Over today and tomorrow, Federal Reserve Chairwoman Janet Yellen will testify before the Senate Banking Committee and House Financial Services Committee in her Semi-Annual Monetary Policy Report. The testimony takes place at 17:00 server time on both Tuesday and Wednesday. The prepared statement by Yellen is not likely to be a major source of volatility, however when the floor is opened to questions by the committee, some volatility can be expected – particularly on questions surrounding inflation and the first interest rate increase.
The FOMC minutes from January’s meeting were on the dovish side of the spectrum – this has been aided by the addition of new voting committee members who skew the FOMC towards being more patient with rate increases. However, given that the Fed has been preparing the public for coming rate increases both in its staff projections as well as changes to its FOMC statement, this board change is unlikely to hold off rate rises for too long.
Futures and rate markets are pricing the first rate increase in the second half of the year, with the probability of a rate increase falling in September or October. Meanwhile, analyst forecasts point to the possibility of an earlier rate increase, showing a majority forecast around the June meeting. It isn’t clear yet which expectation is more correct – as forecasts of rate increases have constantly been pushed back since the onset of the GFC, and market implied rates may be too depressed due to the energy price declines of the last 6 months.
While the Fed has a dual mandate, Yellen may try and focus on the employment side of its responsibility when setting policy and answering questions during the testimony. Central bankers know and stress that policy works with a lag effect, and that wage pressures are a possible consequence of the normalisation of employment levels. With the US coming closer to full employment, Yellen may comment that the FOMC needs to begin planning for this eventuality after the temporary dip in prices from energy components of CPI.
Whatever Yellen’s stance, it is sure to generate a fair amount of attention and market volatility. It has been said recently that never has so much kicking and screaming occurred over a 25 basis point rate hike before – the Fed may take the position that it is better rip the Band-Aid off quickly, rather than prolong the tantrum. Such a move might bring sharp volatility in the near term, but clear the air of fear over further rate increases and allow policy to normalize. Yellen’s testimony will also shape market reactions to this week’s CPI data – which is expected to continue to dip in to deflation.
The ECB is set to release the inaugural Monetary Policy Meeting Accounts for its January meeting – meaning traders will finally get an insight in to the policy decisions and meeting discussion after a decade of undisclosed meetings. The ECB will release the minutes of the previous meeting at 14:30 server time today.
As this is the first ‘Accounts’ release, the exact format and content of the minutes is yet to be fully revealed – however there are some details that we do know:
- The minutes will be anonymous, meaning the decision makers will not be publicly named or have comments personally attributed to them.
- The document is expected to be in excess of 10 pages.
- The minutes are not an exact account of the meeting, but cherry picked discussion that the ECB considers important – for this reason the ECB is likely to use the accounts as a communication channel.
- The only named board members will be Peter Praet and Benoit Coeure – who will provide summaries on the Euro Zone’s economy and markets.
The Accounts should give an insight in to the discussion, debate, dissent and concern within the voting members. It will also reveal any debate of the size and scope of the ECB’s new QE program, which will be important for future changes should the economy either deteriorate further or improve sharply. Due to the fact that these are the first accounts that will be released to the public, it is likely that there is some volatility surrounding the event. Traders and algorithms will not have a previous statement to compare to, and may take some time to assess the content; the length, also, will mean that there is a substantial amount of information to parse in order to reach a trading bias.
Today sees the release of another central bank meeting minutes – the FOMC will disclose the minutes from their January monetary policy statement at 21:00 server time. The FOMC maintained they could be ‘patient’ at the January meeting, but made sure to remove the phrase ‘a considerable time’ from the wording to indicate a shift to data – rather than time – dependent policy action. The committee also judged that the US economy was improving and upgraded their view of growth and that disinflation would be temporary.
The meeting was also the first with a new set of voting members; regional presidents Williams, Evans, Lacker and Lockhart rotated in to the committee – which alters the mix of voters towards the dovish side of the spectrum. The minutes from this meeting will be the market’s first insight in to these new members’ views and concerns, which will be of interest to traders.
The minutes may not provide any dramatic surprises given that the Fed remained very much on hold at this meeting, however details of the new members will be an interesting addition to the mix. Traders will also be looking out for the meaning behind the word ‘Patient’ and a time frame for the first rate increase. The FOMC may also have discussed inflation with a similar stance to the Bank of England last week – viewing the dip as transitory and actually beneficial for the broader economy.
Any discussion here of the lag effect between of monetary policy could affect pricing in rate markets, as this could confirm that rate rises will occur despite low inflation as the Fed looks ahead and through the temporary dip. While inflation is low, wage expectations have sky-rocketed higher in recent months – a survey which has historically led actual wage increases by several months. Indications are that the employment improvement in the US could finally filter through to wage increases, which can drive inflation higher:
Also of note today will be the release of the Bank of Japan’s Monetary Policy Statement – expected to remain at the same stimulus level of 80 trillion per year in monetary base expansion. The consensus opinion is quite broadly held between analysts that the BoJ will not make any changes today – which is underlined by rumoured remarks last week that further stimulus would be ‘counterproductive’ for now – news that caused a dramatic 150 pip decline in Yen based pairs as traders rushed back in to the Asian currency.
With all surveyed analysts expecting the stimulus to remain on hold, a surprise will likely be needed to cause a dramatic currency move. The BoJ releases its statement at an arbitrary time today when the 2 day meeting is concluded – traders should keep an eye on news wires for any updates.
When the RBA cut the Australian cash rate from 2.50% to 2.25% on the 3rd of this month, it took analysts by surprise – those surveyed largely expected the cash rate to remain on hold. Market implied expectations, however, were more accurate – pricing a strong chance of a rate cut which was subsequently shown to be correct. The minutes will be released at 02:30 server time today.
With analysts now having to shift their understanding of how the RBA sees the Australian economy evolving, the Monetary Policy Meeting Minutes from that meeting take on greater importance than usual. Economists and traders will be looking for several indications:
- Whether further rate cuts are likely in the coming months, or if this cut will be followed by another ‘period of interest rate stability’.
- How the RBA sees Australian growth and inflation developing over the course of 2015 and beyond.
- How international economic conditions are affecting the RBA’s decision making process – including easing in Canada and Europe and the expected outperformance of the US.
- The bank’s position on the Australian dollar, and whether it is still above estimates of fair value, or whether their assessment has softened at all since the last meeting given the declines
Much of the impact of the February rate cut is already in the price of the AUD, so the meeting minutes are not likely to be an earth shattering event. What the minutes will affect is interest rate expectations in rate markets, and the trend in the AUD towards the next meeting. If the minutes are particularly indicative of further rate cuts or escalating concerns for the domestic economy then this would be expected to filter through in to a weaker AUD. Conversely, if the minutes indicate no panic at the RBA then the Aussie could find some relief. Interest rates and the level of the AUD have previously been highly correlated:
The Bank of England will release its quarterly Inflation Report today; the report details the central bank’s view of future inflation and economic growth, and can affect sentiment towards the British Pound if the bank is perceived to be particularly hawkish or dovish in its forecasts or comments. The Inflation Report is released at 12:30 server time, and is followed by a speech by Governor Mark Carney as well as a Q&A session with financial media.
In November’s report, the BoE downgraded expectations for Inflation, Growth and Monetary Policy:
“Although the world outlook is undoubtedly softer than in August, the MPC’s growth forecast for the UK is only slightly weaker. That is because expectations for the stance of global monetary policy over the medium term have eased significantly, including for the UK. Markets still expect Bank Rate to increase, but to a more limited extent and at a more gradual pace than they did in August. Real five-year, five-year forward rates are around ½ percentage point lower than in August.”
The market reacted negatively to the Pound as Carney suggested inflation could dip below 1% in the coming months:
“The near-term weakness means that it is more likely than not that I will have to write an open letter to the Chancellor in the next six months on account of the inflation rate falling below 1%.”
With commodity and particularly energy prices falling and inflation already moving below 1%, the BoE is expected to further temper expectations of future inflation. This is likely to be bolstered by the Monetary Policy Committee’s meeting minutes from January, which suggest that chances since the November report will be reflected in staff forecasts this month:
“There had been a number of significant developments since the November Inflation Report. Oil prices had fallen further: the spot price of Brent crude oil had dropped to $50 per barrel, down $20 on the month and $32 lower than at the time of the November Inflation Report. CPI inflation had fallen to 0.5% in December, 0.5 percentage points lower than had been expected in November, and was now expected by Bank staff to reach a trough of close to zero in March, as lower oil prices fed through to petrol prices. There was, therefore, a roughly even chance that CPI inflation would temporarily dip below zero at some time during the first half of 2015…”
“… In light of the degree of uncertainty over these and other factors, a wide range of outcomes for inflation was possible. The Committee’s full assessment would be carried out over the coming month and published in the February Inflation Report.”
The November report signalled a nadir in the inflation rate in early-to-mid 2015 – this may be downgraded again today (Source: Bank of England):
If the Bank of England further downgrades its inflation expectations, it could push back market implied forecasts of interest rates and put pressure on the Pound. Such an outcome is currently favoured by analysts and the Pound has been drifting lower in the lead up to the announcement. While this is the most expected outcome, there is always a chance of a positive surprise. In this case even a restrained downgrade could be positive relative to expectations, however any market reaction will depend on not only the inflation report but the comments by Mark Carney in the following press conference.
The Eurogroup has called an emergency meeting of its finance ministers to discuss the situation in Greece on Wednesday, as negotiations between Greece and its creditors are at an impasse. The meeting comes in the wake of anti-austerity party Syriza winning Greece’s January 25th election and ahead of Greece’s current bailout program expiring at the end of February. Greece is looking for a new bailout program or a bridge program in order to give the country more time to avoid a sudden freeze in its external funding as well as to provide room for reforms to be implemented.
Greece is proposing the following compromise according to insider sources reported by Ekathimerini:
- Greece’s targeted primary surplus of 3% of GDP to be decreased to 1.49%
- Reduction of Greek debt through a swap plan.
- Greece’s humanitarian crisis to be eased by a number of measures given by PM Tsipras on Sunday.
- 10 new reforms to be agreed upon to replace up to 30% of the current memorandum that was agreed upon with the Troika previously.
Reports by MNI yesterday suggested that the European Commission would propose a six month extension to the bailout package, which was seen by the market as a positive for the Euro. The situation for Greece has remained precarious for some time, however the European Commission sees a sharp reversal of current trends in its forecasts for Greece, with 2015 expected to show a return in the budget deficit back to a much more manageable -2.5%; a bailout extension and compromise could give Greece the time it needs to reach these optimistic estimates:
The meetings run all day today, however an agreement may not be announced until Thursday meaning a long period where speculation and rumour will be rife. The Athens Stock Exchange has been rising ahead of the meeting on optimism that a deal can be worked out which is beneficial for Greece, with the Greek bourse rallying almost 8% through the afternoon yesterday.
A deal is critical for the troubled Euro Area – not just for Greece itself, but for creditor countries such as Germany who have benefited from trade imbalances with weaker members such as Greece as well as having a large exposure to any potential Greek exit from the common currency or default.
A deal and extension of terms is likely to be perceived as Euro positive in that it will be kicking-the-can to deal with the problems at a later point in time, reducing the chance of near term crisis. A deal also reduces the chance of a Greek exit – which will relieve fears that have become clear since the anti-austerity Syriza party took power.
Failure to reach a deal will be likely to throw the Euro in to crisis mode again, as the clock ticks down to the end of this month and a sudden stop in access to external funding; this would dramatically heighten the chances of Greece leaving the Euro and could cause significant volatility. Traders may wish to keep an eye on the news over the next day or two, as an announcement could come at any time – dependent on how stubborn each party is at the negotiating table.
It’s no secret that the US has been considered the ‘cleanest dirty shirt’ since last year, as the developed economy has continued to show improving economic data and sentiment surveys in a sea of global economic woe. The FOMC will face the first challenge to its intended tightening cycle in 2015 with tonight’s GDP data release – Advance GDP for Q4 2014 is due to be announced at 15:30 server time.
The world’s largest economy posted some powerful GDP figures last year, after initially falling in to negative rate of -2.1%. The negative growth was short lived and was largely due to what was affectionately known as the ‘Polar Vortex’ – however the snap-back in economic activity and the resumption of normal consumption patterns meant that the GDP figure was rebounding off a very low base – inflating the quarter-on-quarter growth figures slightly to 4.6% and 5% in Q2 and Q3 respectively.
These figures may have influenced sentiment surveys later in the year, with measures such as University of Michigan Consumer Sentiment rocketing higher in an almost euphoric fashion. The annualised GDP gain was much less pronounced, and actually more in line with previous years – in the range of 2-3%. There has been some suggestion that much of the US outperformance has been in soft (sentiment) data, and not in hard data. The quarterly figure is a far more volatile series:
For the US growth story to continue – and many of the trades based off it – it is crucial that the quarterly growth figure is backed up in the coming two quarters. Current growth is by no means poor given the global climate, however it is also a far cry from historical boom periods. Economists are currently expecting the quarter on quarter figure to show a 3.0% gain – which would help drag the less volatile yearly rate upwards. A poor figure could put a dent in the US Dollar bull market, though it would take a terrible figure to offset all the tailwinds that the US dollar is riding.
Traders are preparing for back to back central bank meetings tonight, with both the FOMC Statement due in the US (21:00 server time) and the RBNZ’s Cash Rate decision to follow soon afterwards (22:00 server time). The FOMC Statement will be the headline even for the night – most market movements in the last 6 months being heavily affected by the rapid US dollar strengthening, which has caused a dollar squeeze in Emerging Markets, a collapse in commodities and oil prices and an out-performance of US dollar denominated assets.
Expectations are high for the Federal Reserve to begin its first tightening cycle this year since it set interest rates at zero during the GFC. However, the effect of this expected tightening has been an immense demand for US dollars from traders, with the cratering inflation expectations that followed making any tightening cycle seem out of place. Fed officials have stated that a rate rise could occur despite low inflation as inflation measures are expected to return to 2% over time; it has also been stressed that the fall in oil prices could be viewed as a positive for the economy, rather than a negative, meaning the energy bear market should not be a deterrent for policy moves regardless of the fear it invokes.
Analysts are expecting the Fed to make comment on the falling inflation at this meeting, through it is unlikely that this would sway their policy stance given that they are seeing it as a positive for the US consumer. More importantly the FOMC may remove the phrase ‘considerable time’ from their statement, to reflect that rate rises are coming sooner – which is likely to be read hawkishly. There is little chance of a rate rise occurring, as Fed Chair Yellen stated at the previous announcement – the FOMC is currently expecting to hold rates steady for today’s and the next meeting. All in all no major changes are expected, however the removal of a considerable time is likely to be viewed as US Dollar positive.
The impact of the RBNZ Cash Rate decision is likely to be more localized to Asian markets. New Zealand has been one of the few countries with a more hawkish central bank than the US – however the bank has been on hold for the past 4 meetings at 3.50% as weak global inflation dampens the need for further action. The RBNZ’s statements have been hawkish recently:
“Some further increase in the OCR is expected to be required at a later stage. Further policy adjustments will depend on data emerging over the assessment period.”
However the market is now pricing a small chance of a rate cut in future meetings. No change is expected at this meeting, however what is likely to move markets is any change to the RBNZ’s previous hawkish statement – specifically removing the expectation that future rate rises are coming. Such a change could see further downside for the Kiwi Dollar.
Europe is only part-way done with a period of volatile news releases; with QE now set to take place from March this year at a pace of 60 billion EUR per month, things are temporarily looking better for the troubled union. However Europe is not out of the woods yet – with deflation and an ongoing depression being the norm in Greece, traders are watching developments in Greek parliament closely. The Greek voters go to the polls this Sunday (January 25th) to elect their new leaders, and not all parties are entirely Euro-friendly, causing some concern for those who would like to see a united Europe.
Political coalition Syriza is leading the polls currently, with the party expected to receive about 35% of the vote. Syriza isn’t anti-Euro as much as they are anti-austerity, however there is fear that a victory for the radical left could mean either a Greek exit from the Euro or demands for painful concessions from creditors. The incumbent right-wing New Democracy party is currently polling second, though at around 31% of the vote the race is quite close.
Because the event has potential to swing sentiment about the Euro, traders are wary of holding positions over the weekend – part of the concern is due to the recent Swiss Franc liquidity crisis and the potential for markets to gap significantly over the weekend. The announcement of the ECB’s new QE program has the potential to turn around sentiment, however, so talk of a Greek exit is not a foregone conclusion if Syriza wins. It is possible that easing financial conditions and Greek growth finally turning positive could see Greece’s fortunes pick up – Greek growth has recently moved back in to positive after several hard years of contracting economic activity. While not much, it is at least hope for the Greeks that, along with a QE program to spur growth, that things might pick up.
Regardless of the outcome the result is likely to create volatility over the weekend and a market gap. Traders should be aware that market movements could be substantial and to take precautions accordingly.
Pepperstone has released an exciting new commodity pair for all traders: Natural Gas – symbol XNG/USD
Natural Gas is an energy commodity that is affected by factors such as unexpected weather related demand, fossil fuel prices as well as supply issues. Not as readily portable as Oil, gas markets are fragmented and localized economic factors can cause diverging prices in different regions. XNG/USD is based on US Natural Gas, and is driven by global factors as well as those that affect only the US market.
In recent years US natural gas has been fairly volatile, tripling from $2 to over $6 per MMBTU between 2012 and 2014, before crashing spectacularly back down to below $3 early this year. An unusually cold winter in early 2014 showed the effect that weather can have on this commodity as demand squeezed prices higher; with falling oil prices and a mild winter this year, the price has fallen to the lower end of its recent trading range.
To start trading Natural Gas now in your MT4 Platform, simply right-click on Market Watch panel and select ‘Show All’ – look for the XNG/USD to begin.← Older posts