TradeTheNews.com: Weekly Market Update: Fed's patience is gone but not forgotten
Fri, 20 Mar 2015 16:05 PM EST
As expected, the FOMC altered its forward guidance this week, replacing the
"patient" line with broad language that emphasized its core policy
principle of remaining data dependent. Fed Chair Yellen couched the change in
pretty stark terms: "just because we removed the word patient from the
statement doesn't mean we're going to be impatient." The FOMC also lowered
its economic forecast for 2015-16, hinting that the data might not be as rosy
as required for a normalization of interest rates. Nearly every global asset
class saw big moves on the decision: equities soared, the euro saw an
astonishing move across five big-figures (EUR/USD made a round trip from 1.0580
to 1.1050 and back to 1.0650, the second broadest one-day range seen since
2000), and the 10-year UST yield dropped as low as 1.90% and remained below 2%
through the end of the week. By Friday, the Shanghai Composite posted a fresh
multi-year high, the FTSE index surged above 7,000 for the first time ever,
while the Nasdaq approached its all-time closing high of 5048 set in March
2000. For the week, the DJIA added 2.1%, the S&P500 rose 2.7% and the
Nasdaq gained 3.2%.
The FOMC replaced patient with a statement that policy tightening would be
appropriate when the Fed "has seen further improvement in the labor market
and is reasonably confident that inflation will move back to its 2 percent
objective over the medium term." Maybe more importantly though the updated
economic forecasts revealed officials now foresee the rising US Dollar serving
as a significant headwind to exports and thus a potential drag on growth as well
as inflation. Officials also adjusted their outlook for remaining slack in the
labor market; forecasts for the long-run level of the unemployment rate shifted
down a couple of tenths of a percent. Yellen affirmed that every meeting
starting in June will be a "live" meeting for considering rate lift
off, but indicated a number of reservations about wage growth, low inflation,
and the strong dollar, leaving most analysts saying she was more dovish than
they had hoped.
The impact of the brutal winter weather in the US showed up in housing data
this week. February housing starts dropped 17% from January to an annualize
rate of 897K, while building permits hit a nine-month low of 1.09M. Permits
grew slightly over the January rate, although the bulk of permits were for
multi-family units, with continued softness in single-family permits.
Homebuilder confidence dipped lower than expected in March. The NAHB index of
homebuilder sentiment fell for the third straight month and missed
expectations. Despite the data homebuilders KB Home and Lennar reported solid
Q1 results and suggested the spring selling season is getting off to a solid
start.
Greece and its European patrons remain locked in contentious negotiations.
Greece is at the very edge of solvency, a position the Europeans appear to be
using for maximum advantage to squeeze more reforms out of Athens and beat back
Syriza's electoral pledges to end austerity. Right now the consensus is that
Greece has enough funds to pay debt coming due in March but may run out of cash
in April, though it may unlock a few billion more euros at next week's
Eurogroup meeting. On Friday, German press sources were reporting that German
Finance Minister Schaeuble expected Greece to be ultimately forced out of the
Eurozone even as Chancellor Merkel still wanted to keep Greece in the monetary
union for political reasons.
On Monday Russian President Putin appeared at a press conference with Kyrgyz
President Atambayev, breaking an 11-day absence from public life. During the
period, wild conspiracy theories circulated in media and the internet about a
possible power struggle among the various political factions in the Russian
leadership, with some analysts suggesting that a slow-motion coup was underway.
Responding briefly to the chatter, Putin noted "without gossip, life would
be boring."
Iran and the P5+1 group appeared to edge closer to a nuclear deal. Diplomats
suggest the two sides should iron out most of their remaining differences over
weekend, but another round of talks likely will be needed to seal any deal.
Despite the prospect of Iranian oil spilling back onto the market, Brent moved
higher this week, from lows around $55 as high as $56.80 on dollar weakness
stemming from the Fed decision. WTI slipped into the low $40's on Tuesday but
closed out the week at around $46/barrel.
Scandinavian central banks behaved unpredictably this week in rate actions. On
Wednesday, Sweden's Riksbank delivered an unscheduled interest rate cut and
expanded its QE bond purchase plan. The Riksbank cut its benchmark repo rate to
-0.25% from -0.10% and expanded its bond-buying program by 30 billion kronor,
adding to the 10 billion kronor in purchases that started last month. Norway's
central bank arrested the slide in its currency by refraining from an expected
25 basis point rate cut on Thursday. Governor Olsen explained that the economy
has performed better than was feared, and while rates could still be cut if
needed, the central bank has not considered any additional measures beyond a
rate action.
Valeant clinched its deal to acquire Salix Pharmaceuticals, raising its offer
by about a billion dollars in a new deal that knocked out rival bidder Endo
International. Valeant hiked its all-cash bid to $173/share, or about $11.1
billion total, up from its original offer of $158/share. Mall operator Simon
Property raised its offer for Macerich to $95.50 from $91 just three days after
it rejected Simon's earlier offer and adopted measures to prevent a hostile
takeover. Analysts had suggested Macerich would not be satisfied with much less
than $100/share, and shares of MAC fell as low as $84 as investors doubted the
board would embrace Simon's "best and final" offer.
The Shanghai Composite had its best week of the year, rising over 7% to close
above 3,600, the highest level in nearly 7 years. China Premier Li helped spark
the rally at a press conference on Monday, promising more substantial fiscal
support if the economy slows too much, especially given that recent measures
were not considered very potent. February power consumption, which is one of
Premier Li's favored economic indicators, slowed to just 2.5% from 3.3% last
month and 3.8% in 2014. The Premier's promise to build more affordable housing
was also particularly timely as this week's price data showed growing
imbalances in the property sector - across the top 70 cities, February prices
fell m/m for the 10th straight time and the y/y decline widened by 0.6pts to
-5.7%.
In Japan, the BOJ policy statement was largely a reiteration of the prior
month, maintaining annual rate of monetary base increase at ¥80T, and
reiterating the economic assessment as continuing a moderate recovery trend.
The biggest change in the statement pertained to inflation, as the BOJ scaled
back its current CPI view to 0.0-0.5% from around 0.5% and the outlook for
inflation to around 0% from prior assessment of "slow for time
being." On Friday, Governor Kuroda reiterated his more optimistic stance
that inflation will achieve the 2% target by the end of the intended FY15/16
period, just as the minutes from last month's meeting showed some growing
concern related to the sustainability of the central bank's monthly JGB
purchases. On Monday, the cabinet office is set to release its monthly economic
assessment which local press speculated will show the first upgrade 8 months.
