Global markets are cautious going into today (Wednesday’s) Federal Open Market Committee rates announcement. While many believe that the Fed may now back out of rates increases, US employment gains and calmer markets suggest the FOMC may be preparing to crank rates again.
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In This Week’s Calendar
Tue 15 March
Japan BoJ Monetary Policy Statement
US PPI m/m (actual:-0.2% expected:-0.2% previous:0.1%)
US Empire State Manufacturing Index (actual:0.6 expected:-10.3 previous:-16.6)
Wed 16 March
US FOMC Economic Projections
US Federal Funds Rate (expected:<0.50% previous:<0.50%)
Thu 17 March
EU Final CPI y/y (expected:-0.2% previous:-0.2%)
UK Monetary Policy Summary
UK Official Bank Rate (expected:0.50% previous:0.50%)
US Unemployment Claims (expected:267K previous:259K)
Fri 18 March
Canada Core CPI m/m (expected:0.5% previous:0.3%)
Making The News
Widespread criticism and market turmoil, at the start of 2016, accused the Fed of getting the timing of their rates tightening completely wrong. While the criticism is fair – that the Fed has, historically, managed to mangle policy with uncanny accuracy – there are some indications that the Fed may continue tightening, albeit at a slower pace, during the rest of the year.
Going into 2016, global markets were reeling from several shocks. The commodity (notably oil) and stock market declines that intensified during 2015 were making headlines. Gold was flying on a fear-driven rally and several central banks were announcing increased quantitative easing to cope with the strengthening US dollar.
The Peoples’ Bank of China continued to weaken the Yuan, and oil dependent Saudi Arabia – reeling from shrinking GDP and depleted forex reserves – announced that it had no choice but to drop the decades-long peg of the Saudi real versus the dollar.
During March, equities apparently halted decline; oil clawed back some value to $39/barrel; and the chorus of media headlines predicting the End of Times subsided.
Dow Jones Industrials – Weekly Candle Chart
Back To The New Normal
Additional signs of a return to the way things were before the wheels almost really came off, is a levitating stock market, a pull-back in the gold rally, and continued easing measures by most central banks.
Only last week, the ECB pulled out all the stops by cutting rates further into negative territory and increasing quantitative easing of the euro.
Today, the Bank of Japan, announced its intention to cut rates to minus 50 basis points, while the Japanese government intends to increase sales tax.
Yet, the main event, and show-piece of the teetering global economic dance, centers around the Federal Open Market Committee’s rates announcement at 18h00 UTC, today, Wednesday 16 March.
Which Way Now For Rates?
An additional rates increase by the FOMC (the Fed’s policy-making body) risks re-awakening the kraken and its whirlpool. The US dollar will appreciate faster, bond markets will react by stepping up their yield (to meet higher interest rates), and squeezed national economies will see their markets react with increased volatility and liquidity crisis as money repositions.
The current consensus seems to be that the Fed has taken fright and will not ponder another rate increase lightly. In other words, the sense is that the Fed will not hike, and markets do not expect the Fed to hike any time soon. The decision expressed at the FOMC’s January meeting, namely that the committee was “reassessing” the state of the economy before implementing further rates increases, has left that dog lying, and markets seem to prefer the status quo.
Some commentators have suggested that Ben Bernanke’s mention of negative interest rates (NIRP) as an option for the Fed, implies that the Fed may recognize the error of its way and actually decrease interest rates into negative territory. While this may turn out to be the case, bear in mind that the Fed did not embark on its tightening cycle on a whim.
Tightening has been a Fed policy and operational plan for years. Firstly, through “tapering” of QE, then through “forward guiding” comatose markets, and by announcing their intention to increase rates over 12 months ago.
The multi-year strategy was always going to see bond yields increase, the US dollar strengthen, and risk appetite – and the availability of loose credit – wane.
Notice in this week’s economic calendar (near the top of this page) that the Empire State Manufacturing Index has been posting month-on-month gains, and that US employment figures have been picking up. These are exactly the kind of barometers the Fed uses (correctly or incorrectly) to inform its policy decisions.
US Dollar Index – Daily Candle Chart
There is not any compelling reason why the Fed should abandon its course of tightening monetary policy in the US economy. It is “Currency Wars”, after all, and economic stress in one region squeezes money into stronger economies. Even where “stronger” simply means “the less weak of a bad batch”.
The argument being made, here, is that the Fed will not reduce US interest rates, and opt for NIRP, during 2016. It may hold off increasing rates during this quarter, but will pursue its path of tightening with at least one more increase during 2016 – irrespective of the perceived outcome.
Effects Of A Pause In Rates Increases
The market’s current perception that the Fed is taking an off-ramp from rates increases, has seen a reduction in uncertainty and market volatility. Stock markets are drawing sideways, as is the US dollar, and the SHTF gold rally has fizzled out.
Today’s FOMC announcement may catch many off-guard as the Fed expresses a commitment to tightening via rates increases, but that it will only do so later in the year.
Most likely, the extra time that such an announcement grants a market frenetically trying to squeeze elusive profits, will see a shift in currency and bond markets. The “fear” commodities such as precious metals and bitcoin may slump on the reduced uncertainty, only to restart rallies closer to the next rates “lift-off”.
Gold – Daily Candle Chart
Bitcoin, gold and the dollar all seem to have pulled back and entered holding patterns during the past week.
Bitcoin – Daily Candle Chart
Perhaps the Fed shocks with an immediate rates hike announcement that sends stocks crashing and safe havens rallying, but it has never been their style to intentionally and unexpectedly shift markets before not giving their primary beneficiaries time to factor in the intended change.
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Charts from TradingView, financial data & cartoon from Investing.com, image from Shutterstock.