Thursday 18 January 2018

Daily Market Update: Its “Wait and See” for the Fed

The Bank of England. Photo: PA
The Bank of England. Photo: PA

Jason Rehill

Yesterday’s main event was Fed Chair Yellen’s semi-annual testimony to the House Financial Services committee.

Yellen delivered a carefully crafted message to the market that, upon closer examination, offered a modestly dovish reassessment of changes in factors key to the policy path vis-à-vis the January FOMC statement. How this assessment plays out in the market as we approach the March meeting will be an interesting watch point.

Fed Chair Yellen’s prepared remarks suggest the Fed is still not (at least not yet) backing away from its December guidance. Nothing in the testimony suggests a March rate hike is off the table, nor is there anything that lays the groundwork for an imminent move. For now, the Fed remains in a period of “watchful waiting” (though Yellen did not incorporate this phrase into her testimony today, other Fed officials have used it in recent weeks).

Echoing the sentiment of the January FOMC statement, Yellen said yesterday, “At present, the Committee is closely monitoring global economic and financial developments, as well as assessing their implications for the labour market and inflation and the balance of risks to the outlook.” And she reiterated that “monetary policy is by no means on a pre-set course. The actual path of the federal funds rate will depend on what incoming data tell us about the economic outlook, and we will regularly reassess what level of the federal funds rate is consistent with achieving and maintaining maximum employment and 2 percent inflation.”

Overnight the number of agreed house sales in the U.K. rose to the highest level since April 2014 last month. The Royal Institution of Chartered Surveyors said a net 49% of surveyors reported house prices increased in the three months through January, unchanged on the fourth quarter. RICS also found 74% of surveyors expected house purchases to rise before the new surcharge kicks-in.

Whilst yesterday, UK manufacturing production growth slipped more than the consensus expected in December to -1.7% year on year. Industrial production fell -0.4% year on year, weaker than market expectations for +1.0%. At the margin you would have thought yesterday’s UK industrial data may have been GBP negative, but the pound finished up 0.36% versus the Euro and 0.35% versus the USD.

The possible rationale behind the pound’s strength yesterday maybe down to the fact that current market pricing suggests interest rate rises from the Bank of England are off the table until 2018, so there's quite a lot of bad news already in the price. Nevertheless this latest set of disappointing UK figures may ignite more chatter about rate cuts, however more than likely GDP forecasts will have to be hit another 1% or so before that becomes 'live' and this would likely need the service sector to be hit much harder. Recent survey data suggest this isn't yet the case.

In Europe yesterday Italian industrial production declined by 1% year on year, softer than market consensus for 1.4% growth. French industrial production for December was -0.7% year on year, weaker than market expectations for 1.7%. While ECB Executive Board member Peter Praet said policy makers will continue to use the tools at their disposal to address any liquidity shortages that may arise in the euro area.

For the day ahead, it’s quiet on the economic data front with just initial jobless claims released in the US at 1.30pm. The day will be dominated by central bank speakers; firstly Bank of England deputy governors Jon Cunliffe and Andrew Bailey speak before a House of Lords committee about Europe's plans for closer integration. Then, the main event of the day again will likely be Janet Yellen, the Fed chair’s, appearance before the members of the U.S. Senate from 3 p.m. onwards.

Finally the Irish NTMA today will auction €1bn of the 1% May 2026 bond, tapping the new 10y launched in January. The original issuance of €3bn came at average yield 1.156%; significantly above current trading levels. Ireland has weathered the sell-off in periphery relatively well, particularly given political uncertainty. Nonetheless, given the very scarce supply in 2016 and the relatively small issue size, the market is largely expecting a smooth, or at least uneventful, auction.

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