The vote on the Trump health care plan is important only from the perspective of what the Freedom Caucus was promised in return for acquiescing to the desires of the White House. President Trump is desirous of a win, any win and the Freedom Caucus seems to know they have great leverage in the current political scrum. Whatever the House passes the Senate will have home field advantage and last bat so the initial Trump victory will Pyrrhic at best. What was compromised to assuage the conservative wing of the Republican party? How far will Trump have bent to bring this deal to fruition? The strident nature of the Freedom Caucus has been elevated and what value was extracted?
Archive for the ‘RBNZ’ Category
Today the Fed delivered as expected, leaving rates unchanged and the market conjecturing about the sincerity of the FED’s data dependency (again). Some analysts and algo readers initially thought the FOMC statement was “hawkish” because the FED removed most of the rhetoric about the headwinds of international global and financial developments. I say most because the Fed left in “net exports have been soft.” This is either a concern about the lack of global growth and/or an overly strong U.S. dollar. It is MY OPINION that the Fed removed the language about international financial risks as an offering to the HAWKS as a way to get consensus.
Two central banks announced interest rate decisions today: the Bank of Canada (BOC) and the Reserve Bank of New Zealand (RBNZ). The BOC left rates at 0.50% while the RBNZ SURPRISED markets by lowing its official cash rate by 0.25% to 2.25% as Governor Graeme Wheeler revealed concerns about a slowing Chinese economy and the ever-increasing global financial risks. There was no specific mention about the KIWI but Wheeler voiced concerns about the downward pressure on DAIRY EXPORT PRICES. The KIWI dropped 2 percent against the U.S. and Australian dollars following the surprise move but the explicit notation of slowing Chinese growth should be an alarm for those concerned about the impact of China on global commodity prices.
The FED is on the record as being patient as it tries to achieve its dual mandates of full employment and an inflation rate of 2 percent. In the December 16-17 FOMC release, it said the “… Committee expects inflation to rise gradually toward 2 percent as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate.” While the FOMC statement made no direct mention of the DOLLAR’S STRENGTH, the release of the MINUTES revealed that the dollar had been discussed in reference to inflation. The minutes said: “Participants generally anticipated that inflation was likely to decline further in the near term,reflecting the reduction in oil prices and the effects of the rise in the foreign exchange value of the dollar on import prices.”
The financial press is filled with articles about the recent EURO weakness. During the last week the EU currency has fallen about 1.5 percent. Many pundits have opined that it is the Ukraine situation and Gaza that have made investors uneasy, thus the move into U.S. dollars. In a July 22 Bloomberg article, “Draghi Cedes Euro Control to Yellen on Fed Bets,” it is suggested that the DOLLAR is rising in anticipation of moves by the FED, especially now that the ECB has gone to negative yields on reserves. The problem for the Fed argument is that yields in the U.S. have actually softened during the last week and Fed communication has been muddled over when interest rates might possibly rise. When the ECB announced a negative interest rate June 5 the EURO/DOLLAR made a low of 1.3503. Today we are trading at 1.3465, a little below the 1.35 low but well below that day’s close of 1.3650.
The tinder of the financial world has dried under the roaring blaze of asset appreciation. Global bond and equity prices reflect that all is well and the world’s major central banks have control of the world’s finances. But in the parlance of Mao, a single unexpected spark can initiate a huge fire. (Also, it is important to note that Mao never missed a PMI number either.) Financial history is replete with events of which investors and bankers were never aware of the depth. It was only in 2007 that Chairman Bernanke called the housing situation and its financial repercussions, “well contained.” Today, the news brought two events that can have far greater impacts than the markets’ calmness revealed.
We can say that the markets are afloat in the Sargasso Sea: The home of the doldrums. It is quiet and listless as the market awaits the winds of change. But from where does the whispers of wind arise? A piece by Jon Hilsenrath in the June 3 Wall Street Journal online (h/t R.F.). The Hilsenrath piece cites Fed officials who are worried about the tranquility presiding in the markets and the possible financial risk that arises from complacency. Hilsenrath cites the low spread between investment-grade corporate debt and U.S. Treasury bonds, the lowest since July 2007. Also, homage is paid to the recent lows made in the VIX and its 74-week run below its long-run moving average. Increased global political risk has barely budged the needle on various other risk barometers.
The equity markets were gaga over the news from Apple and Facebook and trying to push through March’s highs when Twitter was busy raising the issue about a possible Russian incursion into Eastern Ukraine. The “breaking news” failed to gather strength and the markets were soon back into positive territory. Just as the equity markets were absorbing the Russian rumors, the precious metals were making recent lows on the back of stock market strength and better economic news from the U.S. For all you technical-oriented market watchers, the gold and silver both put in outside reversal higher days so we will watch to see if there is any follow through in the metals market tomorrow.
If my radar is right, the coming European Central Bank QE program will be a concoction of asset-backed securities in an effort to remove non-performing loans from bank balance sheets. There have been a multitude of “conjectures” about how the ECB is going to pump liquidity into a very low growth economy. Previously it seemed that some at the ECB wished to install negative yields on bank reserves. This would be an experiment fraught with danger as it could cause great problems for the money funds that have recently returned to Europe. The problem for money market funds was epitomized in a statement from Bank of New York Mellon’s CFO Todd Gibbons after today’s earnings release and reported in tomorrow’s Financial Times:”If the eurozone were to go to negative rates that would actually present the opportunity for us to charge for deposits and we are giving that very serious consideration.” The idea of “negative interest rates on reserves” has been bandied about as some members of the ECB board have tried to stem the euro currency’s recent strength. It has been surmised that charging banks for parking excess reserves at the ECB would force European banks to reverse course and put the funds out to lending rather than having to pay a fee for the safety of the ECB.
This afternoon the little bank from down under announced it was raising its overnight cash rate (OCR) by 25 basis points to 2.75%. There is no question that the New Zealand economy has been growing (as has private credit for housing) but the KIWI has been elevated by the strength of the economy and the huge global demand for New Zealand commodities–dairy and other agricultural products. Previously, the RBNZ has refrained from raising the OCR because of the strength of the KIWI versus the Aussie dollar and other commodity-based currencies. But the improvement in global financial conditions gave Governor Graeme Wheeler reassurance for increasing the interest rate. Wheeler noted that “the high exchange rate remains a headwind to the tradables sector. The bank doesn’t believe the current level of the exchange rate is unsustainable in the long run.” The market had been expecting the Bank to raise rates so the initial market reaction was a short selloff but within two minutes the KIWI was trading higher and actually closed on its high of the day in the spot market. If the RBNZ doesn’t intervene, which it shouldn’t, the NZ currency should hold up on the crosses, especially with the high yield on its 10-year note. Finally, one bank breaks out of the pack, even in the face of a potential slowdown in China.