Fed officials seem more relaxed about the state of the economy, judging by the contents of the March 13 FOMC Minutes released last night. At the previous meeting held late in January, some policy-makers felt that additional monetary easing may well be required before too long because of the sluggish nature of the recovery.
That position has now shifted – additional stimulus will only be forthcoming: ”if the economy lost momentum” or should inflation stay below the 2% target. At the same time, the US central bank still believes that the economy needs an extended period of record-low interest rates (through to the end of 2014). Video:
Some members of the FOMC are unconvinced that the improvement in the labour market witnessed over the past couple of quarters will be sustained in the months ahead.
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In response to the Fed’s more hawkish tone, the dollar recorded instantaneous gains against the majors of around 1% – the euro for instance is now at 1.32, cable is under 1.59 and USD/JPY almost touched 83.0 overnight.
Risk appetite has suffered – the 10yr treasury yield jumped 15bp to 2.30% at one stage. US equities were lower (although not by that much), and the Nikkei has fallen by more than 2% overnight.
The importance of March payrolls. Understandably, there is a great deal more critical analysis being applied to the nature of the US recovery these days than there has been for some considerable time. For very good reason too – with large swathes of Europe mired in another recession and Asia’s economic heavyweights slowing down, the US economy right now is virtually the only show in town. As a result, Friday’s payrolls will have a very important role to play in shaping near term expectations on how the US economy is performing. Notwithstanding the encouraging news emanating from the labour market, robust readings from the various ISM surveys, rising consumer sentiment and new four-year highs for the major equity indices, the overall scorecard on the US economy of late has been more mixed. Recently, durable goods orders were softer than expected, housing is still a damp squib, and the weekly retail sales figures were subdued during March. Indeed, the Citigroup US Economic Surprise Index shows a consistent sustained downward trend since early January, albeit from a very high level. At the very least, the current reading of the index is consistent with a more subdued growth performance. To put this into some context, the Citigroup European Economic Surprise Index is now above that of the US for the first time since late summer of last year. Still, the situation in the US is certainly much better than in, say, China or Australia, where negative economic surprises have become the norm over the past few months. Should the price of oil drop back below USD 100, then this would help to steady the situation in the US somewhat. Right now, global asset markets need the US economy to stay as robust as possible.
A sunny Britain. It just keeps on getting better. After Monday’s unambiguously positive UK economic news, there was more good cheer around yesterday. The construction PMI jumped to a 21mth high of 56.7 last month, well above expectations. Building activity was clearly assisted by the third warmest March in Britain for 350 years! Separately, the British Chamber of Commerce reported that small/medium-sized businesses registered a decent jump in orders and sales last quarter after a very weak Q4. Interestingly, the bounce in orders was broadly-based, although export demand remains stronger than local demand. Encouragingly, employment expectations have improved dramatically. Although the BCC expects the UK to avoid falling back into recession, it still regards the pace of expansion as ‘much too slow’, and urges the government to implement ‘forceful’ measures to really get the economy moving. Although the currency has failed to react to today’s developments, it adds to a body of evidence which suggest the economy is displaying some real resilience. The consumer might still be in hibernation, but some other sectors such as manufacturing and exports are recording some respectable growth. Unfortunately, a lot more of this type of rebalancing is required before the UK’s balance sheet returns to a healthier condition.
Brazilian PM opens her cheque-book. Aggrieved at what she perceives to be the ‘predatory’ trade practices being adopted by other major economies, Brazilian Prime Minister Rousseff has implemented a comprehensive stimulus package worth BRL 65bn (USD 35bn) including substantial cuts to payroll taxes and the expansion of a subsidised lending program for businesses. Her Finance Minister, Guido Mantega, the man who continues to speak of ‘global currency wars’, has also undertaken to adopt additional measures designed to weaken the currency further. Investors and traders have certainly been taking notice – since late February, the BRL has fallen by 8% against the dollar, making it the worst-performing of the 16 most-traded currencies over that time. Constant intervention by the central bank and the decision by Finance Minister Mantega to extend a 6% tax on foreign loans and bonds issued abroad have contributed to the BRL’s demise. Domestic economic developments are not helping the currency either – industrial production dropped by almost 6% in the year ended February. Inflation is heading in the right direction, which could well result in lower yields over the course of the year. For now, there is little good news around for the BRL.Get the 5 most predictable currency pairs