Big Day for Central Bank Policy Meetings

March 16, 2017

On Wednesday, the Federal Reserve increased its target fed funds rate band by 25 basis points to 0.75-1.0%. Although meeting expectations, remarks by Chair Yellen proved more dovish than expected. Policymakers envisage the same number of rate increases this year and next as they did back in December.

On the central banking front today,

  1. The Peoples Bank of China bumped up some short-term interest rates by 10 basis points just as it had done in January and February. The latest move was tied to the Fed rate hike.
  2. The Bank of Japan did not change its policy stance, a -0.1% short-term policy deposit rate, about 80 trillion of JGB purchases per year, and a program of yield curve control that aims to keep the 10-year yield around zero.
  3. The Bank of England agreed not to change its 0.25% Bank Rate, although the vote of 8-1 drew a dissent from Kristin Forbes who sought a 25-bp increase. Officials are electing not to immediately react to inflation above target, which reflects energy developments.
  4. The Swiss National Bank kept a -0.75% sight deposit rate and a 3-month Swiss Libor range of minus 0.25% to minus 1.25%. The franc remains “significantly overvalued,” and subjective forex intervention will continue to be utilized to counter such.
  5. The Bank of Norway’s key interest rate was kept at 0.50%, its level since a 25-basis point reduction a year ago.
  6. Bank Indonesia’s 7-day reverse repo rate was retained at 4.75%. Six 25-basis point cuts last year between January and October reduced such from 6.25%.
  7. Turkey’s one-week repo rate was left at 8.0%, having been last raised by 50 basis points back in November. The 8.5% marginal overnight funding rate and 7.25% overnight borrowing rate were not changed, either.
  8. Chile’s central bank is also meeting today.

The dollar weakened yesterday after the Fed’s announcement and press conference but shows no further net change today against the euro, sterling, loonie and peso. The dollar has risen 0.2% against the yen and Australian dollar and 0.7% relative to the kiwi but is 0.3% softer against the Swissie.

  • The kiwi reacted adversely to a halving of New Zealand quarterly GDP growth to 0.4% in 4Q16 after increases of 0.8% in each of the previous two quarters.
  • Australian labor statistics were worse than expected and weighed on the Aussie currency. The jobless rate rose to 5.9% from 5.7%, and employment fell by 6.4K in February.
  • The Swiss franc climbed in spite of being labeled “significantly overvalued” at the SNB’s quarterly review of monetary policy.
  • The euro benefited yesterday from Dutch election results that showed voters preferring the mainstream Liberal Party leadership over the xenophobic, populist message of the extreme political right.

Stocks rallied in Asia and Europe, taking their cue from the post-Fed rise of U.S. equities on Wednesday.

The ten-year bund climbed 4 basis points, and the 10-year U.S. Treasury yield pared yesterday’s sharp dorp. The ten-year Japanese JGB fell 2 bps to 0.07% when the BOJ didn’t leave any clue that officials are considering raising their target from zero.

Gold leaped 2.1% to $1,225.3 per ounce. Oil advanced 0.7% to $49.21 per barrel.

Consumer prices in Euroland rose 0.4% on month and 2.0% on year in February compared to a 12-month decline in February 2016 of 0.2%. However, core inflation stayed at 0.9% and was just 0.1 percentage point higher than a year before. The 12-month change in energy consumer prices swung from -8.1% in February 2016 to +9.3% last month.

Donald Trump’s budget for next fiscal year proposes a wholesale reduction of discretionary spending cuts on domestic social programs to finance a big jump in defense spending.

Treasury-compiled U.S. capital flows, known as the TIC report, showed a swing to net inflows in January. The long-term inflow was $6.3 billion, but the broadest aggregate, which includes short-term capital movements as well, ballooned to $110.4 billion.

New U.S. jobless insurance claims slipped 2K to 241K last week. The four week average of 237-1/4K was down from 245.25K in the prior 4-week period to February 11 and 263.75K in the four weeks through December 16.

The Philadelphia Fed manufacturing index had spiked in February to a reading of 43.3, best since November 1983. As basically expected, such settled back to 32.8 this month.

U.S. housing starts in February rose 3.0% on month, beating expectations. Building permits, in contrast, dropped by a greater-than-expected 6.2%.

Still to come: U.S. job hires and separations, known as the JOLTS report.

Copyright 2017, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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