|•||Fed Chair continues data dependent tapering view||•||Bank of England to amend forward guidance, may hint at lower inflation|
|•||Recovery in labour market “far from complete”||•||Chinese trade data shows massive positive surprise, AUD elevated|
Janet Yellen gave the markets exactly what they wanted yesterday. In a clear and concise discussion of monetary policy to the House Financial Services Committee Yellen made sure to emphasise that, while a recovery in the labour market is “far from complete” and that recent poor jobs reports had surprised her, the Fed’s decision to taper will likely continue in “measured steps”. As I have said since the Fed’s decision to begin reducing the amount of asset purchases it makes on a monthly basis, it will take something pretty surprising to shift the FOMC away from its internal schedule.
The new Fed Chair also reiterated that the decisions around monetary policy are very data-dependent – a significant slowdown in growth or aggressive developed and emerging market issues are the only likely triggers for a hold on tapering. Her typical dovishness was lessened somewhat given she now represents the entire FOMC and mercifully she would not be drawn into the partisan political matters that have made these hearings so infuriating in the past.
There was very little in this announcement that will see economists change their expectations of when the Fed will be looking at a rate hike. It seems pretty clear in our eyes that the reductions in stimulus will keep a pace that sees purchases reduced to zero by Q4 of this year with rate hikes due in Q2 of 2015. Dollar was relatively unaffected by the new Fed Chair’s pronouncements while Eurodollar futures – contracts measuring US interest rate expectations along the curve – were also quiet.
Yellen’s testimony was the first central bank risk of the week’s data calendar with the other, the Bank of England’s Quarterly Inflation Report, due today at 10.30am GMT. The focus of this report will be around the changes to forward guidance although explicit changes to the unemployment threshold of 7% are very unlikely. Despite the very real possibility that we will break, or at least meet, this 7% level this week, the MPC will not move the threshold down to 6.5%; just as much as they have met this threshold in double-quick time that is not to say that another threshold would be met within the MPC’s timeframe. Instead we are looking for the Bank of England to warn about lower than expected inflation in the medium term, something that could take sterling lower, while revising its growth expectations higher and its unemployment thoughts lower.
Chinese data has dominated the Asian session overnight with trade data surprising the AUD and regional equities higher. Exports rose by 10.6% and imports by 10.0% in January compared to this time last year; a strange set of numbers given recent surveys that have hinted at a real slowdown in Chinese output. Once again we must call into question the viability of Chinese data and doubts will be had about the double-reporting of export orders. AUD is at a 2 month high following the release.
Japanese yen wobbled overnight as core machine orders slipped by the largest amount since 1998 according to December’s release. Core orders fell by 15.7%, likely limiting the rate of business and capital investment in the coming few months. This, combined with a 60 per cent increase in sales taxes in April, will hinder overall output and cause the Bank of Japan to increase its Abenomics driven stimulus later this year.
Have a great day.
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