- As expected, last night’s FOMC statement stroke an upbeat tone while keeping the policy outlook unchanged.
- US banking sector stress test results were broadly positive.
- The strong rally in US equities has fuelled Asian gains this morning.
- Today’s rate decision in Norway will be closely followed – we expect no changes
Last night’s FOMC statement was largely as expected, as Fed officials held their course while sounding slightly more upbeat than in January. There were no changes to the policy outlook, with the statement still indicating that rates will be kept “exceptionally low” through late 2014 repeated and that all QE programmes will continue. The backward looking part of the statement acknowledged the improvement on the labour market, while noting that the unemployment rate remains elevated. The impact of the rise in energy prices on inflation was viewed as temporary in nature. In our view, the Fed will keep rates unchanged until mid-2014 (see Flash Comment dated 13 March 2012 for details).
The US Fed released banking sector stress test results two days ahead of time. The results were broadly positive, indicating that 15 out of the 19 banks would be able to maintain capital levels above a regulatory minimum in an “extremely adverse” economic scenario, even while continuing to pay dividends and repurchasing stock. Only if their core capital ratios remained above 5%, the banks would be allowed to increase their payout to shareholders. The financial institutions that failed the test were Citigroup, SunTrust Banks, Ally Financial and MetLife (see Financial Times and Fed press release).
US equities were underpinned by solid economic data, as sales at US retailers showed solid gains in February (act.: 1.1% m/m, cons.: 1.1% m/m, prev.:0.4% m/m). Stocks lost some momentum in the wake of the FOMC statement, but climbed later in the session as support was stemming from the US stress test result, driving the S&P financials index to a 3.9% gain. Overall, the rally pushed the Nasdaq index above 3,000, the highest level in eleven years, while the S&P500 index reached the highest levels since mid-2008. The positive sentiment has carried over to Asia this morning, where the key indices are trading with large gains.
US bond yields moved higher driven by the lack of easing signals in the FOMC statement. Furthermore, the robust economic data and healthy gains in risky assets added to the losses for holders of Treasuries.
In the FX market JPY has sustained further losses, being the big loser in the recent USD recovery. The trend lower in EUR/USD has also persisted, as stronger US data haveoutweighed the positive impact on EUR from rising risk appetite.
Global Daily
Focus today: We have a couple of interesting releases today. We expect to see a rebound in euro area industrial production in January with an increase of 0.3% m/m. Also details on the February euro area inflation will be released, where we expect to see a minor increase in core inflation to 1.6% from 1.5% in January. However, with regard to inflation it is mainly the contribution from increasing oil prices that is in focus. This time around we do not expect any response from the ECB. In the UK data on jobless claims and the unemployment rate could attract attention. In the US current account data will be released but focus is more likely to be on Ben Bernanke who will be given a chance to elaborate on the FOMC statement when he will be speaking in Nashville. In Scandi markets, focus will be on the rate decision in Norway (see Scandi Daily for details).
Fixed income markets: US rate markets broke some important support levels yesterday and are now establishing a new trading range. With strong retail sales and a slightly more upbeat Fed, the strong 10yr auction was not sufficient to prevent 10yr Treasuries to move through the 2.06-2.08% levels. They are now trading 2.15% - the highest since October and the next support area is around 2.20-2.25% and then 2.40%. The surrendering in the US markets overnight is likely to have some rub-off effect on the European swap curve, which is likely to see a bearish steepening again today. In the euro government bond market Italy is printing up to EUR5bn 2½’15 bonds and up to EUR1bn 4¼’19 bonds. We look for healthy demand at the auctions given the recent improvement in the conditions of the Italian sovereign debt market. Tonight the US Treasury will issue USD13bn 30yr bonds and it will be interesting to see if investors increase their bid after the sell-off.
FX markets: The recent bout of USD strength has been somewhat puzzling, as it has coincided with strong performance in risky assets. However, the continuous flow of strong US data has move front-end yield spreads in the dollar’s favour, and the move lower in EUR/USD in March is consistent with the narrowing of the EUR-USD yield spread, as investors have priced out the probability of further Fed QE. As the Fed remains firmly on hold, this should also imply that the downside to EUR/USD is limited, however. In this respect, focus will be on today’s speech by Bernanke. In terms of USD/JPY, apart from USD strength we have also seen JPY-specific factors drive the move higher, including the worsening of Japan’s external balances and more aggressive BoJ easing. For a hint on the future direction of the pair, we will also keep an eye on the investment plans of Japanese life insurers, which are usually published late
March.
Scandi Daily
Norway: We expect no change in interest rates from Norges Bank today. This is also the consensus view. Hence, all eyes will be on what signals the bank sends out about future monetary policy in the monetary policy report. It is unlikely to indicate any imminent change in interest rates, so the new interest rate path in the monetary policy report will be key. Strong growth in the domestic economy, including a tight housing market, argues against cutting interest rates and actually for a rate hike. On the other hand, the strong NOK argues against a rate hike and for a rate cut. All in all, we expect the new monetary policy report to present a downward adjustment of the interest rate path by 50-80bp in 2012 and 2013 but it will not point to a rate cut. Nevertheless, this will be significantly above the current market pricing.
The signals of the impact on monetary policy from a stronger NOK have been blurry recently. We think NB will acknowledge that there are fundamental factors behind the appreciation and that rate cuts will have a limited impact on inflation and competitiveness in the medium and long term. However, it will make it perfectly clear that there are limits to how large an appreciation it can accept. Hence, a more aggressive approach than seen in the annual address in February. If we see a spike in EUR/NOK today we will use it go long NOK.