Fed speakers at pains to stress move not a shift in policy


MAJOR HEADLINES – PREVIOUS SESSION

  • US Jan. PPI out at +1.4% m/m, +4.6% y/y vs. 0.8%/4.4% expected and 0.4%/4.4% prior resp.

  • US Jan. PPI Ex-Food/Energy out at +0.3% m/m, +1.0% y/y vs. 0.1%/0.8% expected and flat/0.9% prior

  • US Initial Jobless Claims out at 473k vs. 438k expected and revised 442k prior

  • US Continuing Jobless Claims out at 4563k vs. 4500k expected and 4563k prior

  • US Jan. Leading Indicators out at 0.3% vs. 0.5% expected and revised 1.2% prior

  • US Feb. Philadelphia Fed Index out at 17.6 vs. 17.0 expected and 15.2 prior

  • EU Feb. Euro-zone Consumer Confidence out at -17 vs. -16 expected and -16 prior

  • NZ Jan. Credit Card Spending out at +2.6% y/y vs. revised +1.9% prior


THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

  • GE PPI (0700)

  • EU Euro-zone Current Account (0900)

  • UK Retail Sales (0930)

  • US Fed’s Dudley to speak (1300)

  • CA Retail Sales (1330)

  • US CPI (1330)

Market Comments:

Fed Chief Bernanke talked about increasing the discount rate to 100bp in his last speech, and the last FOMC minutes showed the Fed had talked about the same at the last meeting, the Fed took the first step towards this goal and surprised the market with a 25bp hike in the discount rate to 0.75% after the US close yesterday.

The timing of the move caught markets by surprise in thin liquidity conditions and the dollar soared as US yields spiked. The Fed was at pains to stress that the move did not signify a change in current monetary policy or change of perception on the economic outlook, but more a normalization of credit policy (in pre-crisis times the discount rate was a full 100bp above the Fed Funds rate). It is perhaps important to note that the discount facility is hardly used by banks for funding and the hike only impacts $14 bln worth of borrowers.

Fed-speak centres round the fact that this is a technical development and not a shift in policy. Fed’s Lockhart was the first on the wires also playing down the decision to hike the discount rate. He added that accommodative monetary policy is still needed to support the fragile economy. Markets showed little initial reaction to his comments, preferring to extend the theme of a firmer dollar and firmer short-term US yields. It was when voting member Bullard took over the microphone that we saw some reaction in Asia. Bullard commented that the markets’ belief that US rates will rise this year were “overblown” and added that the Fed’s current policy stance (of low rates) is more likely to extend into next year. The USD came down from the stratosphere following his comments with EURUSD taking a brief peek above 1.35 before lower again.

With all the hoo-hah caused by the Fed, yesterday’s data releases were soon forgotten. For the record, the US jobless claims disappointed again, losing 473k jobs versus the 438k expected while continuing claims were unchanged at 4563k. Bond markets had initially focused on this aspect rather than the fact that US PPI was higher, both on the headline and core readings in January.

Asia seemed more inclined to go with the “risk off” theme during the session, with bourses echoing the sell-off in S&P futures and slipping into the red. The dollar’s broad-based gains continued overall and were more marked against the lowly GBP. Both cable and GBP crosses underperformed as markets assumed that, as the Fed is taking its first small steps towards an exit strategy, the Bank of England seems nowhere near making the first step. In addition, yesterday’s public sector finances were disastrous reading where the Exchequer recorded a deficit in January for the first time in 17 years. Extrapolating the data forward, some point to the fact that a shortfall greater than £180 bln would mean the UK’s debt/GDP ratio at 12.8% would be greater than that of the embattled Greeks. On the USD index, some technicians pointed to the formation of a “golden cross” (50-day MA moving above 200-day MA) implying further gains for the dollar in sessions to come.

Into Europe German PPI, Euro-zone current account and UK retail sales are released. Note the weak forecast of -0.5% m/m for the latter may be the further catalyst to take GBPUSD towards 1.53. The North American session closes off the week with Canada retail sales and leading indicators together with US CPI.