Dollar Chops About, as “Fairly Soon” Does not Mean mid-March

The US dollar is confined to narrow ranges today within yesterday’s
  Equity markets posted small gains in Asia and have an upside
bias in Europe.  Core bond yields are softer, and today this includes
France, but peripheral European 10-year benchmark yields are 3-6 bp
firmer.  Italian bonds are the poorest performer, while the 10-year Dutch
bond yields are off the most (3.2 bp to 0.56%) despite the looming
election.   Industrial metal prices are mostly lower for the third
session, while an unexpected decline in the US API oil inventory estimate is
helping underpin crude prices. 

The heavy tone of the Italian bonds follows yesterday’s EU warning to
Italy, as we had flagged, due to its structural deficit
.  The
center-left PD could decompose, with a few parts of the coalition going running
their own candidates.  This self-immolation is seen as increasing the
likelihood of the populist-nationalist party coming to power.  

At the same time, the dismal retail sales report is a good reminder that
Italy’s debt challenges on the sovereign level are not simply the function of
excess spending in the past, though that is part of it, the miserably slow
  December retail sales were expected to rise 0.2% in December
for a 0.9% year-over-year gain.  Instead, they fell 0.5% and put the
year-over-year rate at -0.2%.  The year-over-year rate in December 2015
stood at 0.7% and 0.1% in December 2014. 

Politics is also very much in the air in the UK.  Yes, the bill
to begin negotiating the amputation is making its way through the House of
Lords.  It is expected to be formally triggered in the next few weeks with
the Malta summit being a likely venue in early March.  But the issue today
is two by-elections.  In particular, a defeat for Labour may embolden
another challenge to the party’s leadership.  Copeland, in Northern
England could be won by the Tories.  If so, it would be the first time
since 1982 that the government took a seat in a by-election from the
opposition. If that were not a sufficient insult, UKIP may take the seat in
Stoke-on-Trent.  It was one of the strongest Brexit votes.  

With a light diary today, many participants are still talking about the
minutes from the FOMC meeting. 
A key issue is whether the recent
official comments that indicate that March was a live meeting supersede the
minutes older minutes.  The minutes said that most anticipate a hike
“fairly soon.”  This does not mean March.  In the meetings
that preceded the two rate hikes in this cycle, there were mentions in the
minutes of the next meeting.  There was no such mention this time. 
“Fairly soon” seemed to be a way to give guidance to the market and distinguish
it from “next meeting” but also from waiting for the end of the year
as was the case in 2015 and 2016.   

This should also make clear, and something the ECB may not quite get with
it difficulty in even calling its record minutes.
minutes from the FOMC meeting are not simply an objective report of the
meeting, but it is a communication tool.  Because it includes voting and
non-voting members, we often find that it is noisy, but after the FOMC
statement and projections, and comments by the Fed’s leadership, the minutes
are the third most important tool in our understanding.  

The other revelation in the minutes was the use, starting next month, of
fan lines to illustrate the range of uncertainty around economic projections.
Many have called for something like this.  It will help the investors,
many of whom continue to wrestle with the significance of the forecast and
confuse them with policy commitments.  

Consider the shift in expectations.  Using the Bloomberg
calculation of the odds embedded in the Fed funds futures for comparison
purposes, there is a 34% chance of a Fed hike in March.  A week ago it was
36%.  The odds of a May hike have risen to 61.8% from 58.7%.  The
odds of a June move are unchanged a little above 76% chance.   
While obviously a significant minority has not given up on a March hike, it is
interesting that others are also seeing the merits of a May hike like us. 

Two regional Fed presidents speak today, Lockhart and Kaplan, but their
views are known and will unlikely have much market impact.   

Look for the focus to shift from the Fed back to the President Trump. 
In particular, next Tuesday’s speech to a joint session of Congress is seen as
key.  The Republican tax reform, which had the border adjustment at the
center, is unraveling.  Look for a post later today that discusses the implications.    

In terms of the price action, we note that today is the second day that
the euro has spent below $1.06.
We suspect it may try again in the North
American session to regain a foothold.   Yesterday’s roughly
JPY112.90-JPY113.75 range looks set to hold.   Sterling also is going
nowhere quickly and remains in a $1.24-$1.25 range.  The dollar-bloc
currencies are also little changed.  The Australian dollar did manage to
recover from its poor capex report.  Private capital expenditures fell
2.1% in Q4 16, which is more than four-fold larger than expected.  It may
have been tempered by the better than expected plans for going forward and the
upward revision (-3.3% rather than 4.0%) in Q3.  Still, the Aussie
struggles near $0.7700.  


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