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15 Sep 2016
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13 Sep 2016
AM Bulletin: Fed keeps us guessing
13 Sep 2016
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 Tuesday 13 September 2016

AM Bulletin: Fed keeps us guessing



Indices Update

Global stock indices began the week sharply lower yesterday. Not only were Asian Pacific and European equities responding to last Friday’s Wall Street sell-off, but they were also factoring in an early plunge in US stock index futures.  Investors rushed to cut their exposure to stocks at the end of last week following a speech from Boston Federal Reserve President Eric Rosengren. Dr Rosengren is a voting member of the FOMC and so his comments carry some weight. He expressed his “personal view” that “a failure to continue on a path of gradual removal of accommodation could shorten, rather than lengthen, the duration of this recovery.” Dr Rosengren is considered a “dove” so investors felt that his hawkish speech strengthened the argument in favour of the Fed raising its fed funds rate at next week’s meeting.

Also adding to negative sentiment were concerns over the health of Democratic Presidential candidate Hillary Clinton and North Korea’s nuclear test. But global indices bounced off their lows and the US majors were back in positive territory soon after the open.

Yesterday was last day Fed members can speak publicly before they go into purdah ahead of next week’s meeting. There were a number of other Fed members who popped up to offer their opinions. But the most keenly anticipated was another FOMC-voting member Lael Brainard. Dr Brainard is seen as highly influential as she is part of Fed Chairman Janet Yellen’s “inner circle.” She is also one of the most dovish members of the FOMC, so there was some speculation ahead of her speech that she may also turn hawk in order to keep next week’s meeting “live” in terms of a rate hike. However, investors rushed in to hoover up equities after Dr Brainard urged caution. She said that while the US was making economic progress, it would be wise to wait before tightening policy further. She also expressed concerns over China’s ongoing transition from being export-focused to lifting domestic demand.

It must be remembered that the Fed repeatedly bangs on about how its rate decisions are “data dependent” and the latest US economic data has been either disappointing or weak. August's Non-Farm Payrolls came in at 151,000 and were well below the 180,000 expected.  In addition, the latest ISM Manufacturing and Non-Manufacturing PMIs both fell sharply last month.

The FTSE 100 ended the day 76 points lower at 6,700.9

The German DAX fell 141.7 points or 1.3% to end the day at 10,431.8

The US30 closed up 239.6 points to finish at 18,325. The S&P 500 rose 1.5% to close at 2,159 while the Nasdaq 100 gained 1.8% to close at 4,764.7


Shares in Associated British Foods (ABF) fell sharply yesterday. Investors trimmed back their holdings following the release of a trading update from the Primark-owning conglomerate. ABF has benefitted from the post-Brexit sell-off in sterling. However, the company said that it is preparing for a negative impact in the new financial year. It noted that if the current sterling exchange rate continued, then it would have mixed effects on next year’s operating profits with “an adverse transactional effect on the profit margin on Primark's UK sales." Like-for-like sales at Primark are expected to decline 2% due to unseasonably warm weather leading up to Christmas 2015, followed by a cold March and April. The group expects net debt for the 53 weeks to 17th September to be a touch higher than the prior year. The stock ended the day 10.8% lower at 2,815 pence.

Commodities Update

Crude fell sharply in early trade yesterday, continuing a slide which began on Friday. Along with the plunge in equities and the rally in the dollar, the sell-off in crude followed hawkish comments from Boston Fed President and FOMC-voting member Eric Rosengren on Friday. Investors viewed Dr Rosengren’s comments as boosting the likelihood of a Fed rate hike next week. While a tightening of monetary policy by the Fed would appear to indicate confidence in the US economy, investors fear that it could weigh on economic activity going forward.

Crude also came under pressure at the end of last week following the news that US producers  added more drilling rigs for a tenth week running. Just over a week ago the CEO of Pioneer Drilling, Scott Sheffield, said that oil wells in the biggest US oil fields remain profitable even with crude prices below $30 a barrel. His comments helped to offset speculation that other major oil producers may agree to freeze oil production when they meet in Algeria later this month. The US doesn’t take part in such meetings, so could easily step in and increase shale oil production should Saudi Arabia, Russia or anyone else decide to cap output in an effort to lift prices.

Yesterday OPEC revised up estimated oil output from competitors outside the group. OPEC has forecast a larger surplus in 2017 than previously forecast. However, investors soon shrugged off all the negative news surrounding crude and rushed back in on the long side. This saw oil fly back into positive territory as traders had another go at pushing crude up towards the mid-August highs.

Gold and silver have sold off sharply since Friday afternoon. Both metals have come under pressure thanks to growing expectations that the US Federal Reserve is preparing to hike rates at next week’s meeting. Gold and silver had already pulled back from recent highs ahead of Friday’s speech from Boston Fed President Eric Rosengren. But investors drove both metals lower again following Dr Rosengren’s comments which were considered hawkish.

The probability of a September rate hike had diminished recently following the release of some disappointing US economic data. The latest Non-Farm Payroll number fell short of expectations while August’s ISM Manufacturing and Non-Manufacturing PMIs dropped sharply from the month before. The weaker numbers persuaded investors that the US central bank would wait until December to tighten monetary policy. However, Dr Rosengren opened up the door for a September hike which lifted the dollar and weighed on precious metals.

But Lael Brainard’s speech last night has offset this recent hawkishness. Dr Brainard delivered the last public comment from any Fed member ahead of next week’s meeting. She said it would be wise for the Fed to hold off from tightening monetary policy at this time.

Forex Update

Yesterday the Japanese yen rallied sharply as uncertainty surrounding a potential Federal Reserve rate hike this month fuelled a selloff in riskier currencies. There is also a growing feeling that the Bank of Japan will hold off from announcing additional monetary stimulus after next week’s meeting.

Last Wednesday Richmond Fed President Jeffrey Lacker said that it looked as if the case for a September rate increase was growing, thanks to a strong US labour market. Kansas City Fed President Esther George (and FOMC-voter) also said she believes the US labour market is at or near full strength. Then on Friday Boston Fed President added to the increased hawkishness when he said that a gradual tightening of monetary policy could now be appropriate and that a failure to remove accommodation could “shorten, rather than lengthen, the duration of this recovery.” In this he appeared to echo the views of Federal reserve Chairman Janet Yellen. At the Jackson Hole Economic Symposium which took place at the end of August she highlighted the solid performance of the labour market and said “the case for an increase in the federal funds rate has strengthened in recent months.”

Late yesterday Lael Brainard, a voting-FOMC member delivered the last public pronouncement from the Fed before it goes into purdah ahead of next week’s rate meeting. Dr Brainard said it would be wise for the Fed to hold off from tightening monetary policy at this time.

Upcoming events

Today’s significant economic events include UK CPI and RPI. From the Euro zone we have Italian Industrial Production, German ZEW Economic Sentiment, Euro zone ZEW Economic Sentiment and a speech from ECB President Mario Draghi. From the US we have the Federal Budget Balance.


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Posted by David Morrison

Category: AM Bulletin

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