Dealers, speculators and investors have been waiting for over seven-weeks to receive monetary policy guidance from top tier Central Banks. The next fortnight will not disappoint. It will be dominated by either ‘dovish’ rhetoric or specific monetary policy moves by all the major banks.
On Wednesday, the focus will be on the Bank of Canada (BoC), and on Thursday, Draghi and the ECB will be in the markets crosshairs. Currently, the odds of a cut by the BoC are running at about +15%, while the ECB could see more cuts into negative rates territory and/or extension of its QE program.
Canada’s Governor Poloz is not expected to make any market waves. The same cannot be said of the ECB’s President Draghi. He does have a tendency to disappoint when action is required, but does ‘talk’ a good game.
1. Non-farm payroll (NFP) digest
Historically, the first trading session after a U.S jobs report tends to be the quietest trading session of the month. Yet, watching intraday asset price moves for 2016, no one could speculate with confidence that any trading session would be relatively tame.
Friday’s NFP report for February painted a mixed picture of U.S. employment. The American economy added +242k jobs, far exceeding expectations of around +195k; the unemployment rate remained unchanged at +4.9%, the lowest level in eight-years. Nevertheless, if there were a negative, it came in the form of U.S wage growth.
U.S hourly average earnings fell -0.12% m/m, and has again put the pressure back on the Federal Open Market Committee (FOMC) to ‘stand pat’ on rates at next weeks Federal Open Market Committee (FOMC) meeting. Last month it was the opposite scenario with a miss on the headline jobs number, but a surprise rise in hourly wages had the market considering further tightening by the Fed. Last week’s NFP headline growth print has had more of a mid to long-term effect on U.S rate hike expectations – June and September FOMC remain prime candidates for an interest rate raise.
2. China’s Peoples Congress
On the weekend, Chinese leaders began ten-days of policy meetings to plan out how to tackle the nation’s economic challenges and meet the government’s goal of doubling per-capita income by 2020.
China’s Premier Li’s release of his country’s economic projections was just as mixed as the Friday’s NFP. While the anticipated GDP was set as a range of +6.5-7.0% for the first time in years, investors seems to be taking comfort in reassurances that a hard landing will be avoided and that policymakers are ambitious on the fiscal side despite the rise in government debt levels.
In addition to the GDP forecasts which included expectations of at least +6.5% annual growth in 2016-20 period, Premier Li’s other 2016 forecasts were as follows: CPI was maintained at +3% vs. +1.4% actual 2015 print, budget deficit set at +3% of GDP – not as high as +4% speculated but also up from +2.3% 2015 target and +2.4% actual figure. The M2 money supply was raised to +13% from +12% target, retail sales were cut to +11% from +13%, and fixed asset investment cut to +10.5% from +15%.
China trade projections were notably absent from Premier’s address after widely missing estimates last year. The world’s second largest economy has maintained its goal of creating +10m new jobs, keeping urban jobless rate below +4.5%, and lowering defense budget growth to +7.6% from +10.1% last year.
Li added that downward pressure on economy is growing, promising that the People’s Bank of China (PBoC) monetary policy will be “prudent with flexibility” and that fiscal policy will stay proactive. The FX rate would remain basically stable –overnight, Chinese officials continued to strengthen the Yuan fix (¥6.5113 vs. ¥6.5284 prior – to keep markets from speculating against a one-directional trade) to its highest level since January 4.
China’s State planning agency NDRC chairman declared that “speculators’ predictions of a hard landing in China will fail,” although policy makers are conscious of global challenges including unstable financial markets, falling prices of commodities and risks of geopolitical nature. He also indicated that the Yuan will remain volatile due to the Fed’s policy expectations and IMF SDR basket related movements.
3. Commodity fever
Gold and silver have started off this month with a bang. Precious metals have found some momentum despite the ‘big’ dollar doing very little against the EUR (€1.0956) or JPY (¥113.43). Even Friday’s February U.S jobs report has not been able to hold down metal prices.
For the first time in awhile, investors are showing a keen appetite for gold ($1,267)- it has moved more than +$100 higher since the beginning of the year and is now spreading a mild case of gold fever among investors. The ‘bulls’ believe that the yellow metal still has legs, pointing to the fact that there are willing buyers appearing on dips despite capital markets having somewhat stabilized.
Overnight, iron-ore futures have jumped, while copper and aluminum futures have managed to print a three-month high in Asian trade on hopes that China would clamp down on excess capacity in crowded sectors such as steel and coal.
4. EUR under pressure
Thursday’s ECB’s rate decision will be the main event of the week. Currently, the markets are pricing Draghi to lower the deposit rate by -10bps to -0.4% and perhaps raise the QE program by another €10b per month. So if Draghi does not beat market expectations, the EUR could start to rise again.
Naturally, the ‘single’ currency has started this week lower outright (down -0.34% to €1.0953) as investors remain wary of buying the currency ahead of Thursday’s ECB announcement. The ECB-Fed rate divergence theme remains dominant following Friday’s stronger jobs data and the natural reduction of EUR short positions over the past couple of weeks does not create a natural demand for the unit. The U.S jobs report tentatively keeps alive the prospect of another Fed hike.
As long as Draghi reveals comprehensive measures should cement the EUR status as a “funding” currency, which could trigger a fresh wave of capital inflows to EM assets. But, if he under delivers, EUR ‘bulls’ are expected to dominate.
5. What’s the Bank of Japan (BoJ) to do?
USD/JPY is holding comfortably within the range seen in the latter part of last week, but drifting lower, hovering around the €113.50 area just ahead of the NY morning.
Historically, yen has been a solid proxy for market risk (Yen/carry-trade and risk-on assets). Over the past four-years, the relationship between the yen and equities has been exceptionally tight (on an inverse basis). When the value of the yen has dropped, equities tend to rally and vice-versa.
Tech analysts are suggesting current signals from the futures markets may be pointing to a significant decline for Yen, and that could be great news for equity ‘bulls’ with an appetite for risk.
Bank of Japan (BoJ) Governor Kuroda continues to repeat that Japanese policy makers stand ready to lower rates further if necessary (March 15). The Governor has pledged to continue with negative rates (NIRP) and QE until their +2% inflation target takes hold. The Governor is expected to adjust policy without hesitation in future if needed.
Over the weekend, Kuroda spoke extensively in defense of negative rates, stating that lower rates are justified in the fight against deflation, even if they produce turbulence in money markets and weigh on the earnings of financials. Kuroda also said the economy has improved over the past three-years, and while the most recent perception appears to be that of deterioration, the recent JPY rise was due to macro risk aversion outweighing the impact of negative rates policy. Yen bears continue to wait patiently for position justification.