Saturday April 8, 2017 - 00:14:02 GMT
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What Now From The Fed and Trump?
John M. Bland, MBA
Poor March U.S. Employment Data March U.S. Employment data fell short of expectations. Non-Farm payrolls increased by only 98K vs. street expectations for an increase of +175K in the month. Some blamed a weather distortion for the poor data, but the level of job creation was less than the distortion would have implied. Average hourly earnings remained essentially flat in the month with a gain of only 0.20%, as expected. On Friday markets also had to digest a U.S. rocket attack on Syrian facilities in response to a gas attack on Syrian civilians Wednesday.
Fed Minutes More Hawkish Than Expected Financial markets were surprised Wednesday by the Minutes from the March 15 FOMC where the central bank, as expected, announmced a 15bp hike in its Fed Fundes target. Markets too the rate hike in stride as it had ben fully priced in by the markets. Currently, markets have placed about 70% odds in favor of another 25bp rate hike at the June Fed meeting. The market focus in the Fed Minutes was on the discussion of the USD 4.5tln of debt held on the central bank's balance sheet. That debt was accumulated in the wake of the financial crisis as they tried to stimulate economic growth by injecting extra liquidity into the system. The Fed owns a combination of mortgage debt and government securities. The talk is they do not mind holding governmment debt, but that they are not as comfortable holding the mortgage-backed paper. The tought is rather than re-investing the proceeds of maturing mortgage paper that they simply could let it run off in an orderly way. The Minutes suggest that they could start to let excess debt start to run off later in 2017.
Dovishness Of ECB Comments Surprises Traders Economists say the reduction in bond holdings will have a monetary effect, which may slow the pace of interest rate rises for the rest of 2017. It is reported that simulation results from the Fed FRB/US model imply balance sheet reduction may stand in for two to three rate hikes over a multiyear period. They say that this could keep median dots for 2017 and 2018 implying about three rate hikes per year. There was also concern expressed by some members about elevated stock valuations. On balance, markets took the Fed Minutes to be more hawkish than expected.
On the day following the FOMC Minutes ECB President Draghi in a prepared address in Frankfurt upset the markets when he said that inflation in the Eurozone is not strong enough for a shift to tighter monetary policy. Nevertheless Draghi indicated that the risks to growth have been shifting to the upside, but that it is too soon to declare success. He reinforced his views by indicating that a reassessment of ECB policy wolud be unwarranted at this time and there is no reason to deviate from current guidance on rates.
Many traders feel that the ECB has already overstayed its highly accomodative ploicy stance. Draghi's posture on inflation and interest rates stand in stark contrast to the more hawkish (read: German) policy board members who feel that the time is long past for excessive policy accomodation in the Eurozone. Many in the markets had been listening to the hawks and had felt that a shift in ECB policy would have been further along. This suggests that there must be some very sharp differences of opinions in the leadership of the ECB.
Weekly Event Risk Calendar:
11 Apr Tues
08:30 GB- CPI/RPI
09:00 DE- ZEW Survey
12 Apr Wed
01:30 AU- Employment
08:30 GB- Employment
14:00 CA- Bank of Canada Decision
14:30 US- EIA Crude
13 Apr Thu
12:30 US- PPI
12:30 US- Weekly Jobless
14 Apr Fri
00:00 Good Friday Bank Holidays
12:30 US- Retail Sales
12:30 US- CPI
14:00 US- University of Michigan (prelim)
Be sure to refer daily Global-View to see the continuously UPDATED Economic Calendar and the Forex Forum for the complete list of key items (actual data, selected charts, etc.) as they are released.
John M. Bland co-founding partner www.global-view.com
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