20-Feb-2020

1) FOMC Minutes Mix Economic Optimism And Caution
2) USD/JPY: Dip Demand Powers Recovery
3) Aussie Slumps As Unemployment Rises

1) FOMC Minutes Mix Economic Optimism And Caution

Fed officials, economists and staff were more optimistic about the US economy than suggested in the three most recent FOMC statements where economic activity was described as rising at a moderate pace in October and December and a modest one in January.

In the minutes from the January 28-29 meeting participants noted that the risk outlook for the economy had improved since the December 10-11 FOMC.  The minutes highlighted a “cautious optimism” about the business sector which saw investment spending fall to nearly flat in the second half.  Staff assessments also observed that downside risks had diminished.

In addition to the ten voting board members, five alternate members, and three non-voting Fed presidents there are well over 75 economic, technical and support staff in attendance at these policy meetings.

A number of members expressed concerns about the economic effects of the corona virus on China and the world economy.

Though the mainland health crisis was not mentioned in the FOMC statement from the January meeting, concrete details being lacking at the time, Chairman Jerome Powell covered it in the press conference following and in last week’s Congressional testimony. In the House he said the Fed was “carefully monitoring the situation, and that, “We have to resist the temptation to speculate on this.”

Most participants said they expected inflation to move towards the bank’s 2% target for the core PCE rate.   A few officials said they thought there had been a “modest step up in price changes in 2019.

However, this looking forward to the eventual return of symmetric 2% inflation has been the bank’s long-standing rhetorical position. In fact the core PCE target has been observed almost entirely in the breech.  Over the past ten years, 120 months, the rate has been above the 2% target in just 5 months, at target in 10 for a total of 15 months or 12.5%. Inflation has been below target for 87.5% of the time, 105 months.

The Fed’s own economic projections released in December anticipate no rate changed this year and one increase in 2021.

Market perceptions differ pricing in about two 0.25% cuts by year end.  The CME FedWatch gives a 25.4% change of at least a 25 basis point cut by the April 20 FOMC, rising to 44.6% in June,  57.4% in July, 69.3% in September   72.9% in November and 83% by the December 20 meeting.

The estimates of the futures markets tend to be volatile and it is possible that some of these odds are based on the unknown but dangerous potential from the Chinese epidemic.

American equity averages were higher on Wednesday with the DJIA gaining 0.4%, 115.84 points to 29,48.03 and the S&P 500 adding 15.86 points, 0.47% to 3,386.15.

Treasury rates were unchanged with the 2-year at 1.43% and the 10-year at 1.58%.

The dollar was higher on the day Wednesday closing at 1.0795 versus the euro the best for the US currency since April 2017 and 111.24 against the yen, its highest since early last May.

2) USD/JPY: Dip Demand Powers Recovery

The pair’s retreat from the nine-month high of 111.59 reached during the US trading hours ran out of steam near 111.11 three hours ago.

The buyers stepped in lifting the pair back to 111.50, possibly tracking the uptick in the US equity index futures. The S&P 500 futures were up by almost 0.25% in early Asia.

The bid tone around, however, has weakened in the last few minutes despite China delivering an interest rate cut as expected. At press time, the futures are shedding 0.25%.

Further, the US 10-year yield is also reporting a two basis point drop at 1.55%.

As a result, the anti-risk yen could again catch a bid wave, pushing USD/JPY down to 111.11. Currently, the pair is hovering near 111.35.

It’s worth noting that the Shanghai Composite index is currently adding 0.4%. If the positive action in the Chinese stocks feeds into the US index futures, the USD/JPY pair could print fresh multi-month highs above 111.59.

3) Aussie Slumps As Unemployment Rises

Australia’s unemployment rate rose to 5.3% in January, up from 5.1% the previous month, and the highest reading since October last year. The uptick can be partly explained by an increase in the participation rate to 66.1%, the highest since September, from 66.0%.

The rest of the jobs report looked encouraging, with a net 13,500 jobs added in the month, more than the 10,000 economists had expected, made up of a gain of 46,200 full-time jobs countered by a loss of 32,700 part-time ones.

Investors chose to focus on the unemployment rate, given that it is a major focus for the central bank, and pushed the Aussie lower across the board, with AUD/USD touching 0.6641, the weakest since March 2009. 3-year Australian bond yields slid 5 bps after the data.

In a move that had been widely expected, China reduced its Loan Prime Rate (LPR) by 10 bps to 4.05%. At the same time, it trimmed 5 bps off its 5-year LDR to bring it down to 4.75%. The move comes on the back of a 10 bps cut to the MLF earlier in the week. In addition, China had announced last weekend a raft of stimulus measures to help the economy overcome the impact of CoVid-19.

Current sentiment would suggest that the market believes this will be enough to shore up the economy when faced with the virus threat, since Wall Street indices powered higher yesterday, with some hitting new record highs.

However, the South China Morning Post, citing various analysts, cautioned that the rate cut would only provide “limited relief”.

Ratings agency S&P commented that it sees an economic recovery in China in Q3 and forecasts that the Chinese economy will expand 5% in the full year. It also cautioned that the CoVid-19 impact could double the amount of questionable loans in China.