Notable events over the last week
- Fed Chair Yellen remained cautious during her speech at the Economic Club of New York, reiterating many of her very dovish policy sentiments in contrast to much of the Fed speak as of late. Just a week earlier Bullard, Lacker, Lockhart and Williams all hinted at the possibility of a hike as soon as April or June, with Bullard stating that ‘the Fed forecasts suggest that the next hike may not be far off’. Yellen’s caution provided a firm and effective reminder that the Fed is clearly not going to be rushed into prematurely tightening further. Yellen highlighted that the outlook for US inflation had become ‘somewhat more uncertain’ and that recent readings on the US economy were mixed (supported by the downgrade of Q1 GDP growth forecasts by the Atlanta Fed ‘GDPNow’ model from 1.4% to just 0.6%). China and Oil price volatility were identified as key risks to the US outlook and the main reasons for cautious policy adjustment and Yellen’s dovish stance. The focus this week will be on the release of the March FOMC minutes on Wednesday for further indication of the path of US rates.
- Despite a relatively dovish Yellen, Friday’s March employment report was solid and supported by a rebound in the manufacturing sector. Nonfarm payrolls rose by a seasonally adjusted 215k (vs. 205k expected) in March, following a 245k reading in February which was also revised marginally higher, taking the Q1 average to 209k. Average hourly earnings were also up more than expected with a gain of 0.3% MoM (vs. 0.2% expected). Meanwhile, the labour force participation rate edged up to 63.0% (highest in two years) from 62.9% causing the unemployment rate to nudge up to 5.0% from 4.9%. Additionally, the March ISM manufacturing print rose better than expected to 51.8 (vs. 51.0 expected) from 49.5 previously. The March consumer confidence index was also up, ticking in at 96.2 (vs. 94.0 expected) from an upwardly revised 94.0 last month. The strong data is an indication of the domestic labour market’s resilience despite overseas economic uncertainties and commodity volatility. The probability of a June hike currently sits at 24%, despite falling as low as 20% post Yellen’s speech, and down from 38% this time a week ago.
- Meanwhile, Oil has been hit hard over the past couple of weeks as crude enthusiasm has begun to fade after the March Brent rally. WTI closed the week down 6.77% at $36.79/bbl, the lowest closing price since 3rd March and down almost 15% on the highs of last month. Scepticism surrounding the production “freeze” deal between OPEC and Russia has been the made catalyst for the sell off. The latest dent came from Kuwait with the acting oil minister announcing that production is to restart in the Kharfi oil field, a 300k barrel-a-day operation. This was followed by comments on Friday from Saudi Arabia’s deputy Crown Prince who said that the nation will only freeze output should Iran follow suit. Major producers are next set to meet in Doha on 17th April to discuss possible solutions to the Oil crisis.
- Back to the US and stagnating new stock offerings added more fuel to the fire as diminishing risk appetites suggest that investors are turning dovish. YTD only nine companies have listed on US exchanges and significantly 21 companies were compelled by the market turbulence to shelve their IPOs. Reports show that offerings have slowed to the lowest levels since Q1 2009 and the correlation with the buoyant US stock market is dwindling. However, the lacklustre market may be the result of improved capital availability from increases in the variety of finance sources – a sign of US economic strength, not necessarily weakness.
- As we enter Q2 2016, global geopolitical risks remain significant at least for now. Summarising there are a number of risks at play – the impeachment of the Brazilian President Rousseff which should be settled by the end of April; the questionable effectiveness of “Abenomics” (although it looks like the government will give one more push with a sales tax hike delay in May); and the UK referendum where polls have tightened (current odds for a stay vote stand at 2/5). Such risks are likely to unsettle markets in the lead up to each event with further volatility expected.
- Lastly, Japanese industrial production disappointed markets on Wednesday falling the most since March 2011. Output slumped 6.2% (vs. 5.9% expected) in February largely due to diminishing export demand, although a one-off steel-mill explosion which halted Toyota Motor Corp. domestic car production received most of the blame. This stall is likely to have knock-on effects for manufacturing activity and adds to the growing concerns surrounding economic expansion after the contraction in the final three months of last year. The government is currently predicting output to expand 3.9% in March while the median prediction for Q1 growth stands at 0.6%. Should GDP shrink again this would mark the second recession since Abe returned as prime minister in December 2012 further building pressure on policy makers to bolster growth.
Coming up this week (Source: Bloomberg)
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