FOMC tapers quantitative easing stimulus and hints at rate rises in 2015

Mar 20 • Morning Roll Call • 2576 Views • Comments Off on FOMC tapers quantitative easing stimulus and hints at rate rises in 2015

shutterstock_160863200The USA central bank announced on Wednesday that it was lowering its monthly bond purchases under its quantitative-easing stimulus strategy from $85 billion last year, citing improvements in the job market and economy. The Fed has undertaken three rounds of bond buying since 2008, swelling its balance sheet to a record $4.2 trillion.

Federal Reserve Chairwoman Janet Yellen on Wednesday said interest-rate increases could begin in the first half of 2015, around six months after it winds down its bond-buying program. The Fed, in its policy statement, said the benchmark federal-funds rate will remain near zero for a “considerable time” after its bond-buying programme ends. Ms. Yellen attempted to define that term, saying it is “hard to define” but “probably means something on the order of around six months.” The Fed has been reducing its bond-buying program in $10 billion increments and is on track to wind it down in 2014.

The FOMC also said on Wednesday in a statement it will look at a wide range of data in determining when to raise its benchmark interest rate from zero, dropping a pledge tying borrowing costs to a 6.5 percent unemployment rate. A majority of FOMC participants, 13 out of 16, expect the first increase in the main interest rate in 2015. One projected the first rate increase in 2014, while two forecast an initial move in 2016.

“A highly accommodative stance of monetary policy remains appropriate,” the committee said, while releasing the economic projections of FOMC participants. Federal Reserve officials predicted their target interest rate will be 1 percent at the end of 2015 and 2.25 percent a year later, higher than previously forecast, as they upgraded projections for gains in the labour market.

Statement Regarding Purchases of Treasury Securities and Agency Mortgage – Backed Securities

On March 19, 2014, the Federal Open Market Committee (FOMC) directed the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York to purchase additional agency mortgage – backed securities (MBS) at a pace of about $25 billion per month and longer – term Treasury securities at a pace of about $30 billion per month, beginning in April 2014. The existing March schedules for agency MBS purchases at a pace of $30 billion per month and Treasury securities purchases at a pace of $35 billion per month remain in effect until that time.

Canada Wholesale Trade, January 2014

Wholesale sales rose 0.8% to $50.0 billion in January, following a decline in December. Gains were recorded in all subsectors except motor vehicle and parts. Excluding this subsector, wholesale sales rose 1.4%. In volume terms, wholesale sales were up 0.4%. The miscellaneous subsector led the growth in wholesale sales in January, rising 3.1% to its highest level in seven months. The gain was led by the agricultural supplies industry (+7.6%), which posted its largest monthly increase since May 2013. Gains were also recorded in the chemical (except agricultural) and allied product industry (+3.0%) and the recyclable material industry .

U.S. International Transactions: Fourth Quarter and Year 2013

The U.S. current-account deficit—the combined balances on trade in goods and services, income, and net unilateral current transfers—decreased to $81.1 billion (preliminary) in the fourth quarter from $96.4 billion (revised) in the third quarter. The deficit decreased to 1.9 percent of current-dollar gross domestic product (GDP) from 2.3 percent in the third quarter. The decrease in the current-account deficit reflected a decrease in the deficit on goods and services, an increase in the surplus on income, and a decrease in net outflows of unilateral current transfers.

Market overview at 10:00 PM UK time

The DJIA closed down 0.70%, SPX down 0.61%, NASDAQ down 0.59%. Euro STOXX closed up 0.08%, CAC down 0.12%, DAX down 0.37% and the FTSE down 0.49%. Looking towards tomorrow’s open the DJIA equity index future is down 0.85%, SPX future down 0.75%, NASDAQ future down 0.68%. Euro STOXX future is down 0.68%, DAX down 0.27%, CAC down 0.82%, FTSE future down 0.77%.

NYMEX WTI oil finished the day up 0.60% at $100.30 per barrel, with NYMEX nat gas up 0.45% at $4.49 per therm. COMEX gold finished the day down 2.16% at $1329.60 per ounce, with silver down 3.15% at $20.16 per ounce.

Forex focus

The dollar gained for the first time in four days against the euro, climbing 0.7 percent to $1.3831 at mid-afternoon New York time. It rallied as much as 0.9 percent, the biggest intraday jump since Jan. 2nd, to $1.3810, the strongest level since March 6th. The U.S. currency rose as much as 1.2 percent, the most since Jan. 14th, to 102.68 yen before trading at 102.51, up 1.1 percent.

The Bloomberg Dollar Spot Index, which monitors the greenback against 10 major counterparts, rose 0.8 percent to 1,020.27 and reached 1,021.42, the highest since Feb. 27th. It touched 1,011.35 on March 17th, the lowest since Nov. 1st.

The Canadian dollar slumped to the weakest in 4 1/2 years on speculation the Fed will tighten monetary policy faster than Bank of Canada. Central-bank Governor Stephen Poloz said yesterday he might cut rates if the economy worsens. The loonie fell 1 percent to C$1.1242 against its U.S. counterpart and reached C$1.1271.

The pound strengthened 0.4 percent to 83.63 pence per euro after depreciating earlier to 84 pence, the weakest level since Dec. 25th. It dropped 0.3 percent to $1.6538 after rising 0.3 percent before the Fed meeting. Sterling was higher versus most major counterparts after minutes of the Bank of England Monetary Policy Committee’s March 5-6 meeting said the strong U.K. currency is damping inflation.

Bonds briefing

Treasury two-year yields jumped as much as 10 basis points, or 0.1 percentage point, to 0.44 percent after the Fed meeting. Thirty-year bond yields rose five basis points to 3.67 percent.

The benchmark 10-year note yield rose 10 basis points to 2.77 percent. Yields on the notes declined 13 basis points last week, the most since the period ended Jan. 10th, amid turmoil between Russia and Ukraine over control of Crimea.

Fundamental policy decisions and high impact news events for March 20th

Thursday sees the publication in Australia of the RBA bulletin, Germany publishes its PPI, expected in at 0.2% for the month. The bank of Japan governor Kuroda speaks and the Swiss central bank publish their Libor rate combined with their overall monetary policy assessment.

The EU holds an economic summit, whilst the UK CBI publishes its industrial expectation orders, expected to rise to 5 from a reading of 3.

From the USA unemployment claims are expected to come in at 327k for the week. Existing home sales are expected in at 4.65 million on an annual basis. The Philly fed manufacturing index is expected in at 4.2, from the previous print of -6.3. The USA will also publish the results of its recent bank stress tests.
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