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All posts by Viraji Patel

Is it about to or has it already happened? Federal Reserve loss of credibility

25th November 2015 by | News | No Comments

yellen

As we know, December is the favoured month the Federal Reserve begins lift off and hikes interest rates for the first time since 2006, unless an unprecedented catastrophe in the employment figures occurs. If the Fed postpone hiking again, they will lose credibility for sure, but has this already happened?
The arguments for the Fed to hike the Federal Funds Rate outweigh all other moves in monetary policy movements, however markets have already priced in an initial hike and nothing further or reversal and cut rates soon after the first hike.

Why?

Economic growth is the US is still low, yes the unemployment rate at jobs market is back on track and improving. Nonetheless a “lower for longer” policy leads to a substantial amount of debt build up in the economy. If total debt is 300% of GDP across the economy, an interest base rate at 1% would use 100% of GDP to service it, therefore already capping the Fed on further rate hikes after the liftoff. Essentially this means the economy can’t handle a higher interest rate with the current levels of debt in the economy.

What does this mean for the Federal Reserve?

If the Federal Reserve hike and cut, they will lose all credibility instantly. Some would argue this has already happened. The September meeting was favoured the 2015 month for liftoff, however the meeting concluded the Fed was looking at market conditions, raised its international awareness and the effects of the China slowdown, but in the previous minutes from the last meeting there was no mention of this and the sentences were dropped suggesting the Fed is stalling.

Market Reactions

The markets aren’t currently pricing in a sustained hike, or further hikes from the Fed due to nature of the level of debt and the lack of economic growth.
This is evident in the bond markets with the yield curve flattening quickly. If we look at the 3M Eurodollar futures quotes, the March 2016/2017 contracts spread is a just over 60 basis points, suggesting maybe 2 hikes next year and that’s it from the Fed. It’s very apparent the bond and futures markets don’t believe the Fed can hike and sustain at that level.

EURUSD currently trading at 1.0636

USDJPY currently trading at 123.05

Federal Reserve: Will Yellen Finally Hike in 2015?

9th November 2015 by | News | No Comments

2015 has so far very much been the year the Federal Reserve could liftoff and be the first major Central Bank to raise interest rates.

Why?

The US jobs market has grown rapidly, with monthly jobs created above pre 2008 crisis levels and still rising. Throughout the months of September and October, markets saw a slowdown in jobs created, however Novembers numbers beat all estimates with 271,000 jobs created and upward revisions on previous months figures. The US unemployment rate has dropped to 7 year low at 5% and markets saw an uptick in average hourly earnings.
After the latest release of economic data, estimates for a December rate jumped. In October, the chance of a December hike was around 20% – 30%, now analysts and markets are estimating a 70% chance of a rate hike from the Federal Reserve in December and 73% in January, as shown in the Fed Funds Futures.

jobs report paves path to December hike

What’s missing?

The jobs market is strong, unemployment is low and with average earnings is picking up, meaning core inflation in the US should start to rise as well.
However the Federal Reserve still has concerns that could lead them to not hike in December and keep rates lower for longer.
The main problem being the strength of the US Dollar across all currencies except those that are pegged. This is along with the low prices of oil is dampening inflation in the US, making inflation virtually non-existent.
At the current pace of the US economy inflation will pick up, even with the strong dollar. The dollar can get stronger, especially with the ECB across the pond potentially expanding their current QE program, which the markets expect to find out the verdict from Mario Draghi in December also. So it’s vital the Federal Reserve are prepared to hike before inflation has the chance to spiral out of control.

The hiking cycle

There are 2 rates at which the Fed could hike rates, fast and aggressive or slower and longer. At the current rate, the factors for and against a hike require two different cycles of interest rate hikes.
The current jobs market and strong NFP numbers could require an aggressive rate hiking cycle. On the opposite side, the strength of the dollar and low levels of inflation requires smaller rate rises as so not to suppress inflation and increase the strength of the US Dollar further.
What the Fed mustn’t do, hike too soon before the economy is ready, forcing them to cut rates soon after having an immediate negative impact on the economy. Janet Yellen has always been on the “lower for longer” side of interest rates. The US economy is ready for a rate hike, however it’s asking a lot of the Fed to hike before the Christmas holidays, meaning if December isn’t the month for liftoff, January is almost certain if the economy carries on improving at the current pace.
If the Fed don’t hike in December, 2015 will be known as the year the Fed talked about raising interest rates, and didn’t.

The next Fed meeting is on the 16th December
EURUSD currently trading at 1.0770

European Central Bank vs Federal Reserve

27th October 2015 by | Trader's Desk | No Comments

YellenAndDraghi
Two of the largest economies are facing the biggest decisions of 2015, one preparing to ease monetary policy further, one preparing to tighten monetary policy, but what is the final factor and who will react?

The European Central Bank’s Mario Draghi in his press conference has almost guaranteed a second wave of stimulus for the Euro area in December of this year. December is also the next potential meeting that Fed Chair Yellen could raise interest rates in the US for the first time since 2006. We’ve known for a while, 2 of the world’s largest central banks are pulling monetary policy in opposing directions, however acting in the same month could send EURUSD to a new low.

December, historically a low volatility month, could potentially have the 2 biggest policy changing decisions of 2015 to end the year with a bang for the various financial markets.

A summary of what we know

  • Low Oil prices and EURUSD trading around 1.1700 (high of 6month range) counteracts the European Central Bank’s stimulus program
  • Pressure and volatility surrounding China and the already strong dollar has delayed the Fed hiking already

What’s happened recently?

  • After the dovish September FED meeting, EURUSD traded near the high of its 6month range, threatening European inflation making exports more expensive.
  • After ECB QE2 announcement, EURUSD traded to a 2 month low, making the dollar stronger and could influence the Fed’s thinking on monetary policy to delay further.
  • Global equities have continued to rally, oil prices have dropped to below $50 a barrel.

What are the possible outcomes?

  1. The Fed hike in December
  2. The Fed don’t hike in 2015, due to a strong dollar, push back forecasts, sending EURUSD higher, forcing the ECB to act.
  3. ECB ease further in December
  4. ECB cap euro strength after a Fed hike by cutting the deposit rate further
  5. The continued rally in global equity markets gives the Fed a cover to hike rates

eurVSusd
The outcome either way will be a split in transatlantic policy or a united extension of “easy money”.

EURUSD currently trading around 1.1050, with a latest Fed meeting schedule for released tomorrow at 6:00pm UK time.

 
 


 



Is the European Central Bank QE Working?

13th October 2015 by | News | No Comments

Mario Draghi

European Central Bank QE Program

Current appreciation in EUR/USD and continued weakness in Oil prices are battling against the ECB’s bond buying program, creating pressure on the ECB’s Mario Draghi to “do more” in order to boost the Eurozone recovery.
The next ECB press conference is scheduled to take place October 22nd, since the September meeting, Mario Draghi and other ECB governing council members have reiterated their willingness to expand QE in an attempt to stimulate the economy further, however EURUSD trades near the high of its range around 1.1350

Will we see parity?

The EURUSD QE decline which saw levels as low as 1.0463 had banks lowering forecasts to below parity, however the past 6 months range between 1.05 and 1.15 has reduced the majority of year end forecasts around 1.08 which would continue to battle against the current stimulus program and doesn’t include any further action from the ECB.

What can they do?

Mario Draghi is running out of options, in the build up to the initial release of the QE program, it was the “talk” that started the decline of the euro which enabled the European Central Bank QE to effectively purchase government bonds. We could see a similar tactic deployed again by the ECB in the October meeting, talking the Euro exchange rate down by continuing to warn “further action” through expansion and extending the current QE stimulus.

 


 



Oil Commodity Downside Pressure

29th September 2015 by | News | No Comments
Oil Downside Pressure Rises

Both fundamentally and technically a big week for the oil markets. Commodity crisis set to continue as VW Scandal continues to unfold, Royal Dutch Shell and other Russian energy giants cease and delay offshore drilling, ECB inflation expectations turn negative, US Federal Reserve interest rate lift-off speculations and crude oil inventories data release.

Volkswagen Emissions Scandal

As the Volkswagen emissions scandal continues to unfold, econonmists and analysts are expecting a further knock on effect to the diesel markets. European refineries could be forced to switch back to boosting gasoline output and reducing diesel production and imports from Russia, the U.S. and Middle East Refineries. Gasoil futures continue to fall whilst Gasoil inventories continue to rise, putting pressure on the suppy and demand curve making a move lower in oil prices more likely.

Gasoil futures

 

Chinese Demand Knock-on Effects

Oil prices slid on Monday after china reported a drop in industrial profits from a potential weakening in demand by the world’s second largest consumer. The continuing decline in commodity prices has taken it’s toll on Glencore PLC, dropping almost 30% on the announcement from it’s CEO, the biggest decline since the company went public.

glencore plc

Glencore plc record drop

 

Energy Giants

Current oil prices remaining below $50 a barrel have contributed to energy giant, Royal Dutch Shell ceasing artic drilling operations due to fact it’s “not worth” the current price. Russian energy giants Rosneft OJSC and Gazprom have delayed offshore drilling by 2-3 eyars because of similar reasons to Shell and Russia’s roled in the Ukraine Crisis.

Central Banks

The US Federal Reserve’s potentially 2015 liftoff in federal funds base rate hikes will have further downside pressure on the oil prices. Whereas across the pond, the current level and decline in oil prices is surpressing UK and Eurozone inflation. UK inflation has already entered a period of deflation, with the ECB’s Draghi expecting Eurozone Inflation to turn negative in the coming months, counteracting the stimulus programme potentially forcing the ECB to “act” further. Next data release is 30th September.

Mario Draghi Janet Yellen

Downside Risk

Crude oil inventories data expected to be released Wednesday 30th Septemeber, an increase in inventories could see a move lower in oil price. With added pressures from the Federal Reserve, China and energy giants around the globe, further depreication in the price of oil is likely. Light crude trading at the low it’s range between $44.00 and $48.00 a barrel, brent crude trading similarly at the low of it’s range between $47.50 and $50 dollars a barell. A move through the low of the range could see light crude trading near the low of $40 and brent crude trading near the $45 a barrel levels.

light crude and brent crude

 

Charts via Bloomberg

GasOil Futures

Glencore record drop