Markets Overview
HIGHLIGHTS AHEAD
The Bank of England will be in focus today (9 Apr) as it is set to announce its April monetary policy decision but markets are not expecting the BOE to deviate from its current policy stance. The key US economic data on the tap today (26 Mar) include the usual weekly initial jobless claims (9 Apr), the Bloomberg consumer comfort survey (9 Apr), February wholesale inventories. The data docket from the rest of the developed economies on Thursday include the Japan March machine tool orders, German February IP and trade balance, UK February Trade data, UK March RICS house price.
In the March FOMC minutes released on Wednesday (8 Apr), the key take-away was that Fed Reserve officials were divided over when they should raise interest rates, a debate that took place before the release of the disappointing March nonfarm payrolls data (on 3 Apr). According to the minutes, “several participants judged that the economic data and outlook were likely to warrant beginning normalization at the June meeting,” but “others anticipated that the effects of energy price declines and the dollar’s appreciation would continue to weigh on inflation in the near term, suggesting that conditions likely would not be appropriate to begin raising rates until later in the year, and a couple of participants suggested that the economic outlook likely would not call for liftoff until 2016.” So there remained a lot of uncertainty on the timing of the liftoff although the officials “continued to think that an increase in the target range for the federal funds rate was unlikely in April.” A gradual pace of normalization rate is expected and the minutes also noted that monetary policy would remain highly accommodative even after the first increase.
The minutes also reveal what would make Fed officials “reasonably confident” that inflation will move back up toward the 2% objective in the medium term (a condition for a rate increase), highlighting that “further improvement in the labor market, a stabilization of energy prices and a leveling out of the foreign-exchange value of the dollar were all seen as helpful in establishing confidence that inflation would turn up.” That said, the minutes also noted that “there were no simple criteria for such a judgment, and, in particular, that, in a context of progress toward maximum employment and reasonable confidence that inflation will move back to 2 percent over the medium term, the [rate] normalization process could be initiated prior to seeing increases in core price inflation or wage inflation.” The strength of the US dollar was also discussed, and “several participants noted that the dollar’s further appreciation over the intermeeting period was likely to restrain U.S.net exports and economic growth for a time.” External risks that were highlighted included the slowdown in growth in China, fiscal and financial problems in Greece.
Recall that in the March FOMC decision, the Fed dropped its pledge to be “patient” on raising interest rates, marking a shift away from the explicit calendar-based guidance to be more data-dependent guidance but the Fed’s macro-economic forecasts were downgraded and more importantly, the forecasts for the path of rate increases were markedly revised lower in March (the dot-plot chart).
Expectations for the Fed Reserve’s first rate hike have been rolled back following a dovish March FOMC, a repeat of weak GDP in 1Q-2015 and a plunge in US March job creation. We (UOB) have not changed our Fed rate normalization timetable and we still expect the Fed rate normalization to take place in 16-17 June 2015 FOMC based on: 1) Expected growth rebound in 2Q & 3Q-2015 (similar to 2014), 2) Increasing US domestic wage pressure, and 3) The US Fed Reserve’s desire to get away from the prolonged state of being stuck in zero-interest rate environment. While we still see downside risks to the majors & Asian FX, we are making slight adjustments to our FX forecasts as we are now expecting a more moderate USD appreciation going forward.
The US stock markets ended higher on Wednesday (8 Apr) after the FOMC minutes as the sentiment was likely boosted more by the M&A deals announced in the oil & gas and biomedical spaces.The US dollar resumed its appreciation on Wednesday (8 Apr) as the USD rose against the euro & pared losses against the yen following the FOMC minutes showing several Fed policy makers considering a June rate increased warranted. The US Treasury market ended slightly weaker as yields rose between 1-2.6bps across the curve after the FOMC minutes showed Fed official divided over the timing of the Fed rate hike. US and global oil prices plunged on Wednesday after EIA reported US crude inventory added another 10.95 million barrels (the largest weekly buildup since 2001) to a fresh record of 482.4 million barrels while Saudi Oil Minister Ali al-Naimi announced that Saudi production hit an all-time high of 10.3 million barrels a day in March.
Today’s key event in Asia will be the Bank of Korea’s monetary decision and market believes that the 7-day repo rate of 1.75% will be kept unchanged. The BoK had just done a 25bps rate cut back on 12 Mar 2015. Using the Taylor rule, a guideline for how much central banks should adjust policy rates based on inflation and growth, it seems that BoK is running ahead of the curve with that rate cut in March. In fact, the Bloomberg’s computed Taylor rule policy rate is about 1.9% for April, showing that any further easing should be of low probability. Recent data indicate the economy may be strengthening in some respects. Growth in housing prices picked up to 2.3% year-on yearin March, and industrial production rose 2.6% on a seasonally adjusted monthly basis in February.Capital outflows fell to USD5.5 billion in February from USD8.2 dollars the previous month.
