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Daily Commentary | 07/04/15

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• Fed officials see economic weakness as only temporary Friday’s weaker-than-expected nonfarm payrolls don’t seem to have changed attitudes at the Fed. NY Fed President William Dudley, a noted dove, Monday said he viewed the figures “as reflecting temporary factors to a significant degree,” namely the unusually harsh winter weather. He of course hedged his comments with the need to monitor developments and said that it “remains uncertain” when the Fed would start lifting rates, “because the future evolution of the economy cannot be fully anticipated.” In other words, the Fed remains data-dependent, which we already knew. Atlanta Fed President Lockhart was somewhat more confident. He agreed with Dudley that Q1 “was anomalous again, just like a year ago,” but said he “would probably be biased toward the July or September dates as opposed to June” for starting the tightening. “I’m not ready yet to conclude a slowdown is underway,” he said.

• Reflecting these comments, the longer-dated Fed funds rate expectations moved up by 5 bps, undoing about half of the move that occurred on Friday after the release of the NFP, while 10 year bond yields were up 6 bps, unwinding most of the 7 bps rally that occurred Friday. Clearly the officials are expecting that like last year, a depressed winter will be followed by a more normal spring and that their forecasts will come to pass. The similarity with last year can be seen in the graph of the economic surprise index, which is following last year’s pattern quite closely. The indicator has already started to turn up, suggesting that the worst disappointments may already be behind us. This would allow the Fed to tighten policy earlier than the market currently expects, which is sometime around October or next March, depending on whether they move to 25 bps or 50 bps as their first move. The comments helped to revive interest in the dollar and the US currency rose against almost all its counterparts.

• Among the G10, only CAD managed to keep pace with USD’s gains. The Bank of Canada business survey was fairly weak and the Ivey PMI showed further deterioration at 47.9, well below expectations of a slight recovery to 49.9. The index has been below 50 for three months now. I can only assume that CAD remained stable because of the rise in oil prices.

• Oil prices rise on Saudi move, inventory report Saudi Aramco raised its prices for crude shipped to Asia after the country’s oil minister said global demand was improving (but lowered its prices for the US, reflecting the glut in the US market). Also, energy information group Genscape released bullish information about inventories at Cushing, Oklahoma – Reuters said the firm estimates Cushing stocks rose by only 169k barrels in the week to April 3, while Dow Jones said the firm was reporting a decline in inventories of 300k. Either way, it’s a far cry from the recent rise of 2mn barrels a week and was therefore quite bullish for oil. Nonetheless, I think the figure represents temporary factors and I would expect to see another large build in inventories in the following week, with a corresponding decline in prices – and in the CAD.

• RBA keeps rates steady The Reserve Bank of Australia (RBA) kept rates steady at its meeting Tuesday, in contrast to market (and our) expectations of a cut. They continued to complain about the strength of the AUD and said “further depreciation seems likely, particularly given the significant declines in key commodity prices.” Looking at the prices for iron ore and coal, two of the country’s main exports, we can only agree, although the price of coal does seem to have bottomed (for now). Moreover they continued with their easing bias, saying that “further easing of policy may be appropriate over the period ahead…” While AUD gained on the news that rates were being held steady, I believe this rally may provide an opportunity for going short AUD.

• Today’s highlights: During the European day, we get the final service-sector PMIs for March from the countries we got the manufacturing data for on Wednesday. As usual, the final forecasts from France, Germany and Eurozone are the same as the initial estimates, while the UK service-sector PMI is expected to have increased slightly. The revisions in the final manufacturing PMIs on Wednesday increase the likelihood that the service-sector PMIs will be revised as well. This could support EUR somewhat.

• In Sweden, industrial production for February is expected to decelerate a bit. This could prove SEK-negative.

• In the US, the Job Opening and Labor Turnover Survey (JOLTS) report for February is forecast to show that the number of job openings has increased marginally. The market will also be watching for the “quit rate,” which Fed Chair Janet Yellen singled out as “a barometer of worker confidence in labor market opportunities.” A higher quit rate can be seen as a good sign for the overall economy, as people tend to quit when they are more confident in the labor market.

• As for the speakers, Minneapolis Fed President Narayana Kocherlakota speaks. Kocherlakota is a major dove and it will be interesting to see what he says following the weak labor report on Friday. He spoke briefly on Friday but did not mention the economy.

• The Bank of Japan started its two-day Policy Board meeting today and will finish tomorrow. Market expectations are for no change in policy at this meeting. Inflation is trending downward, but the Bank already admitted at its last meeting that CPI inflation “is likely to be about 0% for the time being, due to the effects of the decline in energy prices”. Therefore, the focus will most likely be on Governor Haruhiko Kuroda’s press conference afterwards. One point of interest will be if he says anything about liquidity in the JGB market. FX market participants are waiting for the April 30th meeting, when the BoJ will release its semi-annual Outlook for Economic Activity and Prices. If the inflation forecast is revised sharply downward or fears are expressed about overseas economies, Gov. Kuroda could propose further easing measures then.

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