Wednesday, July 26, 2017

"Quiet Fed Day without Yellen"

I see Brown Brothers Harriman & Co. has loosened up their dress code although, truth be told, that's about an inch more heel than I can handle for any length of time.

From Marc to Market:
By definition, the Federal Reserve Open Market Committee meeting is the highlight of the day. Without a press conference, and following last month's rate hike, there is practically no chance of a new policy initiative either on the balance sheet or the Fed funds target.

Market participants will be most sensitive to how the FOMC statement discusses inflation. In June, the FOMC recognized that inflation had declined and the core was below target. It expected inflation to remain below 2% in the near-term, but stabilize around 2% in the medium term. Lastly, as the Chair noted in her testimony before Congress, the FOMC statement also indicated that it would monitor inflation closely.
There has not been sufficient data to require a significant change in the Fed's statement. The Fed can show patience. There is no rush. After declining from February through May, core inflation needs to not only stabilize, as core CPI did last month but needs to rise for perhaps a few months before a cautious central banker may feel confident that the spot patch has passed.

The scenario we painted after the last FOMC meeting, which sees the Fed announcing the beginning of its balance sheet operations at the September meeting to start in October, and to pause in its rate hikes, after hiking quarterly for three-quarters is gaining adherents. By December, the trajectory of prices, and the economy will be clearer. In this way, the Federal Reserve can achieve a number of its objectives, including beginning the slow reduction of its balance sheet and distancing it from the conduct of monetary policy. The Fed funds target range, with the yield on reserves (not just excess reserves, a point that is not fully appreciated) and reverse repo operations.

The US dollar is sporting a slightly firmer bias. The biggest loser today is the Australian dollar, which is off nearly 0.5% following a soft headline inflation figure and comments from the central bank governor indicating a lack of urgency to change interest rates.

Consumer prices rose 0.2% in Q2, half the pace the economists expected in the Bloomberg survey. The year-over-year pace slipped to 1.9% from 2.1%. The median expectation was for a small uptick. Nevertheless, the trimmed mean and weighted median measures were spot on with a 0.5% increase. Shortly afterward, RBA Governor Lowe underscored the official argument that because the central bank did not ease as much as many other central banks, it needn't follow them so closely in removing the accommodation. He argued that keeping rates low is helping the economy adjust and underpinning the labor market. Lowe also noted that it would be better if the currency were lower.

The Australian dollar approached $0.8000 on July 20 and backed off to $0.7875 before last weekend. It rose in the past two sessions but stalled near $0.7970. Today's set back help above the $0.7875 low, keeping the consolidative tone intact. The technical indicators are beginning to deteriorate for the Australian dollar, which warns that the consolidation may morph into an outright correction unless the $0.7920 level can be overcome. On the downside, the near-term potential exists toward $0.7780-$0.7800.

The UK is the first G7 country to report its first estimate of Q2 GDP. It was in line with expectations, rising 0.3% for a 1.7% year-over-year rate. In Q1 the UK economy expanded by 0.2% for a 2.0% year-over-year pace. Services rose 0.5%, while construction fell 0.9% and production fell 0.4% (manufacturing was off 0.5%). If the estimate holds, it points to the weakest six month period since Q4 12-Q1 13. Economists do not expect the UK economy to accelerate, but grow to expand by 0.3% a quarter in H2. Sterling is also consolidating. Like the other major currencies, it has pulled back from yesterday's high (~$1.3080) but is finding a bid near $1.30 and ahead of Monday's low near $1.2985. Each of those levels has about GBP300 mln options that expire today.

Meanwhile, oil is building on yesterday's rally. The 3.35% rally in the September light sweet crude oil futures appears to be the largest of the year. Reports suggest that Saudi Arabia will cut its oil exports by 100k barrels in August and UAE will cut its exports in September. There are also some signs of a potential slowing of production in the US as the rig count build is losing momentum...MORE