The ECB meets today to announce its Monetary Policy Decisions at 15:30 server time; it is the first meeting since the central bank announced its long awaited Quantitative Easing program in January because the ECB is on a six-week meeting schedule as of 2015, as they consider the crisis to have eased somewhat. The meeting offers the ECB a chance to outline the finer details of its easing program after a month of preparation – the program is set to begin in March, with rumours of the 9th being the inception date.
There is no other policy change expected at this meeting, with all interest rates projected to be left on hold when released at 14:45 server time. What we are expecting to gather is the details or ‘modalities’ of the program such as:
- The Target: Explicitly it might be said that the ECB has a balance sheet target, but previous QE programs have been sold on the premise of reducing longer term borrowing costs to stimulate the economy, stimulating credit demand and forcing people out further on the risk spectrum. As yields in much of Europe are already negative, or at least very low, the scope for further reductions is limited; asset markets are also considered frothy in the wake of several waves of stimulus measures from developed economies, and in this light further encouragement of risk-taking may not be warranted. Most likely the ECB’s goal here will focus on inflation, growth and the balance sheet rather than yields or risk assets.
- The Assets: Given the small size of eligible assets available, as well as the concurrently running ABS and covered bond purchase program – the ECB will need to provide additional clarification about how it intends to meet its additional 50 billion Euros-per-month target without distorting markets too much. However, if the ECB’s QE is anything like that in the US – bond demand may actually fall and yields rise when the program begins, as bond holders seek the returns of risk assets and unload their holdings. Should this be the case, the ECB may have no problems achieving its purchase targets, but there are some sellers who are legally or traditionally bound to hold on to their fixed income allocation and would be very reluctant sellers to the ECB.
There are also other issues for the ECB to cover, such as the method of purchase and the risk sharing element of the program. The event is not expected to cause dramatic EUR volatility, given that the QE program is a known event and there is no expectation for other policy changes. However this meeting is important for overall direction in the market as it marks a new era in the Euro saga and will provide crucial details about a program that will be with us and in the headlines for the next 2 years.
The Bank of Canada will announce today whether it will continue to decrease its overnight interest rate, after reducing the rate to 0.75% at the last meeting. The Rate Statement and Overnight Rate are scheduled for release at 17:00 server time and are to be released simultaneously.
Since the last rate cut of 25 basis points on January 21st, the market initially upped bets on the BoC to continue with another rate cut this month; however, improving data and rebounding oil prices have seen those bets pared back drastically – with futures markets and analysts shifting expectations from ‘almost-definitely’ back to only a 1 in 4 chance of a cut.
Canadian data has shown improvements in employment and inflation, with GDP also slightly beating market expectations last month. Developments outside of the country are equally important in the turnaround of market sentiment as a number of important policy changes have taken place to calm volatility:
- Europe officially announced its long awaited QE program.
- Greece has temporarily found an extension to its bailout program, quelling fears of an exit from the Euro.
- A number of other central banks have cut interest rates, including fellow commodity exporter Australia and commodity consumer China, easing monetary conditions worldwide.
- The Yellen Fed has not appeared in a rush to raise rates, with the FOMC revealing a dovish approach to rate increase.
The RBA’s decision to hold rates steady rather than cut a further 25 basis points may signal that the fear of a crash in commodity exporting countries is coming to a halt – if only temporarily. The Bank of Canada may take cues from its partner down under and leave rates on hold again to maintain plenty of room for accommodation should conditions worsen again. For now oil prices are low, but have recovered powerfully from earlier lows – the Canadian Dollar tracks movements in Oil quite strongly:
While the weight of expectations has now shifted towards a month of holding steady, the RBA announcement yesterday showed that central banks are not afraid of disappointing analysts or the market. Traders of CAD based pairs should be aware that there could be significant volatility around the release – especially if the bank decides to move pro-actively rather than waiting for a further deterioration in the data.
The RBA is expected to announce another rate cut today at its monthly Cash Rate Announcement; the anticipation for a decrease in the cash rate of 25 basis points comes after rate decrease of the same magnitude at the last meeting, somewhat surprising economists who saw a continued period of stability. The RBA announces its decision at 05:30 server time.
The previous announcement took some by surprise as the move was not expressly telegraphed in advance. Previously Governor Stevens had emphasised that changes to policy would likely be preceded by changes to the rate statement – December’s statement did not provide any obvious clues:
“Looking ahead, continued accommodative monetary policy should provide support to demand and help growth to strengthen over time. Inflation is expected to be consistent with the 2–3 per cent target over the next two years.
In the Board’s judgement, monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target. On present indications, the most prudent course is likely to be a period of stability in interest rates.”
However, a deterioration in commodity prices likely forced the board’s hand during the 2 month period between meetings – in the February statement, Stevens focused on this decline and the pass through effects on CPI:
“Commodity prices have continued to decline, in some cases sharply. The price of oil in particular has fallen significantly over the past few months. These trends appear to reflect a combination of lower growth in demand and, more importantly, significant increases in supply. The much lower levels of energy prices will act to strengthen global output and temporarily to lower CPI inflation rates…
The CPI recorded the lowest increase for several years in 2014. This was affected by the sharp decline in oil prices at the end of the year and the removal of the price on carbon. Measures of underlying inflation also declined a little, to around 2¼ per cent over the year. With growth in labour costs subdued, it appears likely that inflation will remain consistent with the target over the next one to two years, even with a lower exchange rate.”
Given the dovish statement and the renewed round of easing worldwide, the majority of economists surveyed now expect a rate cut today to 2.00% – this is backed up by rate markets pricing a high probability of another decline, at above 50%. Expectations of today’s policy change have filtered through to the exchange rate, with the AUD declining one and a half cents overnight down to 0.7760.
While there is good reason for the market to expect a further rate cut – positioning and expectations are decidedly to the downside for the Australian dollar and interest rates, so if the RBA were to hold today it would be likely to catch the market off guard, potentially creating a short squeeze.
Whether the RBA cuts or not, there will be much to learn from posturing and forward guidance in the statement. Whether the RBA returns to a period of interest rate stability or continues to stress further easing of policy measures will be taken very seriously by traders, and is potentially as important as whether the rate cut occurs today. Traders may wish to pay attention to the policy statement rather than focusing solely on the rate decision, as this will be a key indicator for future policy action.
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.