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Summary

  • Key focus is FOMC meeting, though there is little controversy.
  • The dollar rose almost 1% from the PBOC fix, while the rouble and Russian bonds are firmer.
  • UK labor market continues to improve; wage growth appears to be picking up.

The main interest today is the FOMC meeting. There are four elements of today's decision. First is the statement itself. It will likely recognize that the economy has slowed and that temporary factors were the main culprit. This signals confidence that the economic expansion continues.

Second is the decision to continue to taper at a measured pace. In practice, this means $10 bln a meeting and being able to stop the purchases altogether before the end of the year.

Third, Fed officials will update their GDP, unemployment and core PCE forecasts. The new appointees have not taken office yet, so the only difference is the absence of Bernanke's forecasts. There may be a small downward revision in this year's forecast of 2.8%-3.2% GDP, reflecting what has already transpired. A change in the 2015 or 2016 forecasts would be more significant.

These points as not very controversial, and if the FOMC were limited to these, we would likely regard the meeting as a non-event for the markets. However, the Fed's challenge lies in the fourth element. The new chair will have a press conference in which she explains the evolution of forward guidance, away from the quantitative threshold approach toward what has been called a qualitative approach.

This has largely been telegraphed already in other Fed official speeches. The point of all this is to help reassure (both domestic and foreign) stakeholders that it does not intend on raising rates for some time. The collective judgement of the market is that "some time" is more than a year off. Yellen's success might be measured by how little these expectations change.

The euro has traded above the $1.39 level on an intra-day basis for the sixth consecutive session. While many are looking for a push above $1.40, a failure to do so today after the FOMC meeting could be frustrating for the bulls, but to really inflict any pain the euro has to be pushed through the $1.3840 near-term base built and, probably, through the $1.3800 level that marks the top of the previous 5-cent 5-month trading range.

Against the yen, the dollar is stuck in the same narrow trading range as it has been for the previous three sessions. JPY101.20 marks the downside and JPY102 marks the upside, though the greenback has not been above JPY101.70 today. Japan reported a sharp improvement in its trade balance. The February shortfall was just above JPY800 bln after the lunar new year distorted record deficit in January of JPY2.792 trillion. However, even this was about JPY200 bln larger than expected. Nevertheless, the trade shortfall is likely to be offset in full by the investment income surplus and suggests the February current account balance will be positive.

Export growth improved from the 9.5% (year-over-year) in January to 9.8%. The consensus expected closer to a 12.5% rise in exports. The improvement in the trade balance was more a result of the dramatic slowing in imports. Imports rose 9.2% in February after a 25% increase in January. The consensus was for a 7.2% increase. A review of the quantities of imports and exports suggests the deterioration of Japan's balance is largely a function of a weak yen, which has boosted roughly the same quantity of energy over the past year. Price adjustment also appears to overwhelm quantity changes with exports.

The Asian session continues though to be focused on China. The dollar moved above the CNY6.20 level on an intra-day basis for the first time since last April. It moved a little more than 1% from the CNY6.1351 fix. The band was widened to 2% last weekend. Given that the volatility has continued to increase this week, after the widening of the band, that the two developments are different. The increased volatility of the yuan is to continue to press the unwind of the accumulation of speculative positions rather than simply prepare the market for the wider band as some have suggested. The wider yuan band allows the increased volatility to be sustained, but is also desired in its own right.

Russia moved to annex Crimea following the weekend referendum. The results of that referendum, we note, were nearly identical with the referendum in January 1991. The US and EU see the annexation of Crimea as a sign of escalation, or at least the refusal of Russia to deescalate the situation and therefore are preparing another round of sanctions. The EU heads of state will meet tomorrow. Of course, the pain of implementing sanctions on Russia are not shared equally by the EU members and the fissures are evident. The US has called for an emergency G7 meeting March 24-25. Despite the hand wringing and finger pointing, the sanctions being implemented now are already more than what was adopted after Russia occupied (and still does) Georgian territory in 2008.

Yesterday Russia cancelled its sixth bond auction due to market conditions. Projections suggest Russia could theoretically cancel all the Q2 auctions and still not have much strain. Today's Russia 10-year bond yield is 10 bp lower to about 9.08%. The ruble is extending its recovery. The dollar is below the 20-day moving average against the rouble (~RUB36.15) for the first time this year. The MICEX is off about 1% after initially extending yesterday's gains.

The main economic developments from Europe today come from the UK. The minutes from the MPC meeting earlier this month do not appear to contain much in the way of surprises. As hinted by recent official comments, there is much discussion about the extent of spare economic capacity and the role of sterling. However, there is no sign that Carney is losing in his effort to resist rate hikes this year.

Meanwhile, the UK labor market continues to strengthen. The claimant count fell by another 34.6k people. The consensus expected a decline of 25k. The January series was revised to show almost 34k fewer people filing unemployment claims rather than 27.6k in the initial estimate. The ILO unemployment measure was unchanged at 7.2%. Of note average earnings, with an additional month lag rose 1.4% in January from a revised 1.2% in December. Wages in both the US and UK have begun picking up. The markets have yet to focus on this, but we suspect that it will become a more important story as the year progresses.

In the UK afternoon and the US morning, the UK's budget will be presented. The market expects upward revisions to growth, which will project a smaller deficit. This in turn may allow the UK to issue less debt. This is also the budget that will help influence the economic conditions ahead of next year's election.

Sterling itself has been uninspired. It is firmer on the day, but continues to straddle the $1.6600 area. That level seems to be about the middle of the range. The cross against the euro may be more interesting. The euro is turning back from testing the GBP0.8400 and a move below the GBP0.8340-60 band would likely signal additional near-term euro losses/sterling gains.

The Canadian dollar is seeing yesterday's losses extended. The CAD1.12 area is back in view after seeing CAD1.1025 yesterday. We think the market misunderstood Governor Poloz's comments yesterday. He was not signaling a rate cut simply because he could not rule it out in a philosophic sense that a significant change in economic conditions could force its hand. That said, Friday's inflation report is expected to show another decline in CPI, which the Bank has been placing more emphasis. Separately, we note that Finance Minister Flaherty has resigned over a domestic policy dispute with Prime Minister Harper. The National Resources Minister, Oliver, will reportedly be Flaherty's successor.

Source: FOMC And More