sent Greek bond yields higher and drew fresh comments suggesting Greece will require further assistance to avoid insolvency.
“I don’t think that Greece will succeed in this consolidation strategy without any restructuring in the future, or perhaps also in the near future,” Lars Feld, a member of the German government’s council of economic advisers, told Bloomberg Television’s Nicole Itano in Frankfurt. “Greece should restructure sooner than later.”
Source: Bloomberg
The Asian Development Bank (ADB) issued a warning today that rising food and energy prices could impact the expected growth of the Asian economies. Overall, economies in Asia were among the first to recover from the global recession and have experienced robust growth. However, with food prices estimated to have increased 10 percent this year and unrest in the Mid East forcing fuel prices higher, the concern is that price inflation will reverse much of the recent gains.
According to the ADB’s chief economist, Changyong Rhee, “for poor families in developing Asia, who already spend more than 60% of their income on food, higher prices further reduce their ability to pay for medical care and their children’s education.”
“Left unchecked, the food crisis will badly undermine recent gains in poverty reduction made in Asia.” he added.
Source: BBC News
Tomorrow will the be the first of the new, transparent Fed where Bernanke will attempt to get out in front of the population and attempt to get people to suspend their disbelief. While the Fed Chairman is clearly on the wrong side of public opinion with QE2 and the inflation it has caused, trying to convince people that what they are feeling in the economy is wrong just won’t work.
The reason is because there will be no truth to go along with the transparency. It will be very difficult to sway public opinion that there is no inflation when people see it in their daily lives. The debate over which metric of CPI to use to see the true effects of policy have left people with a lack of confidence in those in power. How this speech tomorrow will change this sentiment is anyone’s guess.
So in my opinion this will all amount to much ado about nothing, with the markets hanging on every word spoken, though I don’t think we will learn anything new.
Europe is open again after yesterday’s holiday and European stocks are higher as are US equity futures to start the day. Asian stocks were lower as are commodities, though today can’t be classified as either a risk-taking or risk-averting day.
In the forex market:
Aussie (AUD): The Aussie is higher as interest rate differentials and carry trades are driving market sentiment despite mild risk taking in the marketplace. An index of leading indicators came in higher than expected.
Kiwi (NZD): The Kiwi is the biggest gainer this morning ahead of tomorrow’s rate policy decision as maybe the market is sensing that the RBNZ could turn hawkish again. While the current expectation is the rates will be left unchanged, the added benefit of Dollar weakness has been driving price action.
Loonie (CAD): The Loonie is also mostly higher despite oil prices pulling back to just above $112. Friday’s GDP report will give more clarity into the Canadian economic situation.
Euro (EUR): The Euro is mixed this morning as both Dollar and Yen are weaker, though reports about a possible Greek debt restructuring have left the market un-phased. CPI data due out tomorrow is expected to show higher inflation.
Pound (GBP): The Pound is lower across the board ahead of tomorrow’s GDP report. CBI business optimism figures came in slightly lower than expected, and perhaps the distraction of the Royal wedding later this week has left the markets unimpressed with the Pound. (Click chart to enlarge)
Dollar (USD): The Dollar is weaker across the board ahead of tomorrow’s Fed meetings. There is increased speculation that the Fed will somehow try to continue to support the economy even though QE2 is expected to end in June. Consumer confidence figures are due out later this morning.
Yen (JPY): The Yen is also lower as the expectation of continued weak monetary policy has pushed traders toward higher yielding currencies. Retail sales figures are expected to show big declines later this evening, ahead of Thursday’s rate decision.
While I expect little in the way of learning something new tomorrow from the Fed, there is always the possibility of a surprise. However, the Fed has been pretty clear about its stance and its denials of inflation so I highly doubt that will change anytime soon.
But the market may be more concerned with how the Fed plans to exit QE2 and what that will do to the economy. What is clear is that the Fed needs to pick up the slack for the inaction occurring on the fiscal side of the equation, with politicians in Washington unable to work together.
Don’t expect to walk away from this new Fed format tomorrow with a warm and fuzzy feeling about the direction the US is going, and continue to be cautious. While there is always major volatility surrounding the FOMC meetings, I could see tomorrow turning out to be one big dud.
To learn more about how you can take advantage of world events through the currency market, be sure to check out our currency trading courses!
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