At the end of a day which was thin on news events, it was left to the FOMC to provide what many FX traders believed would be the market drama as they revealed their latest minutes which contained some fascinating detail. We’ve highlighted a couple of the critical passages further down the article.
Perhaps the most revealing aspect of the minutes was a nod in the direction of interest rates in the future. Interest rate rises, with an end to QE, as the dollar is protected? Some analysts might be convinced that (with inflation entering what could be considered a deflationary zone) it’d be far too early to raise rates, but obviously the FOMC don’t feel premature in their announcement. However, let’s not get too carried away and start getting a long position trade on for the major dollar pairs just yet, as the interest rate discussion will still be linked to improved employment data.
In other USA high impact news the rate of new house building fell by just over 16%, hardly unexpected given the atrocious weather conditions the USA has experienced in the first six weeks of the year. But 880,000 is below the critical one million annual rate the analyst community looks for as being a ‘dividing line’ of sorts between contraction and expansion long term. However, a quick reference to the data of this time last year reveals that the print often comes out around this level and is often impacted by weather.
Producer prices in the USA have dropped by 0.2% in January which may result in cheaper consumer prices further down the line. This data may further influence Fed policy in future. Looking at other North American data Canada posted a surprisingly poor print on wholesale data on Wednesday, this was a full one percent lower than analysts expected and caused a selloff in the loonie which may have (and we stress may have) reversed the current swing trend versus the loonie…
January housing starts dive 16% to 880,000 rate
Construction on new U.S. homes tumbled 16% in January to a seasonally adjusted annual rate of 880,000, with drops for single-family homes and apartments, according to government data released Wednesday. Particularly poor weather hit construction last month, according to economists polled by MarketWatch, who had forecast a starts rate of 945,000 for January, compared with an originally estimated rate of 999,000 for December. On Wednesday, the Commerce Department upwardly revised December’s starts rate to 1.05 million. The starts rate fell in three of four U.S. regions last month, plunging 68% in the Midwest and falling 17% in the West.
US Producer Price Indexes – January 2013
The Producer Price Index for final demand increased 0.2 percent in January, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. This advance followed a 0.1- percent rise in December and no change in November. On an unadjusted basis, the index for final demand moved up 1.2 percent for the 12 months ended in January, the largest 12-month advance since a 1.2-percent increase in October 2013. (See table A.) In January, the 0.2-percent advance in prices for final demand can be primarily traced to the index for final demand goods, which rose 0.4 percent. Prices for final demand services inched up 0.1.
Canada Wholesalers Post Biggest Decline Since June on Weather
Canadian wholesale sales recorded the biggest decline in December in six months amid severe weather that probably slowed economic growth. Sales fell 1.4 percent to C$49.6 billion ($45.3 billion), Statistics Canada said today in Ottawa, compared with a 0.4 percent drop that was the median forecast in a Bloomberg survey with 12 responses.
The Key Passages in the Fed’s Minutes
A few officials thought inflation was too low and called into question the need to keep pulling back the program. But even they wanted to continue winding it down for now.
[quote]Several participants argued that, in the absence of an appreciable change in the economic outlook, there should be a clear presumption in favor of continuing to reduce the pace of purchases by a total of $10 billion at each (Fed) meeting. These participants judged that a pause in the reduction of purchases was not justified at this stage, especially in light of the strength of the economy in the second half of 2013.[/quote]
It is striking that the idea of hiking short-term interest rates is finding its way back into the Fed’s discussions. These are likely the “hawks” on the Fed’s policy committee, who have tended to push against its easy money programs. They argued that standard rules of thumb, based on the economy’s past behaviour, pointed to higher rates. This group is still very much in the minority.
[quote]A few participants raised the possibility that it might be appropriate to increase the federal funds rate relatively soon, prescriptions from standard policy rules were not appropriate in current circumstances.[/quote]
Market overview
The DJIA closed down 0.56% at 16040, SPX down 0.65%, NASDAQ down 0.82%. Euro STOXX closed up 0.11%, CAC up 0.24%, DAX flat, with the FTSE flat. The DJIA equity index future is down 0.56%, SPX future down 0.65%, NASDAQ future down 0.56%. Euro STOXX future is down 0.03%, DAX future down 0.16%, CAC future up 0.18% and FTSE future up 0.08%.
NYMEX WTI oil closed the day up 0.86% at $103.31 per barrel, NYMEX nat gas up 10.61% at $6.15 per therm. COMEX gold was down 0.30% at $1320.40 per ounce, with silver on COMEX at $21.85 down 0.22%.
Forex focus
The yen rose 0.1 percent to 102.31 per dollar after dropping 0.4 percent yesterday, and Japan’s currency rose 0.2 percent to 140.51 per euro. The dollar gained 0.2 percent to $1.3733 per euro after sliding to $1.3739.
The dollar gained the most in three weeks after Federal Reserve policy makers signalled emerging-market turmoil and economic reports that have fallen short of forecasts won’t interrupt stimulus-tapering plans.
The Canadian dollar is poised to test a 4 1/2-year low in a reversal of the rally that brought it to its highest level in a month. The loonie, as the currency is known for the image of the aquatic bird on the C$1 coin, depreciated by 1.2 percent to C$1.1080 per U.S. dollar. Australia’s currency weakened against the greenback for a third day, declining 0.3 percent to 90 U.S. cents.
The pound rose 0.2 percent to $1.6713 after falling as much as 0.3 percent after the unemployment data was released. The U.K. currency advanced 0.2 percent to 82.33 pence per euro. The pound has strengthened 12 percent in the past year, the best performer of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro appreciated 5.8 percent and the dollar rose 2.6 percent.
Bonds briefing
The five-year gilt yield fell two basis points, or 0.02 percentage point, to 1.62 percent late London afternoon time after dropping to 1.59 percent, the lowest level since Feb. 11th. The 1.25 percent bond due in July 2018 rose 0.085, or 85 pence per 1,000-pound ($1,665) face amount, to 98.42. The Debt Management Office is scheduled to sell 3 billion pounds of benchmark 10-year gilts tomorrow. The U.K. last sold 10-year bonds on Jan. 23 at an average yield of 2.87 percent, down from 2.977 percent on Dec. 3rd.
The 10-year yield increased by three basis points, or 0.03 percentage point, to 2.74 percent at 5 p.m. in New York. It dropped earlier to 2.67 percent, the lowest level since Feb. 11th. The price of the 2.75 percent security due in February 2024 fell 9/32, or $2.81 per $1,000 face amount, to 100 3/32.
Fundamental analysis and high ism to news events for February 20th
Thursday begins with China’s flash HSBC manufacturing PMI index, expected to print at 49.4. Germany’s PPI is expected in at 0.3% up, French CPI is expected in at -0.3%. French flash manufacturing PMI is expected in at 49.6, services PMI is expected in at 49.5. Germany’s flash manufacturing PMI is predicted in at 56.4, with services PMI at 53.4. Overall European manufacturing flash PMI should come in at 54.2, with services at 51.9. Spain’s ten year debt auction should see a rate of 4.10% set. The UK’s bond auction should see a rate achieved of 2.87%.
In the USA on Thursday core CPI is expected to be at 0.1%, unemployment claims at 335K will be in the usual range. Flash manufacturing PMI for the USA is expected in at 53.6. Consumer confidence in Europe is expected to fall to -11. In the USA the Philly fed manufacturing index is predicted in at 9.2, with mortgage delinquencies in the USA expected to stay at circa 6.41%. Janet Yellen will be testifying on Thursday, whilst USA gas storage data will be published, as will crude inventories data. The day’s high impact news events close with the publication of the BOJ’s most recent policy meeting minutes.
