Posted on: 17 March 2016, by: Pepperstone Support, category: Market Review
The Fed hit all the dovish notes on Wednesday; even moreso than the market expected. April seems almost certainly off the agenda, while June is still sufficiently far away to not create stress in markets. We now see roughly 10bps of tightening priced-in for June 2016 and almost 25bps for December 2016.
Dots for 2016 have moved down from 4 hikes to 2 hikes, though Yellen asks you not to please, not read too much into this. “Considerable uncertainty attaches to each participant's forecasts of economic outcomes,” said Yellen. In the long run, the Fed expects its benchmark rate to reach 3.25%, down from 3.5% last forecasted.
Inflation was the most surprising driver of the FOMC’s tone.Total CPI inflation for 2016 was downgraded from 1.6% to 1.2% reflecting the further decline in oil prices from December. Core inflation was unchanged, with the exception of a minor downward revision to 2017 from 1.9% to 1.8%. The Fed is not yet convinced by data that upward pressures will stick.
Not surprising, global sentiment was another factor. The Fed added a new sentence to the statement: "global economic and financial developments continue to pose risks." In Q&A, Chair Yellen also said “our projection for global growth for those reasons is slightly lower, not dramatically lower, but enough lower to make some difference to our (US GDP) forecast.” The Fed lowered the 2016 and 2017 real GDP forecasts by 0.2% and 0.1%, respectively.
“Balances of risks” wording has been removed from the statement because there was no consensus.
Improving financial conditions were not acknowledged in the FOMC statement, but Yellen explained why during the press conference.“Although financial conditions have improved notably more recently, in addition, economic growth abroad appears to be running at a somewhat softer pace than previously expected.”
Other interesting mentions:
Yellen’s oil discussion. The Fed still can’t figure out if the decline is more helpful or hurtful. Yellen said as oil prices stabilize, “the influence will move out of both headline, of headline inflation, and that is what you see in the forecasts of participants. So if oil prices were to increase to 50, I mean, that would probably slightly move up our expected path for core inflation, maybe speed, how rapidly we would move back to 2%. But I wouldn't think that that would be something alone that would have great policy significance.”
There was one dissenter. Esther George wanted to hike in March. This is the first dissent since October.
Overall market volumes were around 250% higher than normal for a NY afternoon following the FOMC. This effect was fairly broad based across G10 and EM.
While the market reaction was substantial, not everyone in G10 has broken out yet:
Market liquidity remained extremely fragile, with density of liquidity around 40% to 50% thinner than normal for the New York afternoon across G10 pairs, so depth of market liquidity remains fairly thin. This effect was also seen in EM but to a lesser degree.
Average market top of book for pairs such as EURUSD, GBPUSD, AUDUSD, USDZAR and USDSGD around 30% to 60% wider than normal during the New York afternoon.
The USD was bid on a series of supportive data points before the FOMC announcement:
CPI. Core CPI inflation rose by 0.3%MoM (0.283% unrounded) in February, versus 0.2% expected. Core CPI inflation firmed from 2.2%YoY (2.21%) percent to 2.3% (2.33%). Total CPI fell by 0.2%MoM (-0.168%) in February, spot on consensus.
Total IP fell by 0.5MoM in February, while the Street looked for a more modest decline (-0.3%). However, the usual suspects weighed on the print and the disappointment was therefore discounted: utilities (weather related) and mining (oil related).
Manufacturing IP rose by 0.2%, versus 0.1% expected. Manufacturing IP over the January-February span was 1.6% annualized above the Q4 average, following a -0.3% annualized decline in Q4 output.
Housing starts popped in February to a level that is more consistent with authorizations. The number of groundbreakings rose to an above forecast level of 1.18 million from an upwardly revised 1.12 million level. Both single- ( 7.2%) and multi-family ( 0.8%) starts increased during the reference period.
Building permits were somewhat below expectations, as they fell from 1.20 million to 1.17 million. However, that’s still within the recent range and healthy levels
Atlanta GDPNow was unchanged at 1.9% following this data. Remember, it was downgraded Tuesday by 0.3% on the back of retail sales
The UK jobless rate was stable at 5.1% in November-January, the same as in October-December, but down from 5.7% a year earlier. The split shows continued solid job growth (1.5%YoY), with the share of the 16-64 year age population in work stable at last month’s record high (74.1%). Average weekly earnings rose by 2.1% versus 2.0% forecasted, while earnings excluding bonus rose by 2.2% versus 2.1% expected.
Looking ahead for Thursday, we do not expect an SNB rate cut, but it looks closer than the market prices. The worst on growth was avoided, and inflation looks set to creep up. A narrower rate differential vs. the ECB poses a challenge, with the CHF downtrend at risk. Rate cuts would address this better than any other tool. The SNB won’t close the door to a cut, there is some value in long futures which price very small cut risk.