Trading with point and figure

COMMENT: As was perhaps to be expected, markets took some umbrage at the dot plot's implication of one additional rate hike in 2017, though ironically this was mostly down to the mercurial (eccentric? Ed.) Mr Bullard shifting his forecast for just one hike for the whole forecast period to two. The shifts in its economic forecasts were all together much less remarkable, a marginal revision to the Unemployment Rate forecasts for 2017 and 2019 to 4.5 from 4.6%, 0.1 ppt increases for 2016 and 2017 GDP forecasts, and almost no changes to projections for either headline or core PCE deflators, outside of a necessary revision to 1.5% from 1.3% for the 2016 headline PCE deflator, which is nothing more than an acknowledgement of reality. Indeed the statement text appeared keen to emphasize that while market based inflation expectations have shifted higher, they "still are low". As Yellen opined in the press conference, the changes to its projections a "very modest adjustment". Nevertheless with other central banks (G7 and EM) still looking far from ready to shift to a less accommodative stance, it is unsurprising that the dollar has gained on the widening of nominal rate differentials, but as 2017 progresses there may be rather more focus on real rate differentials, with a strong USD likely to bear down modestly on US inflation, while other countries may see a rather faster return to 'normal' or 'targeted ' levels of CPI, due to currency weakness. It should also be remembered in the context of the modest upward shift in the rate trajectory, that in December 2015, the Fed was projection 3/4 rate hikes this year, and has managed to deliver just one.

Eminently the start of year (transient) meltdown and the multitude of political risks have played their part in the Fed's restraint. It is therefore quite interesting to read through this somewhat testy exchange with one reporter at yesterday's press conference, (link to press conference video: https://www.federalreserve.gov/monetarypolicy/fomcpresconf20161214.htm)

Reporter: "The Dow is about to hit 20,000. It's up substantially since the election apparently on investor optimism about the potential impact of President-elect Trump's policies on the economy and an approving economy. I wonder if you share that optimism, number one. And if not, are we seeing a bout of perhaps irrational exuberance right now or are you concerned at all about a bubble in equity prices that could create some financial instability in the economy?"

Yellen: "I don't want to comment on the level of stock prices. They may have been boosted by expectations about tax policy, possible cuts in corporate tax rates that have been much discussed, or by expectations about growth, possible reductions in down side risk to the economy. But these are things that market participants are trying to view along with the likely paths of interest rates, and I think all of that factors in to movements in stock valuations. But I don't want to offer a view as to whether they are appropriate."

Reporter: "On equity prices you talked about whether or not evaluations are still within historical ranges and norms. Is Dow 20,000 kind of within the historical norms, are you comfortable with that?"

Yellen: "Rates of return in the stock market relative to - remember that the level of interest rates is low - and taking that into account. I believe it's fair to say that they remain within normal ranges."

Yellen's penchant for obfuscation remains quite remarkable.

..........................................................................

Marc Ostwald
Strategist
ADM Investor Services International
 
- It's raining central banks; BoE, SNB, Norges Bank top busy schedule;
Flash PMIs, UK Retail Sales, US CPI, NY & Philly Fed surveys, Jobless
Claims make for busy data schedule as equity markets look to
quarterly derivatives expiry on Friday

- SNB on hold, but to forcefully underline commitment to restraining
any CHF strength

- Norges Bank: some risk of slightly lower rate trajectory, but more
a signal of policy bias rather than an actual easing signal

- PMIs: Eurozone seen little changed, US Manufacturing PMI and NY/Philly
Fed seen benefitting from increasing optimism

- UK Retail Sales: downside risks from risk of reactive correction to
outsized October rise, and from uptick in some prices

- US CPI: energy prices likely to restrain CPI this month, Housing
and Healthcare as ever exercising upward pressure, apparel may again
restrain

..........................................................................

********************
** EVENTS PREVIEW **
********************

As markets digest the FOMC meeting, it is central bank policy meetings elsewhere that dominate the schedule, with the Bank of England, SNB and Norges Bank policy meetings accompanying the as expected no change from the Bank of Korea, with rates also seen on hold in Indonesia and Peru, while Banco de Mexico is seen raising rates a further 25 bps to 5.50%, which would mean a total cumulative 225 bps tightening in 2016. The statistical schedule is not short of highlights, featuring flash PMIs from Japan, the Eurozone and the USA, UK Retail Sales, Brazilian monthly GDP and US CPI, weekly jobless claims, NY & Philly Fed Manufacturing surveys, Q3 Current Account and NAHB Housing Market Index, with TIC Portfolio Flows due after the close. Equity markets will also be positioning themselves for tomorrow's quarterly derivatives expiries, while oil markets look to today's WTI options expiry.

** Switzerland / Norway - Central Bank policy meetings **
The Swiss National Bank is also seen holding policy steady (3-mth CHF LIBOR target range -0.25%/-1.25% and Sight Deposit Rate at -0.75%) and will robustly protest the strength of the CHF, and underline that it will continue to intervene when necessary. Indeed Swiss rates are expected to be unchanged until Q2 2018, according to the latest surveys, not only due to a subdued Inflation outlook, but also given the potential for safe haven flows into the CHF around the various election dates. Norges Bank is expected to hold rates ay 0.50%, but assign a slightly probability (ca 50%) to the chance of a further rate cut, primarily due to ongoing weakness in the economy (Q3 GDP just 0.2% q/q) and the recent strength of the NOK, but tacitly knowing that an overheated housing market, which the latest mortgage measures will do little to dent, and a high level of household debt are a sizeable showstopper to further easing.

** U.K. - MPC rate decision / Nov Retail Sales **
- Given the run of generally better than expected growth data, the continued upward pressure on inflation measures, including the jump in last week's BoE Inflation Expectations survey, it is little surprise that . the Bank of England is seen holding rates at 0.2% and its total QE volume steady at £435 Bln, and maintain a balanced policy outlook in the near-term, with a fairly signal that the current round of Gilt QE will not be extended in February, even if it will remain an option in the future, if required. For Retail Sales, it is unsurprising that the consensus looks for a flat m/m reading after a stellar 1.9% m/m surge in October, with somewhat higher than expected CPI implying some downside risks relative to forecasts, even if it would require a sharp downward revision to October to suggest any cause for concern (outside of the very obvious threat from the unsustainable double digit pace of credit growth).

** Eurozone/US - Dec flash PMIs **
- As is always the case with the December flash readings, the holiday related proximity to the prior month's survey imparts a low probability to any significant changes relative to November's final readings. Indeed forecasts for the Eurozone Manufacturing and Services PMI assume no change at all, while it is assumed that the broad based post-election evident in most US surveys will help spur a further uptick to 54.5 from 54.1. Today's NY and Philly Fed Manufacturing surveys are also expected to benefit from the current bout of optimism with the NY Fed measure seen at 4.0 from Nov 1.5 (best since June's 6.0) and the Philly Fed at 9.1 from 7.6 (which would be below Sept 12.8 and Oct 9.7, perhaps reflecting the heavy preponderance of refiners in the region, who continue to suffer from margin pressures).

** U.S.A. - November CPI **
- US CPI is projected to post a 0.2 m/m on both headline and core, which would see y/y rates tick up by 0.1 ppt to 2.2% and 1.7% respectively, after an energy related 0.4% m/m headline rise in October, though core CPI was well contained at 0.1% m/m. While m/m changes in headline CPI have been marching inexorably higher from July's -0.04% to October's 0.357%, energy prices (gasoline and household) are likely to break the recent trend, with moderating pressure from commodities also tempering the gain; given the continued weakness in Apparel sales seen in yesterday's Retail Sales, it also seems likely that Apparel prices will continue to restrain gains.




from Marc Ostwald
 
dow
chart updated...posted yesterday morning

i26r29.gif
 
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