Posts Tagged ‘Philly Fed’
Bernanke’s Testimony to Congress and FOMC Minutes Preview
Monday, 20 May 2013 10:47
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Orginally posted http://www.tothetick.com/bernankes-testimony-to-congress-and-fomc-minutes-preview

THE IMPORTANCE OF BERNANKE’S TESTIMONY

Fed chairman Ben Bernanke’s testimony to Congress will be important in setting the tone for the markets (particularly the dollar, equities and US treasuries), as traders hunt for clues on when the Fed is likely to ease its rate of asset purchases. (Read more…)

The greenback surged last week, with the dollar index reaching a three-year high, on the back of traders’ expectations that improving US economic data will lead the Fed to begin tapering its programme of quantitative easing, possibly as early as the middle of this year.

Minutes from the FOMC’s latest policy meeting in May will follow Bernanke’s testimony. However, it is likely that Bernanke’s testimony may take the edge off this release, in terms of market impact.

FOMC POLICYMAKER UNCERTAINTY

Bernanke’s testimony is crucial, given the mixed messages from Fed officials in recent weeks. For example, Charles Plosser has suggested decelerating the rate of asset purchases, also suggesting that the Fed shortens the duration of the bonds it currently holds.

Some FOMC members, like John Williams, are in favour of tapering asset purchases by the end of this year. On the other hand, Eric Rosengren has argued that now is not the time for the Fed to taper its asset purchases.

And this week, Richard Fisher came out in favour of slowing purchases of mortgage securities, saying the housing sector no longer needs the Fed’s support.

Sebastien Galy, an analyst at Societe Generale, says “the Fed is slowly moving out of the ultra-dovish camp, as the Bernanke clan reassesses the risks for the Fed balance sheet and the economy of ultra-easy conditions for so long.”

It appears as though the Fed is eager to push the debate into the public domain. Simon Smith, an economist at FxPro says that “[the Fed] is keen not to scare markets when the [tapering] does eventually happen, hence the propensity to talk openly about it.”

WHAT CAN WE EXPECT?

What is definitely known is that the Fed is intent on tapering asset purchases. When is less clear – it is generally accepted that it could be anytime from the middle of this year, all the way out to 2015 (assuming that the tone of economic data improves – especially unemployment and inflation).

However, it is worth noting that “the current debate over tapering QE does not stem from a satisfaction with state of the labour market or concern over inflation risks but a desire to limit the perceived financial stability costs of QE,” according to Divyang Shah, a strategist at IFR Markets.

Recent US economic data has softened, but is still encouraging. Retail sales notably beat expectations, rising by 0.1% in March. Consumer confidence has improved; the University of Michigan consumer sentiment index advanced to 83.7 in May, from 76.4 in aPRIL, as the mighty US consumer shakes off the impact of fiscal sequestration.

But challenges on the supply-side of the economy remain, as shown by both the Philly Fed and Empire State manufacturing surveys, which both fell below 0; industrial production also shrank by 0.5% in April. And the employment situation is mixed, with weekly jobless claims inching higher last week, after improving over the preceding weeks.

Nevertheless, Mansoor Mohi-uddin, an FX strategist at UBS, believes that there is still positive underlying growth momentum, pointing to the Philly Fed survey’s inventories sub-index, which rose from -26.3 to 0.7. And although housing starts fell by 16.5% in April, the forward-looking measure of building permits jumped by 14.3% month-on-month.

But Mohi-uddin believes that “it is still too early to expect the Fed to [taper asset purchases] in the summer.” This line of reasoning is underscored by the benign inflation outlook in the US. Core inflation – as measured by Private Consumption Expenditure, which is the Fed’s preferred gauge of inflation – has eased to 1.1% on an annualised basis.

A recent article in the Wall Street Journal by Jon Hilsenrath, a prominent Fed watcher, suggested that FOMC members are not alarmed by the deflation risks, and are satisfied that inflation expectations are stable. Traders consider the benign outlook as supportive of continued monetary stimulus. FxPro’s Smith reasons that “it seems unlikely that the Fed will step back from its commitment to buy $85 billion of securities per month in the near-term, with the economy still mixed and inflation pressures easing.”

Whether or not Bernanke will choose to communicate his personal views on when asset purchases will be tapered remains to be seen. Some speculate that any change to the Fed’s asset purchases will only come when Bernanke holds a press conference after the policy meeting, which would give him an opportunity to fully explain the FOMC’s rationale.

These press conferences are usually held in March, June, September and December, when the Fed also updates its economic forecasts. Mohi-uddin thinks that “June seems too early, while September and December seem more likely for the Fed to start reducing its pace of easing if the US economy re-accelerates.”

But staying focused on Bernanke’s testimony on Wednesday, Kathleen Brooks, research Director at Forex.com, says that there are two key questions that traders want answers to: “How will he explain the uptick in initial jobless claims last week? How will he react to the drop in core inflation to a two-year low at 1.7% for April? His answers to these potential questions from Congress could determine the medium-term outlook for the buck.”

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Goldman Issues Q&A On Tapering: Says “Not Yet”
Friday, 17 May 2013 09:32
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On one hand we have bad Hilsenrath sending mixed messages saying the Fed may taper sooner (with good Hilsenrath chiming in days later, adding it may be later after all), depending on whether HY bonds hit 4% YTM by EOD or mid next week at the latest. On the other, even resolute Fed doves are whispering that a tapering may occur as soon the summer, so in a few months, and halt QE by year end. Bottom line – confusion. So who better to arbitrate than the firm that runs it all, Goldman Sachs, and its chief economist Jan Hatzius, who issues the following Q&A on “tapering.” His view: “not yet. (Read more…)” Then again, Goldman is the consummate (ab)user of dodecatuple reverse psychology, so if Goldman says “all clear” the natural response should be just as clear.

From Goldman Sachs’ Jan Hatzius:

Q&A on Fed Tapering: Not Yet

Q: What are your forecasts for the future of the Fed’s QE program?

A: We expect continued purchases at a $85bn/month pace through 2013, followed by a gradual tapering process toward zero that starts in 2014Q1—presumably announced at the December 2013 FOMC meeting—and ends in 2014Q3. This is based on our forecast that real GDP will grow 2% in Q2/Q3 and 2.5% in Q4, the unemployment rate will fall to 7.3% by the end of 2013, and core PCE inflation will edge up a bit to 1.3% year-on-year by Q4.

Q: How do you see the risks around this central forecast?

A: Roughly evenly balanced between an earlier and a later move. It is likely that the FOMC will want to announce the first reduction in the pace of QE at a meeting followed by a press conference, so that the Chairman can explain the context of the decision. The next four press conferences are scheduled for June 19, September 18, December 18, and March 19. In our view, a tapering announcement is highly unlikely for June 19, possible for September 18, most likely for December 18, and also possible for March 19 (or potentially even later). All of this will, of course, depend first and foremost on the output, employment, and inflation data.

Q: Have you increased your probability of an early tapering step—say, before the September meeting—over the past few months?

A: No. Such a step would imply a hawkish shift at a time when the incoming information has, if anything, pushed in the other direction. As of the March 19-20 meeting, it seems that the median committee member believes that “…if the outlook for labor market conditions improved as anticipated, it would probably be appropriate to slow purchases later in the year and to stop them by year-end.” We believe that “later in the year” means no earlier than the July or—more likely if a press conference is required—September FOMC meeting.

Since the March meeting, economic activity has, on balance, disappointed expectations. Although the weakness in the employment and retail sales reports for March was reversed in the reports for April, the US manufacturing sector continues to slow, with declines in industrial production in April and the NY Empire State and Philly Fed reports in May. Moreover, the latest spike in initial jobless claims raises at least some questions about whether the downward trend in claims that was previously evident is still in place.

Perhaps more importantly, inflation has continued to fall in recent months. Following the lower-than-expected April CPI report, we estimate that the core PCE index slowed to 1.0% year-on-year in April. Although other indicators of the underlying inflation trend have been consistent with slightly higher inflation, our core inflation “tracker” now stands at an estimated 1.3% for April, clearly below the 2% target.

Q: So you don’t read much into the recent increase in press and market chatter about tapering?

A: Not really. A significant part of this chatter seems to be based on an article by Jon Hilsenrath in the Wall Street Journal on Friday evening. But although the headline “Fed Maps Exit from Stimulus” sounded dramatic, the article itself contained little new information on the key question, namely the timing of any tapering moves. It merely stated that ”some” Fed officials “can envision” taking the first step toward tapering soon. This has been clear for many months; in fact, “some” Fed officials have been uncomfortable with the program from the get-go and would of course like to end it as soon as possible.

Q: But didn’t the Hilsenrath article provide quite a lot of information about the shape of the exit process, i.e. the likelihood that the sequencing of the QE tapering will be very sensitive to economic conditions?

A: Again, not really. The FOMC has been trying for a while—going back at least as far as the March press conference and continuing through the May 1 statement—to convince market participants that the tapering process will be less “deterministic” than many have been thinking. The purpose is probably to reduce the extent to which market participants would extrapolate forward a small reduction in the QE pace at one meeting into additional reductions at subsequent meetings.

But even this point needs to be qualified. In our view, Fed officials have an incentive to portray the tapering process as less deterministic than it is likely to be in reality. Uncertainty about whether an initial tapering step foreshadows additional steps at subsequent meetings would probably keep the initial tightening in financial conditions more limited. This would be desirable from the Fed’s perspective. For this reason, we would take the FOMC’s signals on this issue with a grain of salt.

Q: Where does the recent Fedspeak fit in?

A: We have not received a lot of new information since the May 1 statement, which was quite similar to the prior March 18 statement. Perhaps the most interesting update came from a speech on May 16 by San Francisco Fed President Williams. He remains less enthusiastic about continuing the QE program than we would have expected a few months ago: “[A]ssuming my economic forecast holds true and various labor market indicators continue to register appreciable improvement in coming months, we could reduce somewhat the pace of our securities purchases, perhaps as early as this summer. Then, if all goes as hoped, we could end the purchase program sometime late this year.” This was only slightly softer than his remarks on April 3: “[A]ssuming my economic forecast holds true, I expect we will meet the test for substantial improvement in the outlook for the labor market by this summer. If that happens, we could start tapering our purchases then. If all goes as hoped, we could end the purchase program sometime late this year.”

Ultimately, however, it is the leadership whose signals will carry the most weight. We are therefore particularly focused on the upcoming testimony by Chairman Bernanke to the Joint Economic Committee of Congress on May 22. We expect a somewhat softer message than that from President Williams.

Q: Some commentators argue that the rapid decline in the federal budget deficit may prompt the Fed to taper earlier than they otherwise would have done. Do you agree with this?

A: No. This argument seems to be based on the implicit assumption that the purpose of the QE program is, at least partly, to finance the federal deficit. Fed officials would take strong exception to this notion. In fact, if we accept the notion that QE affects financial conditions and economic activity mainly via the stock of securities held, rather than the flow of issuance absorbed, there is no obvious link between the size of the deficit and the pace of asset purchases. A smaller deficit could call for a smaller QE program if it was mainly due to a stronger economy; but it could likewise call for a larger QE program if it was mainly due to greater fiscal drag. In practice, it is probably due to a combination of both factors, and we do not believe that it has substantial implications for Fed policy.

Q: So what could get Fed officials to increase the size of the QE program, either through a later beginning to the tapering process (say, March 2014) or a higher run rate of purchases?

A: Such a decision would probably be due to a combination of weaker job market data and lower inflation. We think that the hurdle for increasing the size of the purchase program is significantly higher. It would probably require either a clear downturn in the economy with a renewed risk of recession or a substantial decline in core PCE and CPI inflation as well as inflation expectations. But the hurdle for pushing out the date of the initial tapering may not be that high. If the labor market and economic recovery remained a little more sluggish than our forecast and underlying inflation trends moved any lower than the current 1¼% rate, we believe that the start date would move into 2014, with an announcement at the March meeting or later.

Q: Will they taper Treasury or mortgage QE first?

A: We think they will disproportionately taper the Treasury purchases, as there is a widespread belief that the stimulative per-dollar effect of MBS purchases is larger. According to the March FOMC minutes, “[a] few participants felt that MBS purchases provided more support to the economy than purchases of longer-term Treasury securities because they stimulated the housing sector directly.” Although the minutes also note that “a few preferred to focus any purchases in the Treasury market to avoid allocating credit to a specific sector of the economy,” the former group is likely to be closer to the views of the FOMC leadership.

    



 
Dull Overnight Session Set To Become Even Duller Day Session
Friday, 17 May 2013 06:01
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Those hoping for a slew of negative news to push stocks much higher today will be disappointed in this largely catalyst-free day. So far today we have gotten only the ECB’s weekly 3y LTRO announcement whereby seven banks will repay a total of €1.1 billion from both LTRO issues, as repayments slow to a trickle because the last thing the ECB, which was rumored to be inquiring banks if they can handle negative deposit rates earlier in the session, needs is even more balance sheet contraction. The biggest economic European economic data point was the EU construction output which contracted for a fifth consecutive month, dropping -1.7% compared to -0. (Read more…)3% previously, and tumbled 7.9% from a year before.

Elsewhere, Spain announced trade data for March, which printed at yet another surplus of €0.63 billion, prompted not so much by soaring exports which rose a tiny 2% from a year ago to €20.3 billion but due to a collapse in imports of 15% to €19.7 billion – a further sign that the Spanish economy is truly contracting even if the ultimate accounting entry will be GDP positive. More importantly for Spain, the country reported a March bad loan ratio – which has been persistently underreproted – at 10.5% up from 10.4% in February. We will have more to say on why this is the latest and greatest ticking timebomb for the Eurozone shortly.

Perhaps the most amusing news of the day was Japan’s report of a surge in machine orders in March, up 14.2% on estimates of 3.5% – the biggest one month rise since January 2003. We say amusing because preliminary data from a CapIQ run on capex spending by Japanese firms indicates some very, very different. If we have time we will present that after China, Japan appears to be the next major sovereign fabricator of data.

And so we look to the US trading session, where volumes are on par to be absolutely abysmal once again with traders starting to leave early for the Hamptons, and with the only data point later is the UMich confidence print (consensus 78.0).

Other key overnight headlines in bulletin format from Bloomberg:

  • Treasuries rise amid gains for global bond markets; gold fell for 7th straight day in worst slump since 2009
  • San Francisco Fed President John Williams said quickening  economic growth and gains in the job market may prompt the Fed in the next few months to start reducing its $85 billion in monthly bond-buying
  • Abe said he will increase private investment and infrastructure exports as he seeks to overcome deflation and build on an economic expansion fueled by rising consumer spending
  • Investors are more confident in a Japanese leader than any time since at least September 2010, with optimism about Prime Minister Shinzo Abe’s policies exceeding that for counterparts in the U.S., Europe and China
  • China cuts red tape, allowing 117 investment projects, including those for airports, paper pulp factories and gas fields, to go ahead without pre-approval from the  nation’s economic planning agency. Move is part of government’s pledge to reduce role in economy
  • ECB is set to take center stage as the euro area’s chief banking supervisor, after the European Banking Authority ditched this year’s stress test in favor of an ECB-led review of lenders’ asset quality; stress tests to take place next year
  • European car sales rose 1.8% from a year earlier, the first rise in 19 months, led by German and Spanish car registrations; 4-mo. sales -7%
  • Turkey’s bonds rallied, sending yields to all-time lows, after Moody’s Investors Service raised the country to investment grade for the first time in two decades,  fueling expectation of capital inflows. The lira weakened on speculation the central bank will cut rates
  • Sovereign yields lower. Asian stocks higher, with Nikkei +0.6%, Shanghai Composite +1.4%. European stocks and U.S. stock-index futures higher; WTI crude,  copper rise; gold lower

Key daily catalysts from SocGen:

The collapse in base and precious metals stands out, but soft commodities have been pretty badly hit too. Losses were trimmed somewhat late yesterday from the worst levels of the week following a disappointing set of US data, including a very intriguing weekly claims number (up 30k over the past week, no distortions) and  a weak Philly Fed survey. The USD did take a brief knock, but the subsequent bounce back suggests market participants are in no mood to desert the greenback. Having said that, the dollar index failed to close above 84.0 and another failure to do so at the weekly close tonight will have  bears wringing their hands over a potential repeat of July last year. Then, the failure to closeabove 84.0 heralded a 6.5% drop over the next six weeks.

Separately, the drop in US CPI to 1.1% yoy in April came before the USD breakout in May and thus suggests that a further softening in price pressure is possible in the months to come, in particular with petrol prices falling back. The decline in core yields (and swaps) that started on Wednesday accelerated yesterday and occurred independently from stocks, which have done extremely well all week to shrug off a mixed set of macro data. The 9bp collapse in 2y bund yields of the last 48 hours (back into negative territory) is nothing short of spectacular and shows investors’ still conflicting views about stocks and bonds. Technically, the equity market is looking toppy, with for example the divergence between the S&P and the put/call open interest suggesting that a retracement in the major equity indices lies ahead.

The ECB will today publish the weekly LTRO repayment amounts and no less than four members of the governing council are scheduled to speak. We also get Canadian CPI and BoE member Weale may rein in his dovish position following this week’s more upbeat Inflation Report. The correction in metals and talk of central bank/fund switches out of AUD and into CAD saw AUD/CAD drop below 1.0050. This was followed by a break below parity overnight. A break of 0.9942 would bring 0.9683 in play.

Full event recap from DB’s Jim Reid:

An interesting day for the S&P500 which found support at the mid-1650s level for much of the trading session despite a raft of disappointing economic data in the US. Indeed, it wasn’t until the final hour of the session that the index broke out of its tight intra-day range to close near the day’s lows of -0.5%. The weak close coincided with some hawkish sounding comments from the San Francisco Fed President John Williams who said that the Fed could reduce somewhat the pace of securities purchases perhaps as early as this summer. He added that the Fed “could end the purchase program sometime late this year”. What was less reported was that Williams qualified his statement with a “if all goes as hoped” caveat. He also added that it will take further (labour market) gains to convince him that the “substantial improvement” test for ending asset purchases had been met.

There were also hawkish comments from the Fed’s Fisher, Plosser and Lacker earlier in the session who advocated for a slowing of MBS purchases.

More on the data flow, yesterday’s batch of US data showed weakness in jobs, housing and inflation. Initial jobless claims came in at 360k (vs 330k expected) which took the 4week average on claims to 339k. Housing starts printed at 853k (vs 970k expected) but building permits of 1017k beat expectations of 941k. In terms of the business outlook, the Philly Fed index disappointed at -5.2 (vs 2.0 expected) which was consistent with a soft Empire manufacturing survey earlier this week. The US CPI was also below forecasts across the headline (-0.4% vs – 0.3%) and core (0.1% vs 0.2%).

Fedspeak and data aside, below-consensus earnings from consumer companies such as Walmart, Dell and JC Penney also weighed on equities. Nine out of 10 S&P500 industry sectors finished in the red led by declines in consumer services (-1.2%), health (-1.1%) and utilities (-0.8%). Only the technology sector finished
higher – helped by a 13% gain in Cisco after they reported consensus-beating quarterly earnings. The USD index finished the day 0.3% lower, but the comments from Williams saw the USD retrace much of its losses towards the end of the day.

In the fixed income space it also was interesting to see the outperformance of the CDX IG index relative to equities, which helped unwind some of credit’s recent underperformance. The investment grade index finished basically unchanged at 71.5bp despite the negative day for US equities. In the govvies space, core bond yields were around 5-6bp firmer across the board reflecting weaker risk sentiment. Moving to the overnight markets, Asian equities are trading with a stronger tone even with the negative lead-in from the US. Most indices are up a quarter to half a percent including the Nikkei, ASX200 and Shanghai Composite. Volumes are subdued with Korean and Hong Kong markets shut for Buddha’s Birthday holidays.

The Australian dollar slipped below US98c in the Asian session to reach a near 12-month low, and gold continues to lose ground (-0.5%) as it inches lower to the recent lows seen in April.

JGBs remains in focus amid reports that the Bank of Japan will discuss the related risks and potential effects of its 2% inflation target and a surge in long-term  rates at its two-day policy meeting next week (Nikkei). Prime Minister Shinzo Abe acknowledged that sharp increases in long-term interest rates could increase the national debt burden. He declined to comment on the recent rise in JGB yields saying that doing so “could risk causing the markets unnecessary confusion” (Dow Jones). 10yr JGB yields are unchanged overnight at 0.81%. In the EM space, Moody’s upgraded Turkey’s ratings to investment grade (Baa3 from Ba1) overnight, in a decision that was somewhat long-awaited. The rating is equivalent to that of Fitch who upgraded Turkey to investment grade last November. Moodys last rated Turkey investment grade in 1992. In its commentary, Moody’s said that progress on structural and institutional reforms that Moody’s expects will reduce existing vulnerabilities to shocks and improving financial metrics.

Turning to the day ahead, the University of Michigan’s consumer confidence survey is the main data point on the calendar. In terms of central bank speakers, The Fed’s Kocherlakota and the the ECB’s Coeure and Asmussen are scheduled to speak today. On Saturday, Bernanke will deliver a commencement speech at Bard College in Massachusetts titled “Economic Prospects for the Long Run”.