Powell to keep it ambiguous and leave options open
USD: Avoiding March rate cut speculation
The first FOMC meeting of 2024 is upon us and with the outcome of the meeting clear – an unchanged policy – the guidance will be everything, from the statement to particularly the press conference. So what has taken place since the last meeting that could help shape the communication from the FOMC and Powell this evening? The S&P 500 has advanced by 6.0%; the 2yr UST note yield is down 37bps and the 10-year yield is 13bps lower. The Bloomberg IG Corporate bond index is 2% stronger and the US dollar has weakened by about 0.5%. Clearly, financial conditions have eased markedly.
On the data front we would argue that on the activity side the flow of data has been on the stronger side. Housing data has been mostly stronger, consumer confidence has shown strength as has retail spending and of course the GDP data for Q1. The January NFP data and average hourly earnings data were stronger than expected and initial claims data have also been lower than expected. The December CPI data released in January was a little stronger but the underlying picture was still favourable. The best inflation news came in the Q4 GDP data with the core PCE at 2.0% for the second consecutive quarter – 6mths of achieving the inflation target is compelling. That said, the so-called ‘supercore’ PCE (core services, ex-housing) picked up on a MoM basis from 0.1% to 0.3% while the YoY rate remained elevated at 3.34%. Add to all that, the IMF yesterday revised its 2024 GDP projection for the US from 1.5% to 2.1%.
So it’s hard not to conclude that the case for turning more dovish than at the last meeting in December is pretty weak. At the last meeting, Powell did admit that the topic of rate cuts was discussed at the meeting so this will be an obvious question again for Powell to address. Given the topic was discussed he may well admit it was discussed again but based on developments since the December meeting, Powell may well try and distance any rate cut discussion from the March meeting. Unless the FOMC have had a glimpse at the NFP to be released on Friday and it’s a horrid report, the logic of giving a signal of a potential March rate cut just isn’t there.
The topic of QT will also be in focus – the minutes of the December meeting revealed the topic of when to commence tapering was not discussed but signalled that the time for that conversation was approaching. It may be that Powell avoids any strong guidance on a rate cut but offers up the prospect of a tapering by the middle of the year. QT matters but ultimately for this evening and tomorrow it will be guidance on rates that matter most and if Powell avoids any signal of an imminent approach of the start of cutting (ie: March), which seems likely, the front-end of the curve should drift further higher and offer scope for some further dollar strength. The scale of any move will of course be dictated by the tone and rhetoric and of course moves could be somewhat contained given the imminent jobs report on Friday.
FED FUNDS POLICY RATE IN REAL TERMS NOW AT THE MOST RESTRICTIVE SINCE BEFORE THE GFC
Source: Macrobond & Bloomberg
JPY: Minutes offer further evidence that a hike is coming
The yen strengthened in the early part of the Tokyo trading session today in response to the release of the Summary of Opinions from the monetary policy meeting earlier this month. The 10-year JGB yield jumped as well with the evidence from the release indicating a firmer view amongst some BoJ policymakers that the key policy rate could be lifted. One member stated that “It seems that conditions for policy revision, including the termination of the negative interest rate policy, are being met”, citing improvements in wages and the prospect of the upcoming wage negotiation round being favourable. The current scenario for the BoJ was described as a “golden opportunity” to alter the policy chance and escape decades of mild deflation. Members also discussed the processes of exiting the current stance including the sequencing and the potential termination of ETF buying as well.
The impact of the earthquake on 1st January was also discussed and a view was expressed that a “couple of months” would be needed to gauge the economic impact of the earthquake. That potentially brings March into scope for the timing of a rate hike although we maintain that April is more likely. The OIS market has not really altered in any meaningful way the implied probabilities of a hike at the March or April meeting. The March probability of a 10bps hike stands at 30% and 75% in April.
The impact of the BoJ release has not lasted in FX or rates with USD/JPY rebounding after hitting intra-day lows with a 70-pip rise from the intra-day low earlier. There is no Japan-specific reason for that but there has been a broader bid for the US dollar following the much weaker Australia CPI about 30mins after the BoJ release. We would still describe this Summary of Opinions as further example of evidence of a shift in policy coming but Ueda communications and wage data will remain key given there is plenty of developments to unfold before we get to the March and April BoJ meetings.
USD/JPY IS OVERSHOOTING RELATIVE TO THE BROADER DOLLAR MOVE
Source: Macrobond & Bloomberg
KEY RELEASES AND EVENTS
|
Country |
GMT |
Indicator/Event |
Period |
Consensus |
Previous |
Mkt Moving |
|
GE |
08:55 |
German Unemployment Change |
Jan |
11K |
5K |
!! |
|
GE |
08:55 |
German Unemployment Rate |
Jan |
5.9% |
5.9% |
!! |
|
IT |
09:00 |
Italian Monthly Unemployment Rate |
Dec |
7.6% |
7.5% |
! |
|
SZ |
09:00 |
ZEW Expectations |
Jan |
-- |
-23.7 |
! |
|
EC |
09:00 |
ECB Bank Lending Survey |
-- |
-- |
-- |
! |
|
GE |
10:30 |
German 10-Year Bund Auction |
-- |
-- |
2.190% |
!! |
|
IT |
11:00 |
Italian Industrial Sales (MoM) |
Nov |
-- |
0.10% |
! |
|
IT |
11:00 |
Italian Industrial Sales (YoY) |
Nov |
-- |
-1.70% |
! |
|
US |
12:00 |
MBA Mortgage Applications (WoW) |
-- |
-- |
3.7% |
! |
|
GE |
13:00 |
German HICP (MoM) |
Jan |
-0.1% |
0.2% |
!!! |
|
GE |
13:00 |
German HICP (YoY) |
Jan |
3.2% |
3.8% |
!!! |
|
US |
13:15 |
ADP Nonfarm Employment Change |
Jan |
145K |
164K |
!!! |
|
US |
13:30 |
Employment Cost Index (QoQ) |
Q4 |
1.0% |
1.1% |
!!! |
|
CA |
13:30 |
GDP (MoM) |
Nov |
0.1% |
0.0% |
!! |
|
CA |
13:31 |
GDP (MoM) |
Dec |
-- |
-- |
!! |
|
US |
14:45 |
Chicago PMI |
Jan |
48.0 |
47.2 |
!! |
|
US |
19:00 |
FOMC Statement |
-- |
-- |
-- |
!!!!! |
|
US |
19:00 |
Fed Interest Rate Decision |
-- |
5.50% |
5.50% |
!! |
|
US |
19:30 |
Powell Press Conference |
-- |
-- |
-- |
!!!!! |
Source: Bloomberg
