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Tickmill UK Daily Market Notes

Discussion in 'Market Predictions and Reports' started by tickmill-news, Jan 25, 2018.

  1. tickmill-news

    tickmill-news Tickmill Representative

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    Preview of the upcoming ECB meeting: Are new TLTROs necessary or not?


    From the beginning of the new year, when it comes to the ECB policy stance, the discussions most often focus on the reasons, conditions and design of a new round of TLTRO round, long-term bank financing operations. After the massive asset-purchase program ended in 2018, basically meaning that ECB opened a new chapter of policy normalization, economic conditions in the Eurozone suddenly deteriorated as shown by numerous negative surprises in manufacturing and services PMI reports. This prompted the ECB to taper off rate hike discussions completely, while raising the need to offer some flexible easing measure to confront the downturn. The “candidate” supported by ECB members and markets which has reasonable impact on financial conditions and is safe to discuss in the current situation is TLTRO.


    The latest meeting of the ECB offered few surprises, the guide to interest rates and reinvesting policy remained unchanged. Meanwhile, the Head of the ECB Mario Draghi and other officials became more concerned about the growing number of negative surprises in the data, especially in current corporate sentiments and their outlook, which slashed chances of the rate hike in 2019. After a short period of relief at the beginning of this year, Citigroup’s calculated economic surprise index resumed its decline in February and March:
    [​IMG]

    It looks like that the ECB got some clues from Fed’s pessimism in January, which suddenly changed its tone in January due to the pressure of negative market expectations. Several ECB board members said that the economic slowdown may be stronger and longer than previously expected which shifted expectations for a rate hike to a more distant future, at least until 2020. At the last meeting, the ECB described risks as “tilted to the downside”, as compared to the previous wording “moving to the downside”, i.e. raising the degree of gloom relative to the pace of economic recovery. However, at the press conference, Draghi limited the impact of the bearish statement saying that the reassessment of economic conditions would not have monetary policy implications. On the front of ECB policy decisions, there is a consolidation of views that banks will probably need a new round of cheap funding (TLTRO). According to the latest data from Handelsblatt most members of the expert community, referred to as “ECB Shadow Council” considered that the ECB should extend long-term financing operations in order to maintain control over financial conditions, preventing their unwarranted tightening. It should be noted that the purpose of the community comments is to determine the preferred behavior of the regulator, and not to predict its decisions. At the last meeting of the ECB, the inflation forecast for 2019 was lowered from 1.6 to 1.4% and remained unchanged for the next year at 1.5%.


    A useful indicator of the ECB’s readiness to continue normalizing policy will be the updated forecast for 2021. Lowering the long-term forecast means recognizing by the ECB that inflation is moving away from a convergence path with a target of 2%, which implies incline towards the measures. Within the limits of existing opportunities, this means a signal for a new round of TLTRO. At the last meeting, the ECB expected inflation to be 1.8% in 2021, and GDP – 1.5%.

    Forward guidance with respect to rates is unlikely to change at this and subsequent meetings without visible signs of economic growth, so as not to complicate decision-making for the new head of the ECB. Recall that that Draghi’s term ends in the end of October this year.


    The ECB rhetoric after the last meeting is full of doubts, both among dovish and hawks. Benoit Coeure admitted that the growth momentum is becoming less and less pronounced, the trajectory of inflation is less distinct, a new round of TLTRO may be needed and this point is included in the ECB agenda. Chief economist Pratt said that the short-term outlook is not particularly bright, but there are positive signs in the medium term. Ewald Novotny, one of the most eminent hawks of the ECB, said that the reasons for the slowdown in the economy can be transient and TLTRO should be probably delayed. He also noted that there are some discrepancies between market expectations and the ECB guidance, most likely pointing to an underestimation of the chances of a rate hike in the future. Draghi, speaking to Parliament, said that a significant monetary stimulus for the economy remains a necessary measure.

    Here are the scenarios of the meeting and the possible reaction of EURUSD and European bonds according to ING:
    [​IMG]

    Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.
     
  2. tickmill-news

    tickmill-news Tickmill Representative

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    US trade deficit soars to record highs at the expense of the government?


    The US trade deficit updated the record in December, official trade data showed on Wednesday. Strong consumer demand and tax cuts were essential factors of import immunity to the impact of import duties, but US exporters also failed to secure sales due to counter-tariffs, which increased the skew in foreign trade in favor of imports. Trump’s protectionist policies, judging by the US trade with the rest of the world, produce results that are directly opposed to the stated goal of restoring the trade balance.

    [​IMG]

    The US Commerce Department reported on Wednesday that the trade deficit jumped 12.4% in December from the previous month. Last year, imports surpassed exports by $621 billion, which is 12.5% more than in 2017, making it the highest figure since 2008. Considering the change of the US budget deficit, which grew by 77% over the period October-January compared with same period of prior year, it is likely that the United States paid for the growth of the trade deficit by increasing the public debt.



    Decline in exports by 1.9% in December in monetary terms amounted to 59.8 billion dollars, which was the worst change of US trade since October 2008. Imports in December increased by 2.1% compared with November. By adjusting the data for inflation, the increase in the trade deficit amounted to 10 billion dollars.



    Growth in the real deficit may indicate that the revised estimate of GDP growth in the fourth quarter of last year may be less optimistic with a preliminary estimate of 2.6%, published last Thursday.

    US importers sought to increase stocks of goods for sale in response to the imposition of tariffs, fearing that the escalation of a trade war would lead to a chain of tariff increases and a subsequent rise in import prices.



    The trade deficit with China increased by 11.6% to a historical record of 491.2 billion dollars. The Trump administration introduced tariffs for steel, aluminum, solar panels, and washing machines, but as a result received a record import of goods from 60 countries, the leaders of which were China, Mexico and Germany.

    [​IMG]

    Nevertheless, tariffs also led to a positive export change, which rose to 1.7 trillion dollars in 2018. For the last three months, exports have declined due to tariff restrictions from China, a slowdown in the global economy and a strong dollar that reduced the competitiveness of American goods.



    The dollar has slightly changed against other major currencies on Wednesday, while the yield of Treasury bonds declined ahead of the ECB meeting today.



    Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.
     
  3. tickmill-news

    tickmill-news Tickmill Representative

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    Chinese exports show Lunar Year celebration came at a price for the economy

    With the data on foreign trade for February, China has decisively emerged as the leading source of gloomy economic headlines. Exports in RMB fell in annual terms by 16.6% against the forecast of 6.6%, imports grew by only 0.3% against the forecast of 6.2%. In dollar terms, the data is even more disappointing.

    At first, Bloomberg “refused to believe” in the scale of the fall, mistakenly reporting an increase in exports by 16.6%, but quickly corrected the data, adding a minus sign. Algo traders were probably left with the bad taste.

    Part of the decline can definitely be attributed to the seasonal factor, namely, the celebration of the Lunar New Year, which began 10 days earlier than last year, probably propping up shipments in January and leaving a negative print in February. The rebound in manufacturing PMI from 48.3 to 49.9 points in February, in light of the significant downturn in foreign trade, has slightly lost its relevance in assessing the state of the Chinese economy.

    In dollar terms, exports crashed by 20.7% YoY, while imports fell by 5.2%. The trade surplus was $4.12 billion, Chinese customs reported.

    Looking into the past years of exports and imports data, the role of seasonality looks pretty convincing, making the February figures not so much frightening.
    [​IMG]
    Strong trade downturns at the beginning of the past years suggest that the trade prints in coming months should help to understand February decline better, especially whether it was a seasonal quirk or heavy blow to world trade due to domestic issues or decline in consumer demand in the economies of major trading partners, such as the United States.

    Despite the “commitment” of the US and China to constructive talks, the trade war seems to be unleashing in full swing.

    [​IMG]

    As can be seen from the chart, China’s imports from the United States fell at a record pace – more than 40% compared with February 2018. This explains the record increase in the US trade deficit, which was published yesterday. The decrease in exports was also accompanied by a strong drop in imports from the United States, so if anyone benefits from Trump’s protectionist policies, it is China.



    In contrast, imports from the EU increased by 5.8%, according to Chinese customs data.

    Reducing imports from the United States can significantly affect the layoffs and the creation of new jobs in the US manufacturing sector. This will probably happen with a delay, as US factories will need time to adjust.

    [​IMG]

    In January, the PBOC announced a giant injection of liquidity into an economy, which amounted to 4.6 trillion RMB in the form of various forms of loans (including through shadow banking), explaining its decision with rising liquidity needs in the economy. The manufacturing sector responded poorly to stimulation, hope remains for rapid growth in the service sector.

    Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.
     
  4. tickmill-news

    tickmill-news Tickmill Representative

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    What “gold rush” of Central Banks tells us about credit risk in US Treasuries?

    A central bank’s demand for gold

    The data on China’s foreign exchange reserves, which is reluctantly and irregularly released by the PBOC, indicated another increase in gold reserves for three consecutive months (December-February) to 60.26 million ounces. The value of Chinese gold reserves rose by almost $3 billion to $79.5 billion compared with the same period last year.
    [​IMG]
    Goldman Sachs believes that the price of gold could rise to 1,400 per troy ounce in the next 6 months due to increased demand from central banks.

    At the same time, investments in US Treasury bonds by the PBOC declined again reflecting a shift of investment accent on gold:

    [​IMG]

    Given the money supply in circulation, it is difficult to imagine that the Central banks – active buyers of gold are considering a return to the gold standard in the long run. The price of gold in this scenario has to be much higher, which, in fact, should naturally follow from the failure of the concept of fiat currencies. However, in the presence of more realistic reasons, there is no need in mental exercises for constructing conspiracy theories. After a 10-fold increase in the Hungarian Central Bank of gold reserves in October last year, it became clear that, considering the Central Bank as an organization that is not without goals for profitability, diversification and liquidity of its asset portfolio, the increase in gold reserves should pursue one or more of these goals. Given that the choice of assets for the Central Bank is limited, we can assume that there is a so-called concentration risk, as for an ordinary bank – that is, when investments are focused on one or several assets. In turn, this naturally implies reduced portfolio diversification.

    It is easy to see that in the asset portfolio of China, Russia and other Central banks, significant share of total assets accounts for non-resident securities, in particular, US treasury bonds. Recalling costly tax reform, funded from the government’s pocket, debates on the Trump wall construction, the Green Deal, which are also expected to be funded by the government, we can clearly understand the Central Bank’s concern about the growing risk of asset concentration in their portfolios. United States not only opted to postpone reduction of the fiscal spending, but also wants to deviate from stable path of expenditures further. In this case, there are certain expectations that the credit risk in the “risk-free” US government bonds may eventually increase and their price fall.

    And Central Banks’ forecasts, as you know, are often credible signals.

    Credit maneuver

    After the January generosity of the Central Bank of China, when cheap loans flooded the economy with an aggregate volume of 4.6 trillion. yuan, the “horn of credit plenty” suddenly disappeared in February, leaving “credit addiction” rumors with little proofs. The data released on Sunday showed that the total social financing in China grew by only 703 billion yuan, which is two times lower than the forecast and almost 7 times less than the January liquidity surge.
    [​IMG]
    Thus, the “demand for liquidity before the celebration of the Lunar Year” argument turns out to be the leading one in understanding China’s monetary policy. Switch to the higher timeframe, it can be seen that, in annual terms, total financing (including municipal bonds) increased by 10.1% in February, after rising by 10.4% in January, and the figures don’t look quite surprising.

    The head of the PBOC said at a press conference that the data for January and February should be considered together, but the intensity of easing still exceeds the level of the same period last year. The indicators of credit expansion for March should give even more evidence that the policy adheres to the long-term target level and that the January growth was due to a seasonal increase in demand for money.

    New loans increased by 886 billion yuan instead of the expected 950 billion, and that significantly exceeds the total social financing. This implies that the government resumed “tightening the screws” on shadow banking i.e. money market financing of capital markets. In January, the figure grew by 343 billion yuan, but in February it turned around dropping by 364.4 billion, including such components as entrusted loans (-54.4 billion), bank acceptance bills (-310 billion)

    Tough measures against shadow financing followed Premier Keqiang criticism of the central bank in January, urging banks to focus on long-term loans to the real sector, instead of trying to revive economic activity by inflating a bubble of short-term financing.

    Considering the distortions in export and import activity in the period before the Lunar New Year celebration, which I explained in my Friday article, extraordinary credit growth in January fits into a number of macroeconomic effects resulting from seasonal economic challenges.
     
  5. tickmill-news

    tickmill-news Tickmill Representative

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    Retail sales still miss welcomed rebound in car sales
    In the first quarter of 2019, the US economy did not perform a miracle. Retail sales rose a mere 0.2% in January, after the little tragedy in December, when the seasonally favorable month was marked by surprisingly sluggish consumer activity. The revised value for December was probably the biggest negative point of yesterday’s report.

    [​IMG]

    The preliminary value of -1.2% in December was revised down to -1.6%, thus excluding speculation about an incorrect assessment due to delays in the collection and processing of statistical information after the government stopped working.

    Excluding car sales, which turned out to be very weak, retail sales rose by 0.9%. Two basic indicators of the report – sales excluding cars and fuel, as well as sales in the control group showed quite healthy growth of 1.2 and 1.1 percent. In December, these figures were revised down to -1.6 and -2.3 percent.

    General consumer goods constitute the most stable core of retail sales; therefore, a corresponding increase of 0.8% in January, after a fall of 1.5%, may indicate the transitory nature of the drop of consumer spending at the end of last year. Retailers without physical stores, which also include online stores, increased sales by 2.6% in January, after a decline of 5.0% in December.

    The increased volatility in the data is likely to force the Census Bureau to be doubly attentive when revising the indicators. However, it’s not just the cost of restoring the agency’s work after a 35-day vacation. The suspension of the government’s work negatively impacted consumer sentiment, but also consumer spending (primarily through the civil servants who did not know for a long time whether they would be compensated). Despite the pressure of this factor in January, retail sales have rebounded, which indicates the preservation of consumer potential.

    The only weak point is in car sales, which seem to have lost touch with consumer optimism. Motor vehicle sales fell by 2.4% and year-on-year sales contracted as well.

    [​IMG]

    Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.
     
  6. tickmill-news

    tickmill-news Tickmill Representative

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    Lunar Year weighs on February data but the outlook remains dim
    Industrial production growth in China slowed to a 17-year low in the first two months of this year, fueling expectations that the “difficult child” of the Chinese economy will draw more attention from the authorities, mainly in the form of financial support.

    Nevertheless, the contribution of other components of GDP has tallied with or exceeded expectations, allowing hopes to spin that the peak of the slowdown in the economy has passed. Investment in housing grew by 11.6% YoY, with a forecast of 9.50%, while retail sales lost an impressive growth rate, although they preserved the necessary firmness, rising by 8.2%. Capital investments continue to rely on the support of the government, which creates implicit guarantees of demand in the economy, for example, through infrastructure spending. This type of spending missed expectations of it rising by 4.3%.

    [​IMG]

    The authorities intend to increase support for the economy in 2019, as economic growth risks falling to the 29-year low, but most measures need time to take effect. Chinese Premier Keqiang announced that the state will provide the economy with billions of dollars in the form of tax cuts and increased infrastructure spending, although the general tone of Chinese officials indicates an unwillingness to conduct massive state interventions in the economy as it was, for example, in 2016. Then the economy quickly went on the mend and caused a strong reflation impulse that swept across the world.

    The output of the industrial sector grew by 5.3% in the period January-February, less than previously expected. The pace turned out to be minimal since the beginning of 2002. The forecast projected that output would decrease to 5.5% from 5.7% in the previous period.

    China is trying to combine data for January and February to smooth out the distortion of data caused by the celebration of a long holiday – the Lunar New Year. This happened with exports and imports, which also show strong seasonal fluctuations, as well as with social financing, for which there was a seasonal surge of up to 4.6 trillion. dollars in January. The Central Bank urged to consider the data immediately for two months – January and February in order to better understand the dynamics of credit expansion.

    [​IMG]

    Non-seasonal distortion, output grew by 6.1% over two months, the official statistics agency of China reported in annual terms.

    A survey of Chinese factories, adjusted for seasonal factors, indicated a monthly decline in output in February, for the first time since January 2009. Such data naturally follow from the universal reduction in demand, both domestic and foreign due to the effect of tariffs.

    On Wednesday, Trump said that he would not rush to conclude a trade deal with China, stressing that it would necessarily contain provisions for the protection of the intellectual property of American companies in China and measures to prevent theft and extortion.

    Another surprise in the data was the increase in unemployment among respondents to 5.3% from 4.9% last month. However, the holidays probably left a strong imprint on employment, as some factories were closed for more than three weeks.

    Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.
     
  7. tickmill-news

    tickmill-news Tickmill Representative

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    Trade terms improve for the US, but housing market disappoints
    Following a strong Core PCE growth of 1.9% in February, import prices in the US also rose by 0.6%, after a slight increase of 0.1% in January and a fall of 1.4% in December. The leader in price growth among imported goods was fuel, that is, the main increase in inflation in February was due to an increase in costs, which is a somewhat unwelcome change on the inflation front, since it doesn’t come from consumption uptick (but could boost it).

    Excluding the cost of fuel, import prices have not changed, raising many questions about the existence of some hidden factors constraining inflation caused by tariff wars.

    [​IMG]

    Export prices, for the first time in three months, went up and also added an 0.6% after falling by 0.5% in January and by 0.7% in December. Some clues about the warming in the tariff confrontation between the US and China and the effect of seasonality gave a rise in prices for agricultural products by 0.2% in February, after a decline of 2.1% in January. Export prices excluding agricultural products rose by 0.7% for the first time since April 2018.

    [​IMG]

    US strengthening positions in trade with specific countries surprisingly concerns China as well. Prices for Chinese imports to the United States did not change in February after falling during the previous two months, at the same time there was some growth in export prices; in February it was 0.7%.

    As soon as the November and December data on housing sales inspired some optimism in the hearts of developers, the January data broke the positive trend, indicating a monthly decline of 6.9%. It turns out that in annual terms, home sales not only did not grow, but also declined.

    Sales of new homes fell in January to the lowest level since October last year. The largest drawdown in demand was observed in the mid-west, where high prices scared off buyers.

    [​IMG]

    Real estate sales at the pre-construction stage fell to 183K, the worst figure in three months, indicating that the pace of construction in the coming months will be sluggish. Despite the fact that the median property price fell by 3.8%, consumer demand “requires more affordable prices.”

    [​IMG]

    Investment in housing accounts for about 13-18% of US GDP and the forecast for this component is likely to be consistently revised downwards in coming months. Few improvements on this front are expected since there are no “super-bright” expansion prospects for the US economy. The offsetting effect curbing impact from downbeat housing data can be expected from U. Michigan consumer sentiments figure which is due today. Unfortunately, its rise has little to do with increase in the number of expensive purchases. This is confirmed not only by home sales, but also by sliding car sales.

    Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.
     
  8. tickmill-news

    tickmill-news Tickmill Representative

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    Will carry trade bonanza continue?
    With world central banks shelving their plans to tighten credit conditions, investors were forced to hunt for yields in emerging markets, making carry trade the “top choice” in terms of risk/reward in the first quarter of 2019.

    But will it continue further?

    The regime of subdued volatility in the equity markets of the US and Europe should last for some time due to a number of statements and forecasts of the ECB and the Fed, which can be unambiguously interpreted in favor of keeping rates at the current level or even reducing them.

    For the European Central Bank, there was a reduction in GDP and inflation forecasts for 2020 and 2021 at the last meeting, as well as a signal for a new TLTRO round, i.e. flexible and small-scale easing measures. Against this background, the talks about rate hikes would at least send a conflicting signal to the markets and make it difficult to interpret the policies of the ECB.

    The Fed, in turn, announced the imminent completion of the process of reducing the balance of the assets, i.e. turning off the autopilot mode, which Powell talked about in December. The reason for this decision was also implied the inconsistency in the policy of the regulator, where the pause in the rate increase, indicated in January, was combined with the tougher nature of the decline in assets on the balance sheet. That is, the conflict signal for the markets, the Fed soon called for interpreting in favor of further bearish policy changes. In other words, the transfer of the balance of assets under “manual control” in this case served as an important confirmation that the pause in tightening the policy is not transitory.

    The need for the Central Bank to make binding commitments (as it is intended to preserve the reputation and correct transmission of monetary policy decisions) in turn becomes the final step in the reasoning why large central banks have provided and will continue to provide a lot of time for the safe carry trade.

    According to HSBC, the carry trade has already yielded investors about 5.5% since the beginning of 2019, due to asset returns and FX returns. At the same time, the year 2018 was marked by a negative return for the carry traders in the amount of 1.4%, apparently due to the period of the Fed interest rate increases.

    [​IMG]

    BNP Paribas predicts that the short-term trend of large economies will not enter either the extreme growth zone or the strong decline zone, so the carry trade remains an attractive opportunity to earn.

    But if the yield differential is high enough to attract investors to the carry trade, then the second factor of preference, i.e. risk can soon scare them away. The first in the list of risks is the US trade conflict with China and in favor of the growing chances of realizing this risk is the postponement of the deadline for negotiations until June of this year. The second is the threat of accelerating inflation or the increased credit risks of developing countries, again as a result of the slowdown in world trade.

    Despite possible threats, investors gained long positions in the Mexican peso by 2.3 billion against the dollar since January 2019, the latest CFTC data showed. The net position on the ruble also rose from almost zero to 22.6K positions in the trading week ending March 15.

    Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.
     
  9. tickmill-news

    tickmill-news Tickmill Representative

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    Only recession could be worse: Why the Fed’s Wednesday surprise lies between neutral to mildly bullish range.
    On the eve of the FOMC decision on Wednesday, the market is contemplating two base case scenarios: soft policy comments, while preserving the possibility of 1 rate hike this year and 1 in 2020, or an even softer bias with only 1 rate hike in 2019 with a corresponding downside revision of economic forecast. At the same time, the old dot plot, which boldly indicates two increases in 2019, diverges drastically from the current Fed stance and it will probably need to be revised. The question is whether the FOMC will be able to correct the “problematic channel of communication” with the market so as not to give a signal for future recession and at the same time avoid a premature hint of a rate hike that Bill Dudley, the former head of the New York Fed and analysts Morgan Stanley discussed this week.

    The federal funds market went even further in anticipation of the end of policy normalization, believing that the Fed would have to lower the rate in 2020:

    [​IMG]

    Dudley, answering questions in an interview with Bloomberg, said he expects the Fed to extend the pause in providing accurate guidance to the markets due to sluggish and iffy momentum of the economy in the first quarter. According to him, this may change in the second quarter, when the conflict signals from the economic front will be replaced by more predictable dynamics and the Fed will be able to “come into play” again.

    Dudley believes that only weak inflation prevents the Fed from continuing to raise rates. If a recent wage increase finds a way into the consumer inflation, which usually occurs, but with a lagging nature, then the current expected limit of normalization of the policy can be lifted.

    The former Fed top manager said that the Fed will probably devote March meeting to the discussion of fine points of balance sheet runoff. Recall that at the last meeting in January, Powell unexpectedly announced that the Fed was leaning in favor of maintaining abundant reserves system to ensure the effectiveness of the transmission of monetary policy. The federal funds rate, which the Fed announces, “does not oblige” banks to borrow or lend to each other precisely at this rate. Depending on the demand and supply of money it can fluctuate in a range and its precise value is called effective funds rate (EFFR). The upper limit of the corridor of fluctuation is controlled by the rate on excess reserves (IOER), i.e. the interest that banks earn by keeping money in the FRB accounts. The lower limit of the corridor is adjusted by REPO operations. If the Fed believes that the EFFR went too low, they increase repos with banks, in effect replacing securities (assets on the balance sheet) with cash borrowed from banks. Then the supply of federal funds in the market falls and their cost, i.e. market rate rises.

    So, taking into account how this mechanism works, the Fed should maintain a sufficient level of securities on the asset side (and as a result, encourage banks to maintain excess reserves in the Fed accounts) so that in case of deterioration of control over the market rate, the volume of repos can be increased on a large scale.

    Here you can see how excess reserves started to rise after the Fed signaled the early end to balance-sheet decline:

    [​IMG]

    In addition to the issue of policy transmission, Powell also mentioned the problem of conflicting signals, which arose when a pause in raising rates was announced and at the same time, the balance sheet continued to decline. After the signal at the last meeting that the sell-off of assets will soon be completed, the market is interested in the composition of the balance of assets that the Fed will choose. Since the bulk of the assets will fall on treasury bonds, the market will be interested in detail on their maturity structure. Obviously, the shape of the yield curve, and, consequently, inflation expectations, will depend on this.

    Formally, Dudley’s views cannot in any way reflect the FOMC position, but in reality, he can safely “correct the direction” in which market expectations are formed (without threat to the Fed’s reputation) so that the market will be more or less prepared for the bullish surprise of the regulator.

    Given that the federal funds rate futures are pricing the rate cut in 2020, the Fed will find it difficult to negatively surprise the market. The worse is only a warning about recession. Therefore, in my opinion, the expectations of the response in sensitive assets should be based on a neutral meeting or weakly positive surprise.

    Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.
     
  10. tickmill-news

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    Yuan’s confident rally drops some clues about trade talks success
    The Asian markets opened on Wednesday with a decline as a result of investors’ tendency to liquidate their long positions in Asian stocks before the period of high market turbulence. The meeting of FOMC officials is today, which should determine the fate of monetary tightening cycle in the US.

    The broad MSCI index, which tracks the aggregate stock returns in the Asia-Pacific region, except Japan, fell by 0.2%. The leaders of the fall were shares of Australia and South Korea.

    European stock futures have been also wary about possible surprises in the US. The concerns drove futures lower indicating that European session is also likely to spend most of the time in the red zone today.

    The Japanese Nikkei index lost 0.2%, while shares of companies in mainland China have changed little, posting tepid response to the updates on trade negotiations.

    New difficulties in trade talks between China and the United States have become one of the reasons that deprived the stock market of a positive mood. Bloomberg said that China does not agree to some of the demands of the American side due to the lack of guarantees that the tariffs will be canceled after the deal is made. At the same time, the WSJ, referring to sources familiar with the course of the negotiations, wrote that the negotiations have reached the final stage and the end of April is the reference date of the deal. US Trade Representative Robert Lighthizer and Treasury Secretary Stephen Mnuchin plan to visit China next week to sum up the interim progress in the negotiations, the White House administration said on Tuesday.

    Yuan has been decisively updating highs thanks to positive WSJ note:

    [​IMG]

    Asian firms are postponing investment plans as indicated by INSEAD poll. The confidence remained at the lowest level for three years in the first quarter and contagion spread to investors who are not in a hurry to stage a rally in the stock market. Trade wars, interest rate hikes and slowdown in the Chinese economy were listed among the top risks for the companies.

    The Fed is expected to leave the interest rate unchanged at today’s meeting, so the focus of market participants is shifting to the regulator’s expectations, in particular, plans to complete the asset sales program and the change in forecasts for macroeconomic indicators – GDP and inflation.

    Since the beginning of this year, Jeremy Powell has persistently intertwined the phrase “patient Fed” in his comments, so that with the incoming data more and more it acquires an interpretation of the Fed’s intention to complete the normalization of monetary policy. Futures on the interest rate price in first rate cut in 2020 and based on this fact it will be difficult for Powell to disappoint the markets today.

    The current volume of assets on the Fed’s balance sheet is about 4 trillion. dollars, consisting predominantly of treasury bonds and mortgage-backed debt. It is difficult to call the program of reducing assets on the balance sheet as such, since after buying assets from the pre-crisis level of $900 billion to $4.5 trillion, the Fed was able to release to the market a total of $500 billion worth securities. The need for the swelled balance sheet stems from the transition to the so-called system of abundant reserves where the major amount of excess reserves of banks are kept on the Fed’s accounts, which makes it easier to keep the market federal funds rate within a certain range. The final balance at the time of the completion of the asset sale program is projected at $3.85 trillion and the composition of the assets will primarily contain treasury securities.

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    The British Pound remains hostage to Brexit-related headlines.

    Prime Minister Theresa May will be begging for another postponement for leaving Britain from the EU for at least another three months after the third vote on her plan failed. May’s blackmail of the Parliament is now in the simple principle of “My plan or no plan” and asking the EU to delay the process can bring the process closer to “no” plan that certainly won’t suit the Parliament. On the other hand, the head of the EU Brexit negotiation team, Michael Barnier, said that extending the time frame for discussing the plan would make sense if May’s chances of ratifying her agreement increase in the Parliament.

    Oil continues to cautiously update its highs against the background of a decrease in the activity of American oil companies, as shown by data on drilling rigs from Baker Hughes and a gradual shift in market equilibrium in favor of the deficit, which the IEA recently warned in its report.

    Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.
     

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