thursday march 16, - bloomberg.com · thursday march 16, ... dollar spot index fell 1.2 percent,...
TRANSCRIPT
Thursday
March 16, 2017
March 16, 2017
U.S. Budget Outline; Debt Ceiling Limit; BOE RatesBy Ben Baris and Geoff King
What to Watch: President Donald Trump’s for fiscal 2018 is first budget outlineexpected. He’s said he’ll seek a $54 billion boost in defense spending, paid for by an equal amount of cuts to non-defense agencies. The White House budget director, Mick Mulvaney, working on this so-called “skinny budget,” said his office seeks to include funds for Trump’s border wall with Mexico as supplemental defense spending. A full budget request from Trump is expected in May.
Economics: The is forecast to leave policy unchanged as it stays Bank of Englandin a holding pattern after cutting interest rates last year. Economists surveyed by Bloomberg forecast U.S. rose 1.4 percent in February from a month housing startsearlier to a 1.26 million seasonally adjusted annualized rate, 8:30 a.m. The March
(8:30 a.m.), for the week Philadelphia Fed Business Outlook Survey jobless claimsended March 11 (8:30 a.m.) and January report (10 a.m.) are also reported.JOLTS
Government: A pair of judges President Trump’s revised travel ban before it haltedcould be enforced today, slamming it for discriminating against Muslims. The U.S. debt
, which expired March 15, is set to be reinstated. President Trump will ceiling limitprobably push for an increase. If there’s no agreement, Treasury can delay any pain until late summer by shifting funds around and deferring payments. German Finance Minister
and U.S. Treasury Secretary meet to discuss Wolfgang Schaeuble Steven Mnuchintrade and economic issues, followed by a joint news conference at 1 p.m.
Markets: Rallies from Seoul to Jakarta pushed the MSCI Asia Pacific Index to the highest since mid-2015, while European shares rose a second day. Hong Kong stocks jumped the most since May as China followed the Fed in raising rates.
(All times local for New York.)
Live chart on the Bloomberg .terminal
Commentary in This Issue
It was little surprise that Federal Reserve policy makers delivered on a rate increase. Of greater significancewas the lack of change to their economic and financial projections: Bloomberg Intelligence economists.
The Fed’s longer-run median projection, which represents the neutral fed funds rate, has fallen steadily since being introduced in 2012. This came to an end in trendDecember and may continue reversing: Michael McDonough.
While the Fed raised rates, the central bank made little change to the “dot plot,” meaning it isn’t signaling a faster pace of normalization, analysts
: say Alexandria Arnold.
Quote of the Day
"One of the most important things we need to do as a country through the bilateral negotiation process is increase the rules of origin, which specify how much of a product has to be made in the U.S.A."
— Peter Navarro, head of the White House
National Trade Council, on the future of the
U.S.-Mexico relationshiptrade
China is as the emerging World ’s unlikely Trade Organization
champion amid Donald Trump’s threats to weaken it, backed by an army of negotiators who have spent 15 years quietly learning the ropes on trade disputes.
Big Picture
USD Falls as Fed Disappoints Bulls Seeking Hawkish Signals
Source: Bloomberg
The dollar tumbled against all of its major peers after the Federal Reserve raised interest rates while forecasting a continued gradual approach to tightening monetary policy. The Bloomberg Dollar Spot Index fell 1.2 percent, the most since January. Traders who were speculating on a more hawkish slant from the Fed were left disappointed that the central bank didn’t signal it was shifting to a more aggressive tightening path, instead keeping projections for the number of rate increases in 2017 and 2018 unchanged. “This is broadly negative for the U.S. dollar,” said Mark McCormick, North American head of foreign-exchange strategy at Toronto-Dominion Bank. “The market was looking for a definite shift in the dots and more clear signals towards a more restrictive stance over the next few years.”
— Lananh Nguyen and Vincent Cignarella
Economics 2 March 16, 2017
Big Picture
Fed Hikes, But Holds Fast to Goldilocks OutlookBy Carl Riccadonna, Yelena Shulyatyeva and Richard Yamarone, Bloomberg Intelligence economists It was little surprise that policy makers delivered on a rate increase following theirwell-executed communications campaign in advance of the meeting. Of greater significance was the lack of change to their economic and financial projections.
This suggests that the Fed merely viewed March as an opportune moment to continue along its prescribed path, as opposed to a faster sequence of rate increases pointing to a newfound sense of urgency to normalize rates at a quicker pace.
Medium-term forecast changes were largely inconsequential, reflecting slightly faster growth next year and incrementally firmer core inflation in the current year. However, the slightly lower longer-run unemployment rate marked a continued drift downward in expectations of the neutral level of unemployment. At the margin, this signals policy makers becoming somewhat more confident that they can let the unemployment rate decline without significant negative consequences for the consumer inflation outlook.
The composition of the updated dot plot signaled that Fed Chair Janet Yellen has successfully maintained a strong coalition of doves and moderates that favor just two more rate hikes this year. Bloomberg Intelligence Economics projects those to occur in June and December. There was a minor compression in the timeline to the arrival of the neutral fed funds rate, essentially from early 2020 to mid-late 2019. There may be additional compression in the future, depending on economic performance, however, this is likely to be limited, as policy makers refrain from more aggressive normalization in order to maintain leeway to begin reducing the size of the Fed’s balance sheet.
The vote to increase the range to 0.75 percent-1 percent was nine to one, with Minneapolis Fed President Neel Kashkari dissenting against the action and preferring no change in monetary policy. The last time there was a dissent was Nov. 2, 2016 (eight to two).
The statement, unsurprisingly, did not reveal any details regarding balance sheet policy, confirming that talks regarding the unwind of the Fed’s balance
Full analysis on the Bloomberg .terminal
sheet remain in preliminary stages. The fact that discussions are at such an early stage suggests that policy makers are inclined to wait until the fed funds rate is significantly higher. BI Economics believes the committee will wait until the fed funds rate is closer to 2 percent to begin tapering reinvestment. Given the current projections, the FOMC is unlikely to initiate the plans until late 2018.
The dot plot composition of interest-rate expectations provided a telling signal that policy makers remain broadly unified with the notion of a cumulative total of three rate increases in 2017. Nine dots were aligned with the median, which fell in the 1.25 percent-1.5 percent range. If this tight clustering holds, then Yellen should be able to continue leading a gradualist approach to policy normalization with a minimal amount of dissent. The cohesion around three-four rate hikes in 2018 is also increasing. In December, there were only three dots at 2 percent-2.25 percent for year-end 2018, now there are six. Nine members favor either three or four hikes next year.
In the official meeting statement, the general characterization of the economy remained intact, most specifically in reference to overall activity ("continued to expand at a moderate pace") and labor-market performance ("continued to strengthen"). Previous descriptions of household spending ("continued to rise moderately") remained unchanged, however, the characterization of business
investment was upgraded ("business fixed investment appears to have firmed somewhat" from “has remained soft”).
The characterization of inflation indicated the Fed feels a little bit more confident in achieving its inflation target: Fed officials acknowledged that inflation has moved “close to” the 2 percent objective. The statement specifically mentioned core prices were “little changed and continued to run somewhat below 2 percent,” indicating the Fed is dismissing the recent pick up in energy prices. The Fed also reminded that its inflation target is a “symmetric” goal.
The guidance regarding the timing of future rate moves was ambiguous in the statement. Policy continued to be described as “accommodative” following the latest rate hike, and guidance that future increases in the fed funds rate would be “gradual” remained intact. There were no clear hints pointing to action in the second quarter, but there is a vast amount of economic data to digest in the interim.
There were essentially no meaningful changes to the medium-term economic projections from those issued at the December meeting.
The only change in the anticipated appropriate policy path for Fed funds wasa slight increase in 2019 to 3 percent from2.9 percent prior. There was no change in the 2017 and 2018 expectations of 1.4 percent and 2.1 percent, respectively. Thelonger-run projection held at 3 percent.
March Versus December Fed Dot Plot
Economics 4 March 16, 2017
Monetary Policy
Fed Showing Its Dots Are No Longer a One-Way BetBy Michael McDonough, Bloomberg Intelligence economistThe Federal Reserve’s longer-run median projection, which represents the neutral fed funds rate, has fallen steadily since being introduced by the central bank in 2012. The shorter-term projections, which represent the next several meetings, have fallen even more precipitously. This trend came to an end in December and may continue reversing.
The median longer-run dot held at 3 percent in March after increasing by 12.5 basis points to that level in December. The median for the dots representing 2017 and 2018 — which rose by 25 basis points in December, reducing the spread between the longer-run projection — both held at their respective levels of 1.375 percent and 2.125 percent in March. The 2019 dot, which also rose 25 basis points in December, to 3 percent, matched that level in March.
In a recent speech, Fed Chair Janet Yellen indicated that the real neutral fed funds rate is low by historical standards due to a number of factors including low productivity growth, an aging population in advanced economies, slow global growth and a lack of animal spirits in the aftermath of the Great Recession.
Some of these factors, including demographics, are structural and can’t beinfluenced through monetary policy and may continue weighing on the neutral rate
at advanced central banks around the world. A boost in productivity growth, which could coincide with a more meaningful rise in wages, coupled with rising prices, may gradually push up the Fed’s projections for the real neutral fed funds rate.
This is especially true if President Donald Trump’s fiscal agenda — tax reform and infrastructure spending and other initiatives — manages to resurrect the market’s lost animal spirits.
In the short-term, budding signs of mild inflationary pressure, pushing the core PCE deflator closer to the Fed’s target of
2 percent, along with the benefits of the economy’s proximity to full employment and a less dovish tilt in policy makers’ public comments, may lead Fed officials to price in more aggressive tightening over the next several years to close the gap between the neutral and target Fed funds rate.
Admittedly, current data would indicate the Fed has not yet fallen behind the curve, so the pace will likely remain very gradual. The Atlanta Fed GDPNow is currently indicating first-quarter growth of 1.2 percent, well below the Fed’s full-year expectation of 2.1 percent.
Research Roundup
Evolution of the Fed's Rate Projections (Median Dots)
Economics 5 March 16, 2017
Research Roundup
Fed Seen in No Hurry to Continue Raising RatesBy Alexandria ArnoldWhile the Fed raised rates March 15, the central bank made little change to the “dot plot,” meaning it isn’t signaling a faster pace of normalization, analysts say. Read additional analysis on the Bloomberg .terminal
“Key for the market was that the dots were left unchanged, signaling little urgency to shift to a faster pace of normalization”
Market response favors more consolidation in majors in near term; broadly negative for USD “and the supportive risk tone favors the high-yielders while the pullback in rates should boost some of the low-yielding currencies”
“It’s being taken as a little more dovish than expected. Prior to the meeting, the bar was definitely moved higher with respect to how the Fed will deliver the message. The market was priced for a more hawkish tone to move rates higher”
Likely to see rates hover between 2.3 percent and 2.6 percent, “because investors are going to be waiting for information on fiscal stimulus and tax reform coming from the Trump administration”
Path of interest rates is higher over time, but market is comfortable in this range for a while
Fed just made clear “the gradual nature” of tightening
Evident that the FOMC is still “extraordinarily dovish”
Bottom line, “Fed is going to take its grand old time in normalizing rates”
Fed hike “will be seen as a mistake in the period ahead"; Fed rushed move and did so without changing macro forecasts
TD (Mark McCormick, interview)
Janus Capital Management (Nick Maroutsos, interview)
The Lindsey Group (Peter Boockvar, note)
Mizuho (Steven Ricchiuto, note)
Tone of FOMC’s forecast turned ‘‘a bit more bearish”
“The market is expensive and just became more expensive”
Mizuho was previously only primary dealer to stick with call for Fed to raise rates in May while other firms expected a hike in March
FOMC seems “in no more of a hurry to normalize rates in March than it was in December”
Decision to raise rates in March thus viewed as FOMC taking advantage of favorable financial market conditions rather than as a first step to a faster pace of rate increases
March hike endorses growth over last six months, but “a continuation of this positivity in line with market expectations will only stem from an increase in throughput from the Trump administration on taxes and infrastructure”
More likely to see dots rise in June assuming further strong labor market data and emerging clarity on fiscal plans
Will give Fed the excuse to hike rates in June and signal further increases in September and December; expect Fed will add another dot to plot in 2018
“Fiscal policy will be critical for Fed policy going forward”
Expects one or two additional
Barclays (Michael Gapen, Rob Martin, note)
World First (Jeremy Cook, note)
Pantheon Macroeconomics (Ian Shepherdson, note)
Prestige Economics (Jason Schenker, note)
25-basis-point hikes this year, but next increase may not come until September
“However, we also see upside risks to inflation in 2018 from U.S. fiscal policy stimulus, if tax cuts and deficit spending increase. This would present upside risks to Fed policy in 2018, when we see four rate hikes”
“The dollar softened after the FOMC statement was released — it didn’t add much to what was already expected, and much of the bull rally had already been priced in”
“This is a relief trade — the market had braced itself for a more hawkish statement and a more hawkish set of dots”
USD rally earlier this year may have been overdone, and “there’s a chance that the dollar is cresting here. High-yield emerging-market currencies are clearly benefiting from this”
Expects UST 10-year yield trade near 2.5 percent for next couple months before drifting lower
“The pressure is upward” for the dollar in longer term, even amid intraday selloff; the currency will be supported by stronger U.S. economy and rising rates
While Fed raised rates and updated dot plot, it wasn’t a “hawkish hike”
Statement reiterated Fed’s anti-inflation commitment and “leans against those interpretations suggesting the Fed is willing to let the economy run hot”
Silicon Valley Bank (Minh Trang, interview)
PGIM Fixed Income (Robert Tipp, interview)
Savos Investments (Jason Thomas, interview)
BBH (Marc Chandler, note)
Data & Events
Economics 6 March 16, 2017
Data & Events
TIME COUNTRY EVENT SURVEY PRIOR
8:00 U.K. Bank of England Bank Rate 0.25% 0.25%
8:00 U.K. BOE Asset Purchase Target 435b 435b
8:00 U.K. BOE Corporate Bond Target 10b 10b
8:30 U.S. Housing Starts 1264k 1246k
8:30 U.S. Housing Starts MoM 1.40% -2.60%
8:30 U.S. Building Permits 1268k 1293k
8:30 U.S. Building Permits MoM -1.90% 5.30%
8:30 U.S. Initial Jobless Claims 240k 243k
8:30 U.S. Continuing Claims 2050k 2058k
8:30 U.S. Philadelphia Fed Business Outlook 30 43.3
9:45 U.S. Bloomberg Consumer Comfort — 50.6
9:45 U.S. Bloomberg Economic Expectations — 50
10:00 U.S. JOLTS Job Openings 5562 5501
10:00 U.S. Revisions: Job Openings and Labor Turnovers — —Source: Bloomberg. Surveys updated at 5:05 a.m. in New York.
Live chart on the Bloomberg .terminal
Calendar
Click on the to see the full range of economists' forecasts on the terminal. highlighted releases
Overnight
Dutch voters turned out in force to back pro-European parties and help Prime Minister ’s Liberals Mark Rutteeasily beat off an election challenge by the anti-Islam of Freedom Party
, drawing a line in the Geert Wilderssand over the spread of populism. With more than 90 percent of votes counted, the was Liberal Partyprojected to take 33 seats in the 150-seat lower house of parliament to 20 seats for the Freedom Party. The
and the Christian Democratscentrist party were tied one seat D66behind Wilders. The result assures Rutte the first shot at forming a government, although with no obvious majority, coalition talks may take months.
The kept its Swiss National Bank at an historic low and deposit rate
reaffirmed its threat to intervene to keep a lid on the franc. Keen to prevent the currency from appreciating, SNB President Thomas
and his colleagues held the Jordan interest rate on sight deposits at minus 0.75 percent today, as forecast in a Bloomberg survey. They also repeated their pledge to wage foreign-exchange interventions if needed, saying the franc remained “significantly overvalued”.
China’s central bank raised borrowing costs as a stable economy and factory reflation give it scope to follow the Federal Reserve in tightening policy. Hours after the Federal Reserve's quarter percentage-point move, the People’s
increased the rates it Bank of Chinacharges in open-market operationsand on its medium-term lending
. facility The central bank said markets expected higher borrowing costs and that open-market rate increases don’t necessarily equate to interest-rate hikes, according to a statement.
Europe
Asia
Mild Weather Could Have Boosted Housing Activity
Housing starts could get a boost from last month's warmer-than-usual weather, similar to the impact on construction payrolls in the February jobs report. Temperate weather favored an earlystart to hiring in outdoor-employment sectors, such as construction. Absences from work due to bad weather, as well as weather-related curtailments of average weekly hours, were significantlybelow their respective historical averages. As a result, construction hours worked jumped 1.3 percent, the highest reading in more than a year. Building permits have also picked up as of late,particularly in the single family segment, also supporting a strong February housing starts print. A solid start to construction season could pull forward activity at the cost of future months.
— Carl Riccadonna and Yelena Shulyatyeva, Bloomberg Intelligence economists
Economics 7 March 16, 2017
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