Data dependence by Fed means rates can move both ways

Fundamental View

Yesterday saw very little in the ways of real market movement. In Europe we saw the beginning of a pullback in bourses with the DAX moving below the 12,000 handle. We saw this index attempt to break back above the psychological handle but with little success, with the DAX now trading below 11900. Although we have seen the Dollar index lift slightly, up 0.02% on the day we saw much US data disappoint. Housing starts were down by - 17.0% on the month, blowing past expectations of -2.40% and posting the largest decline since February 2011. We also saw building permits rise by 3.0%, reflecting the necessity for repair work due to the severe weather experienced in many states in the US. WTI Oil has also continued its downward trend, with the May future now trading below the $45bbl handle. The April contract is lower still with the low being posted at $42.05bbl. This morning we saw the Bank of England’s Monetary Policy Committee minutes released, showing a vote 9-0 to leave their interest rates unchanged at 0 .5% once again. Sterling has continued to be on the back foot with both dollar strength entering the market as well as sterling weakness with regards to wage growth data in the latest employment releases. Average weekly earnings from the UK missed expectations of 2.2% with a reading of 1.8%; ex-bonus numbers were also lower at 1.6% against the expected 1.8%.

Today’s View

Ahead we have the UK budget debate at 1230pm. this event could serve to exacerbate the move in sterling. We have one of the most important monetar policy meetings so far for the year of 2015. The majority of participants are awaiting to see whether Chairwoman Yellen will remove the ’patience’ language from the Fed’s forward guidance. This will be the main barometer for gauging whether the Fed will accelerate the rate-hike timeline. It is not clear however what this will be replaced with. Some analysts are calling for “caution” amid weakening global growth and a strong US Dollar. It will be during the press conference that Chairwoman Yellen is likely to talk down concerns, reiterating data dependency over the medium term and focusing on inflation, employment and housing. The pace of normalisation is also likely to be described as steady and gradual to limit market participants’ expectations. It is also important to note that a rate hike does not necessarily imply that rates will go one way. The data-dependency clause in the Fed’s forward guidance has implications that rates can also return lower as well as continue to move higher. Robert Shiller reiterated this this morning stating that “the FED can always lower rates again, put their tail between their legs and get those rates back down.”

Alternative view

Traders are reminded that saving ammunition for the meeting tonight is preferred as moves ahead of the release are likely to be short-lived. Conservative, trend following technical entries are recommended ahead of the meeting. Although the moves this evening are likely to be more volatile than normal, risk management procedures still apply and good trade management is actively encouraged.