T.S. Eliot tells us that April is the cruelest
month. A great poet he was, but a trader he was not. Caesar was warned about the Ides of March, and
investors may find the caution to be particular apropos now.
Consider the congestion of events around March 15.
A few days before, March 9 is ECB
meeting. Although no policy change is likely, the press conference
often elicits a market response. Headline inflation is moving toward the
target, though core inflation remains stable and just a little above the 0.6%
trough. Still, the risks of deflation have all but disappeared, while
growth looks solid and above trend.
The following day the US reports February
employment figures. The early call is for a modest slowing of net new
jobs from 237k in January to 178k. Such a report would still be solid and
above any month in Q4 16. The three- and six-month averages have
converged at 183k. Investors will also focus average hourly
earnings. The median is a 0.2% increase, which given the base effect
(flat report last February), is consistent with an increase in the
year-over-year pace back toward 2.7% where it was in the September
2016-November 2016 period. It then ticked up to 2.8% in December before
falling back to 2.5% in January.
On March 15 itself,
the FOMC meets, and the Dutch hold the
first European election of 2017. The market perceives an
increased risk of a rate hike at the March meeting. However, in our
ranking of Fed signals, we put more
weight on the FOMC statement and the speeches by the Fed’s leadership than the
regional presidents, many of whom seem more anxious to normalize monetary
policy. We do not see the FOMC statement or the minutes from the last meeting indicating a rate hike. The
word cues were different than before the December 2015 or December 2016
meetings.
The idea that there is not strong urgency and
that the Fed’s leadership does not think that the central bank is behind the
curve informs our leaning against a March move. May remains
interesting in our view as it would allow the Fed to recapture the full range
of meetings rather than just the four that update
forecasts and are followed by a press conference. March may
be too soon and June too late.
The populist-nationalist party candidate
Wilders may garner a plurality of votes in the Dutch elections, and while this
in itself is a feat, it still does not appear he will be able to find
sufficient coalition partners to cobble together a government. As we
have noted, the success of populist-nationalists in the US and UK were functions
of the main center-right party adopting their program rather than the
populist-nationalists winning outright. Note that UKIP lost a byelection
last week in a district that voted heavily for
leaving.
The formation of a coalition government in the
Netherlands may require the inclusion of a few smaller parties, which could
make for a less stable arrangement. The markets do not seem
particularly concerned. Consider that the Dutch two-year yield is off 20
bp over the past month, while German two-year yield is off 24 bp.
Although the record low German yield grabbed attention, the Dutch yield also
fell to a record low of 84 bp (February 24).
Two days later, on March 17, the US debt
ceiling will be reached. In the past,
the raising of the debt ceiling has been used by Congress to try to get
concessions from the President. The Trump Administration is composed of
different views, perhaps more so than other recent administrations. The
Treasury Secretary appreciates that making timely debt payments is
critical. The head of the Office of Management and Budget and the
President himself have talked about renegotiating the debt and/or prioritizing payments.
How the Republican Congress and Republican
President deal with the debt ceiling is important. The passing of
March 17 deadline without a deal is not necessarily problematic. By the
end of the month, though extraordinary measures may begin being required. These could include
postponing making retirement contributions for federal employees, among other
things. Such measures and the cash on hand could be enough to stretch
through most of the Q2. The
spending authorization limit is not seen being
reached until the second half of April.
The G20 finance ministers and central bankers
will meet on March 17-18. It will be the first to be attended by US
Treasury Secretary Mnuchin. He will likely be the focus of
attention. He will likely be urged to be more careful when talking about
exchange rates. The undervaluation
of the euro now that the US has noted
needs to be placed in the larger
context. It was overvalued against
the dollar for more than a decade (2003-2014).
In addition to these events around the middle
of March, the ongoing discussion of US fiscal policy, and the looming French
elections, and the formal triggering of Article 50 to being the UK’s amputation
from the EU body will make for more turbulent waters in the foreign exchange
market. Foreign exchange participants also will have to
navigate around the quarter IMM expirations.
Forewarned is to be forearmed.
Beware the Ides of March.