Succinct Views of Ten Events and Market Drivers: Week Ahead

<br /> Succinct Views of Ten Events and Market Drivers: Week Ahead – Marc to Market<br />


The week ahead is the busiest week of the first quarter.  It sees four major central meetings,
including the Federal Reserve which is likely to raise rates for the second
time in four months. The Dutch hold the first European election of the year, and
the populist-nationalist party remains in contention for the top slot. The week
concludes with the G20 meeting, the first that the Trump Administration’s
presence will be felt.  
Since the
events are well known, we may be able to add the most value by sharing our
expectation of the outcomes and significance for the capital markets. 
 The immediate backdrop
is solid US jobs growth, heightened expectations of a hike, firm eurozone data, stabilization of the Chinese
economy, capex and export-led expansion
of the Japanese economy, and a pullback in commodity prices, including oil,
after a run-up that carried over from
last year.   Interest rates are mostly moving higher, and equity markets have been trading heavier after a strong
start to the year.  
1.  FOMC
combination of data and official comments spurred a sharp swing in expectations
toward a rate hike on March 15.  There is no reason to think that the Fed
will not deliver. This is taken as given
now, and investors will be more interested in the updated forecasts (dot plot)
and the context Yellen provides at her press conference.   While the last
set of forecasts showed the median expectation (not a promise or commitment)
that three rate hikes would be appropriate this year, the market is
unconvinced.  It is discounting about a one in three chance that the Fed will
deliver three hikes this year.  We suspect the market is underestimating
the hawkishness of many regional presidents,
some of whom will be emboldened by the resilience of the US economy as they
have argued. To the extent that the forecasts are
changed, we expect more dots to be raised.
 We see the confidence of the Fed officials, seen in subtle shifts in
their word cues, as indicative a different reaction function.  Previously
officials needed confirmation that the recovery was resilient.  It has
become convinced.  Now it is looking for appropriate opportunities.
 A hawkish hike, as opposed to the past two dovish hikes, could support
the dollar and spur bearish curve flattening (short-term rates rise more than long-term rates).  If the
Fed statement, forecasts, and press conference fail to convince the market that
a follow-up hike in June ought not to be
ruled out, the dollar would likely sell-off, as stale longs move to the
sidelines.  A rally in bonds would likely weigh on the dollar against the
yen.  Rising yields are seen helping banks and other financial
institutions.  A fall in yields may see some investors shifts into other
2.  Dutch
by the developments in the credit markets, investors are not as worried about
the prospect of the populist-nationalist forces winning that the media.
 The fragmented nature of Dutch political parties requires coalitions, and this serves as the ultimate check on the
Freedom Party and Wilders’ agenda.  It will take some time to sort out the
results and form a new government, which may entail the inclusion of four or
five political parties.   The hubris of small differences may make it
difficult to form a government in the first place or lead to a fragile
government.  A stronger than expected showing for the Freedom Party (PVV),
of say 26 seats (150-seat chamber) could elicit a market reaction, but in lieu of this, the market impact is likely to
be minor.   The generally expected
outcome that a new government excludes the PVV
might encourage investors and observers to question the main narrative that populism-nationalism is sweeping across
Europe and the US.  To the extent that the populist-nationalist agenda
entered the governments in the US and UK was when the main center-right party
adopted.  In Europe, the center-right parties are running against the
populist-nationalist parties. 
3.  G20
finance ministers and central banks meeting:  
No fresh initiatives can be expected.  The outlook for the global
economy has improved marginally.  The most important change since the last
meeting is the inclusion of the new US Treasury Secretary.  Many partisans
fail to appreciate that the despite that there are two distinct economic wings
of the Trump Administration.  There is protectionist, unilateralist (most
definitely not isolationist), American-First wing.  It is facing off
against a more free-trade wing that accepts the basic premises of the liberal
global world order of the post-WWII era.  The G20 statement, and how the
final version evolved from the preliminary leaked version may occupy analysts
and journalists, but investors will likely file it with the “good to
know” rather than an inducement to act.  
4.  Before
the G20 meeting, there are two US-German meetings that will draw attention.
  German Chancellor Merkel will meet Trump
in Washington, and Treasury Secretary
Mnuchin will meet Schaeuble, his counterpart in Germany.  Over the past
year or two, the US Treasury Department’s  semi-annual reports on the
international economy and foreign exchange market have become more critical of
Germany.  In the early days of the Trump Administration the line has been
pushed more forcefully.  There has been a striking juxtaposition of roles.
 Merkel has defended the liberal global order against the threats to it by
American protectionism.   Traditionally,  Americans often saw Russia
posing a greater threat than many Germans.  Now Merkel is trying to keep
sanctions in place of the seemingly more accommodative Americans.  
Mnuchin appears to be part of the free-trade wing of the Trump Administration
and will likely get on well with Schaeuble.  They can commiserate over the
soft money policies of the ECB and the bureaucrats in Brussels.   The market impact may be in inverse proportion
to the news coverage.  The more talk,
the less was done.  
5.  ECB: The ECB does not meet, but the market attention has shifted
toward the inevitable exit of the unorthodox policies.  Reading between
the lines and attentive to Draghi’s press conference, it seems clear that the ECB is
past peak QE.  What has captured the market’s
attention is the sequencing of the exit.  Even before the leaked
reports claiming that the possibility of lifting the deposit rate was discussed, we noted: “
With the negative
deposit rate of 40 bp, there is some thought that the ECB could reduce the negativity
before completely ending is asset purchase program.  But this does not
appear particularly likely in the next several months, and, moreover, it may
look a bit different if inflation peaks, as we expect, in Q2.”  The
Federal Reserve waited for a “considerable period” after the end of
its asset purchases before raising its Fed funds target.  However,
negative deposit rates add a  complication.  The increase in market
rates may offer an opportunity to do so with minimal risks.  
6.  Bank of Japan meeting:  No new initiatives are expected to be announced.  Governor Kuroda made a big
splash when announcing new measures, but he has more quietly modified the program so that
the BOJ’s balance sheet is growing slower and slightly fewer funds at the BOJ are burdened
with a penalty or negative rate.  The market has hardly talked about
Kuroda’s soft exit.  Although there have been periods that required
action, the 10-year yield has been mostly stable as global interest rates
have risen.   The key driver of dollar-yen are the interest rate
differentials (US-Japan 10-year, dictated now by the US side) and equity
markets.  Japan’s policy of relatively loose fiscal and monetary policy is
a given and not a new factor for investors.  
7.  Bank of England meeting:  This meeting,
like the BOJ meeting, is likely to pass without
much fanfare.  Under past governors, when the Bank of England didn’t do
anything they wouldn’t say anything.  That was then.  Now, in the new
era of greater transparency and enhanced communication, the BOE will hold a
press conference and release the minutes simultaneously.  The minutes
themselves are a channel of communication and not simply an objective record of
the meeting.  The two key drivers of sterling presently are Brexit and interest
rate differentials.  The discount to the US is near record levels.
 The Brexit amendments return to the House of Commons this week.  The
Tory majority should be sufficient to defeat them.  A formal trigger is still seen as most likely before the end of
the month.  Two other Brexit-related issues have arisen:  A second
Scottish referendum and maybe an early UK election.  The former is seen as sterling
negative.  The latter has been denied by 10
Downing Street, but the political logic, with
Labour continuing to falter, is not deterred by the more complicated
legislative process that is required. The Tories themselves voting no
confidence in its own government to
topple it trigger the new elections.  
8.  Norges Bank meeting:  The market had felt comfortable with
ideas that Norway’s central bank would leave the deposit rate at 0.5% when it
meets on March 16.  However, before the weekend, Norway reported a soft
February CPI report, and it captured some imaginations.  It accelerated
the krone’s slide.  The euro rose 2.65% against the krone last week, the
most in over a year.   It was pushing on an open door as the euro had
already begun rallying against Nokkie and
rose 1.1% against it the previous week, which at the time was the most since
last August.  The 0.4% rise in February consumer prices was the largest
increase since last September, but it was only half was what had been anticipated. The year-over-year rate fell
to 2.5% from 2.8%, and the core rate, which excludes energy and tax changes,
fell to 1.6% from 2.1%.  The sell-off in the krone, not just against the
euro but on a trade-weighted basis in the last couple of weeks takes pressure
off the central bank to do something it does not really want to do.    
 Swiss National Bank meeting:  
The euro rallied against the Swiss
franc at the end of last week and reached its best level in three months.
 The increase in Swiss sight deposits seems
to reflect that the SNB had been actively defending the CHF1.0650 area where
the euro chiseled out a bottom since the end of January.  Separately, we
note the convergence of short-term German and Swiss rates.  Consider that
over the past year, the Germany two-year yield has fallen 38 bp to 
minus 85,  while the
Swiss two-year yield has risen 16 bp to 
minus 95. Despite the low
level of anxiety over the Dutch election and the ECB exit talk, the German
two-year yield was flat to slightly lower last week.  The comparable Swiss
yield was up nearly seven basis points.  Can the Swiss begin normalizing policy
toward the end of the year, maybe after the German elections, or is it a 2018
10:  US debt ceiling:  The forbearance of the debt ceiling
that was agreed at the end of 2015, to
effectively kick the can past the election, ends on March 15.  It
is a political ritual in the United States in which the legislative branch
often seeks concessions to grant the
executive branch the authorization to pay for what has already been
purchased/borrowed.   The looming expiration is already impacting the
T-bill market as the government has already begun preparing and investors have
also responded accordingly.  However, the larger market impact is minimal.
 There are several months before truly difficult decisions will have to be made and there are several opportunities to
raise the debt ceiling.  Even though one
party has a majority of both chambers of the legislative branch and the
executive branch, the issue is also illustrative of another split in the government.  On one side is the seize-the-moment strategy
that sees this as an opportunity to roll back the government’s role in the
economy and society. On the other side are those that ultimately are more
opposed to the direction of previous policies not the legitimacy of the
policies. In the campaign, the candidate Trump briefly suggested
the possibility of renegotiating US debt,
but this line has not been pursued and,
currently, does not seem relevant.  

Succinct Views of Ten Events and Market Drivers: Week Ahead
Succinct Views of Ten Events and Market Drivers:  Week Ahead

Reviewed by Marc Chandler

March 12, 2017

Rating: 5

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