Last night’s Fed meeting was an exercise in how strange these markets have become. We might as well go through what the end product has been first and then detail just how markets find themselves at a point where some people are talking about rates rising in the US as soon as April.
We were correct in our belief that the language around a ‘considerable period’ of low interest rates would be withdrawn in favour of a pledge to remain ‘patient’ in the approach to raising rates. Markets became confused, however, as the statement continued by saying that the language of here was in line with previous statements, and in no way signalled a change in policy.
Despite the revisions lower in the Fed’s latest inflation expectations for the US economy – seeing a range of 1.0%-1.6% from 1.6%-1.9% at the previous press conference – we know that core inflation, prices minus food and oil, has been strong. The first piece of the hawkish surprise from Janet Yellen was that the Federal Reserve was prepared to look through the recent slips in headline inflation. This is similar to what the Bank of England said on Tuesday and marks a deviation from previous assertions that the run in CPI measures was simply noise.
The second impetus, and what has really got the US Dollar flying higher, was the news that the Federal Reserve was unlikely to raise rates for at least a couple of meetings. A couple of meetings, now clarified as meaning two by Yellen, eliminates rate rises in January and March. I think we can still rule out April’s meeting as it is not scheduled to coincide with a Summary of Economic Projections and a press conference by Chair Yellen. That would leave us with June, and that’s where we sit looking for a rate increase.
USD loved the press conference, strengthening to nine day lows against EUR/USD and GBP/USD, four year lows in AUD/USD and gaining 200 pips against the yen. We still believe that the emphasis into the end of the year is for dollar strength; the data remains so much stronger than the circus elsewhere.
Enough has been enough for the Swiss National Bank, it seems, with the central bank cutting interest rates into negative rates this morning. Rates are now -0.25%, paying people to borrow and charging them to save. The timing of the announcement is rather strange, however. The SNB met last week and left policy as is, reiterating its ‘utmost determination’ in maintaining the floor in EUR/CHF at 1.20. The major change in markets in the past week has obviously been the situation in Russia and it is here that we must look for a rationale. The falls in the rouble has prompted a huge amount of capital flight from Russia into assets such as London property and German debt but we can imagine a fair bit is being squirrelled away in Switzerland as well.
As part of our 2015 outlook we said that the biggest fear for the SNB was the prospects of the European Central Bank unleashing such a QE policy that the ensuing sell-off in the single currency is too much to stem. It seems that, certainly in the near-term, the flows from Russia are a larger concern. EUR/CHF is up towards the 1.21 level this morning, the highest since mid-October. We will have to see further preparation by the Swiss monetary authorities in the coming months to guard against the flood of euro-selling that the market is looking for in 2015.
Elsewhere we have had the final minutes of 2014 from the Bank of England and jobs report from the UK yesterday. Internally, news from the UK economy is strong. Average weekly earnings increases of 1.4% compared to the same period last year are the strongest since March of this year. The falls in inflation that we have seen from oil and food prices have increased disposable income and taken the pressure off the Bank of England to raise rates this year. These minutes show a Bank of England that is wary of lower inflation – anticipating a fall below the 1% level at the December CPI reading – but also willing to look through these temporary, transitory effects in favour of longer term price stability. Wages need to grow more, of course, and we want to see them above the CPI target of 2% by the end of Q1 to show that the UK economy is humming along nicely.
On Russia, President Vladimir Putin is set to give his annual speech to the Russian people at 9am GMT. A TV channel released a rather bombastic trailer for it yesterday detailing the glory of Russia in Ukraine. Let’s see what he has to say about the collapse of his currency.
