30 January 2014 The Big Picture • Central banks dominate the market The FOMC meeting went as expected – a further reduction in its monthly bond purchases of USD 10bn and no significant changes in the statement or its forward guidance -- and had almost no impact on trading. The Fed said that underlying strength in the economy was improving and the risks to future activity had become more balanced. We’ll learn more about this later in the day, when the US announces the flash estimate of Q4 GDP. It’s expected to show an annualized rise of 3.2%, a deceleration from +4.1% in Q3. Private-sector demand is expected to be healthy, led by strong consumer spending and a pickup in exports, but this will be partly offset by a drop in federal spending because of the government shutdown. Investors may therefore look through the decline in the headline when assessing the data and focus on the details. Strong private sector demand could support USD even if the headline figure shows a slowdown in growth. On the other hand, the personal consumption core price index, the Fed’s favorite inflation measure, is forecast to slow to +1.1% qoq SAAR from +1.4%. Inflation this far below the Fed’s 2% target could start to make some FOMC members nervous about withdrawing too much stimulus, but so far this is largely a theoretical concern in the US. • The Reserve Bank of New Zealand (RBNZ) also kept its interest rates unchanged, but that pushed the NZD lower as the market had been pricing in about an even chance that they would hike at this meeting. Furthermore, the end of the statement merely said that the RBNZ “remains committed” to hiking rates as needed and that the pace of increase “will depend on future economic indicators.” The lack of any hint of a hike at the March meeting disappointed some investors. I think a hike is likely, or at least the possibility of a hike is likely – more than can be said for many markets – and recommend investors consider buying NZD on dips. In this context, I remain bearish on AUD/NZD. Following this morning’s downward revision in the final HSBC/Markit China manufacturing PMI for January, it appears to me that the AUD is more vulnerable to a slowdown in China than NZD is and so NZD should continue to gain on AUD. AUD could get a boost near-term however as the official Chinese manufacturing PMI coming out on the Feb 1st is forecast to continue showing expansion. • The main story though was not in the G10 currencies, but rather in the emerging market (EM) world. EM currencies continued to sell off despite – or perhaps due to? – the South African Reserve Bank’s (SARB) surprise 50 bps rate hike yesterday. In fact the ZAR was far and away the worst-performing currency overnight, falling 3.1% vs USD. But many other EM currencies saw large declines: HUF was down over 2%, MXN -1.7%, and PLN and INR off 1%. The SARB rate hike demonstrates the poor trade-offs that EM countries face with the Fed tapering: either let their currencies go and face higher inflation/lower purchasing power, or raise rates and stifle growth. With funds just starting to flee EM stocks markets, this crisis is just beginning, in my view. It has further to go and these currencies have further to fall. • On the other hand, heightened tensions in EM and thoughts of global monetary tightening sent the safe-haven JPY and CHF higher. • Today’s indicators: During the European day, the German unemployment rate for January is expected to remain unchanged at 6.9% and the country’s preliminary CPI is forecast to be down 0.6% mom in January, a turnaround from +0.5% mom in December. Nonetheless, the yoy rate is estimated to accelerate slightly to 1.3% from 1.2%. That could take some pressure off the ECB to ease and therefore be EUR-positive. From Eurozone as a whole we have the final consumer confidence index for January. In UK, BoE mortgage approvals for December are forecast to be higher than in November, confirming that the housing boom continues. • In the US, along with the GDP figures, initial jobless claims for the week ended on Jan. 25 are expected to rise to 330k from 326 the previous week, while the continuing claims are forecast to fall to 3000k from 3056k. Pending home sales for December are estimated to have fallen 0.3% mom, from a rise of 0.2% in November.
Posted on: Thu, 30 Jan 2014 08:06:19 +0000