Still Rehabing Their Balance Sheet

January 30th, 2015 9:01 pm

The WSJ is running an article which states that consumers are saving large chunks of the windfall they have received with the crash of energy prices. According to the story credit card company Visa suveyed cardholders and determined that consumers are saving about half of what has accrued to them with the decline in energy prices.

Via the WSJ:
Savings at the Pump Are Staying in Wallets
Cautious Consumers Are Choosing to Sock Away Extra Cash
Americans are keeping, not spending, much of the cash saved as gas prices fall.
Robin Sidel and
Nick Timiraos
Updated Jan. 30, 2015 7:15 p.m. ET

Americans are taking the money they are saving at the gas pump and socking it away, a sign of consumers’ persistent caution even when presented with an unexpected windfall.

This newfound commitment to frugality was illustrated this past week when the nation’s biggest payment-card companies said they aren’t seeing evidence consumers are putting their gasoline savings toward discretionary items like travel, home renovations and electronics.

Instead, people are more often putting the money aside for a rainy day or using it to pay down debt. That more Americans are saving their bounty at the pump comes as a surprise, because the personal savings rate, after rising during and after the recession, has declined steadily over the past two years.

“We haven’t seen the extra savings from lower gas prices translate into additional discretionary consumer spending,” said Ajay Banga , chief executive of MasterCard Inc., on a conference call Friday to discuss quarterly earnings.

The new data is perhaps the best indication to date that the pain of the recession remains fresh in the minds of many Americans, even as the economy picks up steam.

The Commerce Department said Friday that the U.S. economy grew at a 2.6% annual rate in the fourth quarter. Personal consumption expenditures rose 4.3% at a seasonally adjusted annual rate in the last three months of 2014, representing the biggest increase since the first quarter of 2006.

Also on Friday, the University of Michigan said consumer sentiment in January reached its highest level in 11 years. The closely watched index has increased in each of the past six months, rising 20% since July.

But that positive outlook doesn’t mean consumers feel emboldened to splurge with their savings at the pump, and card-company executives said spending growth would have been higher if consumers had put their gas savings toward more big-ticket items rather than savings.

This year through Jan. 26, the national retail price for gasoline averaged $2.21, according to the U.S. Energy Information Administration. Average gas prices on Friday reached $2.05 a gallon, down nearly 45% since June, when they stood near $3.68 a gallon, according to auto club AAA.

That translates to average savings about $60 a month for the average consumer, according to industry estimates, or more than many workers have received in pay raises in years.

A survey of 4,500 consumers conducted for Visa Inc. in early January found that consumers are hanging onto roughly half of their gasoline savings.

Another 25% is being used to reduce debt, while the rest is being spent on small purchases like groceries, clothing and fast food.

“Since the recession, you have a much more cautious consumer,” said Wayne Best, chief economist at Visa.

Both Visa and MasterCard said in earnings reports late this week that consumers spent more money on their credit cards and debit cards in the fourth quarter, but the lower gas prices put a lid on the companies’ growth rates. Discover Financial Services Inc. made similar statements last week, and it blamed lower gas prices for lowering its growth rate.

“It’s a party at the pump,” says Leo Divinsky of Los Angeles, who says his wife already is using some of his family’s $75-a-week gas savings to pay down credit-card debt.

But the asset manager for a commercial-real-estate developer says he isn’t planning any major spending, outside of more frequent road trips to see his brother in Northern California if fuel prices stay low.

Gasoline spending tumbled 23.8% in January from year-ago levels, according to First Data Corp. which processes electronic payments for more than six million merchants.

Economists say the consumer benefits from lower gas prices tend to accrue over time and that it isn’t unusual for people to stash any initial savings from the pump. If crude-oil prices were to stay at $50 a barrel this year, that would translate to savings of roughly $1,325 per household on gas over the coming year relative to last year’s spending, according to an estimate prepared for The Wall Street Journal by ClearView Energy Partners.

As consumers become more convinced that lower prices “are permanent, they’re more likely to spend it,” said Lewis Alexander, chief U.S. economist with Nomura Securities. So far, “the initial reaction has been to save it.”

Mr. Banga of MasterCard said consumers may need to see low gas prices for two or three more months before they feel comfortable plowing the savings into other types of spending.

Consumers’ confidence about their job situations can also shape how much they are likely to spend. With the unemployment rate falling steadily and employers consistently adding more than 200,000 jobs a month, “the positive effect on the economy should be magnified,” said Torsten Slok, chief international economist at Deutsche Bank .

Mr. Slok isn’t much discouraged by reports that consumers are spending money to pay down debt, either, given concerns that household-debt burdens—while down from their recession highs—are still elevated. “We should be happy that consumers are paying down debt, and we should be happy that consumers are spending,” he said.

Kathryn Grayson, a 23-year-old graphic artist in Asheville, N.C., commutes about 15 minutes to work each way but hasn’t yet decided where to put her gasoline savings.

“Honestly, I should just try to make extra car payments,” she said. “Every little bit helps.”

Write to Robin Sidel at and Nick Timiraos at





GDP Perspective

January 30th, 2015 10:07 am

Via Jay Morelock at FTN Financial:

Quarter-over-quarter fluctuations in GDP contain a lot of noise, allowing economists and market pundits to pick and choose statistics to make their case for a strong or weak economy.  No matter how many times CNBC tells us the economy is strong – that we are right around the corner from escape velocity – the numbers tell a different story.

These year-over-year GDP numbers tell a story of steady growth; not spectacular, not dreadful.  And while these numbers may by the envy of the developed world, they are nothing to brag about from an historical perspective. They certainly do not point to breakout growth.

Expectations of robust future growth are based on models of an economy that hasn’t been in place for more than 10 years.  Five years into a “recovery” where we have yet to hit 2.5% GDP growth may signal it is time to reevaluate our assumptions.

Jay Morelock

Secondary market Trading of Corporate Bonds: Still Heavy

January 30th, 2015 7:19 am

Via Bloomberg:

IG CREDIT: Trading Volume Remains at Record High Levels
2015-01-30 10:46:26.974 GMT

By Robert Elson
(Bloomberg) — Trace count for secondary trading ended at
$19.2b vs $20.8b Wednesday, the highest session in the history
of the Trace aggregates, vs $18.2b last Thursday.
* $19.2b yday, 7th highest volume since Jan. 2005
* Previous days over $20b were in Sept. 2013, May 2009; 5 days
between $19b-$20b have occurred
* 10-DMA $16.1b
* 4-wk moving avg was $14.3b yday, more than on 96% of trading
days since Jan. 2005
* Most active issues longer than 3 years
* VZ 6.55% 2043 with client selling 6:5 over buying,
together accounting for 75% of volume
* T 4.35% 2045 was next with client flows at 72%
* ETN 2.75% 2022 was 3rd, client flows at 96% of volume
* ETN 2.75% 2022 was 3rd, client flows at 96% of volume</li></ul>
* MDT 3.50% 2025 was most active 144a issue; client flows took
88% of the volume with selling 1.7x buying
* BofAML IG Master Index at +151, unchanged; 2014 range was
+151, seen Dec 16; +106, the low and tightest spread since
July 2007 was seen June 24
* Standard & Poor’s Global Fixed Income Research IG Index
unchanged at +181, for 5th session in a row; +182, the wide
for 2014-2015, was seen Jan. 16; +140, the 2014 low and new
post-crisis low was seen July 30, 2014
* Markit CDX.IG.22 5Y Index at 67.8 vs 68.3; 76.1, the wide
for 2014 was seen Dec 16; 55 was seen July 3, the low for
2014 and the lowest level since Oct 2007
* IG issuance totaled $6.2b Thursday; weekly volume $18.45b,
and 2015 at $132.25b.
* Pipeline of expected domestic, SSA issuers and M&A-related
deals for 2015

What to Watch Today

January 30th, 2015 7:18 am

Via Bloomberg;

* (All times New York)
Economic Data
* 8:30am: Employment Cost Index, 4Q, est. 0.6% (prior 0.7%)
* 8:30am: GDP Annualized, 4Q Advance, est. 3% (prior 5%)
* Personal Consumption, 4Q, est. 4% (prior 3.2%)
* GDP Price Index, 4Q, est. 0.9% (prior 1.4%)
* Core PCE, 4Q, est. 1.1% (prior 1.4%)
* Core PCE, 4Q, est. 1.1% (prior 1.4%)</li></ul>
* 9:00am: ISM Milwaukee, Jan., est. 58 (prior 57.61)
* 9:45am: Chicago Purchasing Manager, Jan., est. 57.5 (prior
58.3, revised 58.8)
* 10:00am: U. of Mich. Sentiment, Jan. final, est. 98.2 (prior
* U. of Mich. Current Conditions, Jan. (prior 108.3)
* U. of Mich. Expectations, Jan. (prior 91.6)
* U. of Mich. 1 Yr Inflation, Jan. (prior 2.4%)
* U. of Mich. 5-10 Yr Inflation, Jan. (prior 2.8%)
* U. of Mich. 5-10 Yr Inflation, Jan. (prior 2.8%)</li></ul>


January 30th, 2015 7:15 am

Via Marc Chandler at Brown Brothers Harriman:

Danish and Russians Cut Rates

- The Danish central bank cut its deposit rate again yesterday from -0.35% to -0.50%, the third cut in ten days
- The Russian central bank surprised markets by cutting rates by 2 percentage points to 15.0%
- Data out of Europe today was largely upbeat, though deflation concerns are as strong as ever
- During the North American session, the US reports Q4 GDP, with consensus at 3.0% SAAR vs. 5.0% in Q3
- Brazil reports December PPI and fiscal data; Colombia central bank meets

Price action:  The dollar is mixed against the majors.  The yen is outperforming, with dollar/yen trading near 117.50.  The dollar bloc continues to underperform, all down against the US dollar today.  The euro is trading around $1.1350, while cable is trading just below $1.51.  EM currencies are mostly softer, with RUB the worst performer after the central bank surprised with a 200 bp rate cut to 15%.  BRL, IDR, ZAR, and TRY are also underperforming.  MSCI Asia Pacific fell 0.2%, the third straight down day as the 0.3% gain in the Nikkei was offset by larger losses in China and India.  Euro Stoxx 600 is down 0.4% near midday, while S&P futures are pointing to a lower open.  The 10-year UK gilt yield is trading at a record low 1.39%.

  • The Danish central bank cut its deposit rate again yesterday from -0.35% to -0.50%, the third cut in ten days.  The last one was on January 19.  The country is using both of its tools to maintain the narrow band against the euro.  It has also intervened, with estimates ranging from €5-8 bln this week.  Under ERM II, it is committed to keeping the DKK in a 2.25% band against the euro, but in practice has adopted a 1% band.  Under ERM, the central bank is obligated to defend both sides of the band, the strong and the weak.  Unlike the SNB’s franc cap, the Danish regime is supported by the ECB.  Will the ECB act to defend the euro against the rising Danish krone?  Since it has not exercised inter-margin intervention at the 1% band, will it be there if the 2.25% band it tested?  
  • Meanwhile, the euro has rallied strongly against the Swiss franc this week.  After the Greek election, the euro tested CHF0.98.  Today it briefly resurfaced above CHF1.05.  The market suspects SNB intervention.  This reaffirms our understanding that the lifting of the franc was a tactical decision and did not signal a free float or the end of the SNB’s balance sheet expansion.
  • The Russian central bank surprised markets by cutting rates 2 percentage points to 15.0%.  We did note that the new man at the central bank, Dmitry Tulin, was placed as the head of monetary policy to take some action, but we didn’t expect it to happen so soon.  The central bank stated that “Inflation and inflation expectations are forecast to decrease as the economy gradually adjusts to changing external conditions and the impact of the exchange-rate dynamics on prices wanes.”  The ruble is down nearly 3% against the basket and 4% against the dollar, and we expect to revisit the December lows in the coming weeks.  Separately, European Union foreign ministers extended (by six months) the targeted sanctions against Russian individuals and companies, but fell short of creating new stations.  Meanwhile, Germany appears to be doubling down on its line towards Greece.
  • Data out of Europe today was largely upbeat, though deflation concerns are as strong as ever. Looking at the wider eurozone, CPI came in at -0.6% y/y vs. -0.5% consensus and -0.2% in December.  Eurozone unemployment rate was slightly better than expected at 11.4% in December.  Germany reported December retail sales at 4.0% y/y vs. 3.6% consensus.  France also reported December consumer spending up 0.5% y/y vs. -0.5% expected.  Spain reported Q4 GDP growth higher than expected at 2.0% y/y vs. 1.6% in Q3 and harmonized CPI at -1.5% y/y.  Also, Spain’s current account balance continues to improve, rising to €1.7 bln from just €0.3 bln.  The numbers show that deflation in Spain is not preventing growth and also that the recovering economy does not stand in the way of Podemos.  In the UK, consumer sentiment hit a 5-year high, rising from -4 to 1 in January.  Expectations were for a print of -2.
  • There was a lot of data out of Japan overnight.  The labor market continued to tighten with the unemployment rate falling to 3.4%, the lowest level since late 1997, and the job-to-applicant ratio edging higher to 1.15, the highest since March 1992.  The participation rate rose slightly to 59.3%.  Despite the encouraging trend, compensation is still not rising meaningfully.  Japan reported December national and Tokyo January CPI.  The former came in at 2.4% y/y vs. 2.3% consensus, while the latter came in at 2.3% vs. 2.2% consensus.  Ex-fresh food and energy measures for both series were largely close to consensus.  Japan also reported December IP up 1.0% m/m vs. 1.2% consensus and -0.5% in November, as well as overall household spending at -3.4% y/y vs. -2.3% consensus.  Overall, the data support the notion that the economy remains hobbled by the consumption tax hike, with consumer spending weak and inflation still likely to come in under target.  
  • During the North American session, the US reports Q4 GDP, with consensus at 3.0% SAAR vs. 5.0% in Q3.  By way of comparison, the Atlanta Fed’s GDP NOW model is tracking at 3.5% growth for Q4.  The US will also report Q4 Employment Cost Index (ECI).  Canada reports November GDP, with consensus at 2.1% y/y vs. 2.3% in October.
  • The FOMC embargo ends today, with Rosengren slated to speak this afternoon.  Next week sees Bullard, Kocherlakota, Mester, Rosengren again, and Lockhart all speaking.  We expect the upbeat message from the statement to carry over into the remarks, with the Fed still on track to hike rates near mid-year.
  • Brazil reports December PPI and fiscal data.  Primary balance is seen at BRL8.2 bln vs. -BRL8.1 bln in November.  If so, the 12-month total would still move further into deficit territory.  Indeed, the fiscal numbers are likely to get worse before they get better.  Note that tax revenues contracted y/y in December for the second straight month.  The current account gap was wider than expected in December, and highlights the growing “twin deficits” problem in Brazil.  For USD/BRL, support seen near 2.60 and 2.55, resistance seen near 2.65 and then 2.70.
  • Colombian central bank meets and is expected to keep rates steady at 4.5%.  However, with the economic outlook weakening, we think an easing cycle will start in 2015.  The last move was a 25 bp hike to 4.5% back in August.  Inflation was 3.7% y/y in November and December, and consensus for January CPI due out next week is 3.8%. . This would a new high for the cycle, and barely within the 2-4% target range.  The central bank may feel more comfortable waiting for inflation to move back towards the 3% target before cutting rates.  For USD/COP, resistance seen in the 2460-70 area, and break above would suggest a test of the March 2009 high near 2610.  Support seen near 2350 and then 2300.
  • South Korea December IP rose sharply to 3.0% m/m, well above the expected at 0.9% m/m. However, the future doesn’t look so bright.  February manufacturing forecast sentiment dropped to 73 from 77 in January.  New orders dropped to 88.  Korea will be the first to report January trade over the weekend.  Exports are seen -2.8% y/y and imports -6.2% y/y.  If so, this does not bode well for global activity to start off the year.  Brazil will report January trade on Monday.

Job Creation in 2014

January 29th, 2015 11:03 am

A fully paid up subscriber sent this abstract of a research paper from the NBER which posits that the job gains in 2014 were a result of the decision by Congress in late 2013 to not reauthorize extensions of emergency unemployment benefits.

Access to the full paper is available for $5.

Via the NBER:

Marcus Hagedorn, Iourii Manovskii, Kurt Mitman

NBER Working Paper No. 20884
Issued in January 2015
NBER Program(s):   EFG

We measure the effect of unemployment benefit duration on employment. We exploit the variation induced by the decision of Congress in December 2013 not to reauthorize the unprecedented benefit extensions introduced during the Great Recession. Federal benefit extensions that ranged from 0 to 47 weeks across U.S. states at the beginning of December 2013 were abruptly cut to zero. To achieve identification we use the fact that this policy change was exogenous to cross-sectional differences across U.S. states and we exploit a policy discontinuity at state borders. We find that a 1% drop in benefit duration leads to a statistically significant increase of employment by 0.0161 log points. In levels, 1.8 million additional jobs were created in 2014 due to the benefit cut. Almost 1 million of these jobs were filled by workers from out of the labor force who would not have participated in the labor market had benefit extensions been reauthorized.

Five Year Auction

January 29th, 2015 10:33 am

Via CRT Capital:

We are apprehensive about this morning’s 5-year auction as the sector has recently pushed toward the yield lows and is only offering a modest outright concession. Moreover, with the WI suggesting the lowest yield for a new 5-year since May ’13 we’re cognizant that could prove a disincentive to bid aggressively. The FOMC meeting triggered a solid bid on Wednesday and we’re expecting that a more significant accommodation will be required to takedown the new issue.  Recent history illustrates that 5s tend to tail, doing so at seven of the last nine auctions and while the average stop-through is larger (1.3 bp) than the average tail (0.8 bp), the frequency of tails overwhelms.  On the other hand, foreign demand has been strong for Treasuries as an asset class vs. lower-yielding European sovereigns and the liquidity provided by the auction could prove enticing – note that foreigners tend to buy roughly 17% of the 5-year auction. Issuing 5s and 7s on the same day muddies the data a bit, but volumes are strong for an auction day at 111% of the norm.

* 5s have recently seen weak receptions with seven of the last nine auctions tailing for an average of 0.8 bp vs. two stopping-throughs averaging 1.3 bp.

* Foreign buying has ticked higher recently, taking 17% at the last four auctions vs. 16% of the prior.  Foreigners bought $14.6 bn of the maturing issue – middle-of-the-range for rollover potential.

* Non-dealer bidding has been steady at 5-year auctions recently, taking 64.6% at the last four auctions vs. 65.1% at the prior four.  Investment Fund buying has increased, taking 43% of the last four auctions vs. 39% at the prior four.  On an outright basis, fund buying has taken $15.2 bn vs. $13.8 bn prior.

* Technicals are mixed with momentum in the middle of the range with both fast and slow stochastics at 49.  We’re looking to the recent range as the most relevant trading parameters and see initial resistance at the FOMC-day low yield-print of 1.223% and then the Jan low yield-close of 1.157% with the range bottom at 1.150% immediately beyond there.  For support we have a modest volume bulge near 1.31% before this week’s range top at 1.362% and also note the downward-sloping trendline at 1.380% before the 21-day moving-average at 1.40%.

What to Watch for Today

January 29th, 2015 7:12 am

Via Bloomberg:

* (All times New York)
Economic Data
* 8:30am: Initial Jobless Claims, Jan. 24, est. 300k (prior
* Continuing Claims, Jan. 17, est. 2.405m (prior 2.443m)
* Continuing Claims, Jan. 17, est. 2.405m (prior 2.443m)</li></ul>
* 9:45am: Bloomberg Consumer Comfort, Jan. 25 (prior 44.7)
* 10:00am: Pending Home Sales m/m, Dec., est. 0.5% (prior
* Pending Home Sales y/y, Dec., est. 10.8% (prior 1.7%)
* Pending Home Sales y/y, Dec., est. 10.8% (prior 1.7%)</li></ul>
* 10:00am: ISM Seasonal Adjustments
* 11:00: U.S. to announce plans for auction of 3M/6M/1Y bills
* 11:30am: U.S. to sell $35b 5Y notes
* 1:00pm: U.S. to sell $29b 7Y notes

Is the Global Economy Hooked on the US Dollar

January 29th, 2015 6:48 am

This research piece was sent to me by Martin Enlund who is the author and Chief FX strategist at Nordea Markets. It is an interesting and worthwhile read. I apologize to Mr Enlund for leaving out some charts which do not translate well to my low rent blog.

Via a fully paid up subscriber (Martin Enlund):

Well I don’t know why I came here tonight,

I got the feelin’ that somethin’ ain’t right,

I’m so scared in case I fall off my chair,

And I’m wonderin’ how I’ll get down the stairs

- Stealers Wheels – Stuck in the Middle With You


Caveat: this mail has nothing to do with the Fed’s most recent decision, but provide food for thought on USD liquidity and markets potential dependency thereof. For Nordea’s take on yesterday’s FOMC decision, read here.


The liquidity elephant in the room  

Why is it that, every time the Fed stops its money-printing programs, or initiates the end of such programs (the tapering process), global nominal activity eases, inflation expectations drop, the USD appreciates, volatility rises and long-term bond yields plummets? (chart 1)

It could be that either i) the Fed’s QE programs have been more important than thought, as they have provided abundant USD liquidity to the rest of the world (which needs a lot of it, see our pieces on Quantitative Tightening), or ii) the programs haven’t very important at all: the 2009-2015 relationship between QE and both real and financial developments is mostly noise.

The first argument infers that the world is much more dependent on USD liquidity than commonly thought. Why could this be? Being the only true safe-haven currency, and the currency most often used in pricing and transactions, countries will want to have FX reserves of which the most must be in USD (having e.g. EUR, CHF or SEK would help little in a  truly adverse scenario). Maybe world trade cannot grow without a rising supply of USD / without FX reserves growing? It could be added that six years of zero-interest rate policies and QE program may have made the rest of the world more dependent on USD than in earlier times (due to the USD now being used as a funding currency to a greater extent, which suggests higher structural demand for USD in coming years – for instance in FX reserves). In short, if the market needs to re-price the availability of USD liquidity, it would be positive for the price of the USD, but also disinflationary for the world via its effects on world trade and global activity. (A consensus economist would not agree with any portion of this).

According to the second line of thinking, the “QE on/QE off” phenomenon is just a bogus correlation: the positive effects from a drop in interest rates (caused only marginally by QE expectations) have caused a boost to global activity just as the Fed had formally initiated a QE program. This bounce in activity eventually led to higher bond yields, of which the delayed negative effects just happened to kick in as the Fed ceased its new money-printing program. Looking ahead, a leading indicator based on changes in interest rates does indeed global activity should pick up and indeed accelerate soon after Easter this year (chart 2). If this is what will play out this year, all will be well – and the ECB will congratulate themselves on work well done! (even though they should not).

If the world is hooked on USD liquidity, how should we think?

The first theme is the more interesting of the two (goldilocks scenarios seldom are, at least not for the FI & FX crowd).  If the rest of the world is more dependent on USD liquidity than commonly believed, then the recent disinflationary process will continue until either i) the Fed launches a new QE program providing liquidity, or ii) US domestic demand grows quick enough so as to widen the current account deficit materially (through which the rest of the world will obtain USD liquidity), or that iii) the USD appreciates enough so that it via price effects provides a widening of the current account deficit. It does seem as if the pattern since the eighties suggest that at least some crises (LatAm, Asia) were “solved” with a widening of the US current account deficit (chart 3)

Last year’s dramatic oil price developments fit quite nicely with this non-consensus conjecture. The US non-petroleum trade deficit has been widening since 2010, but since the US has been growing more self-sufficient in terms of energy, the trade balance has actually narrowed – as have the current account deficit. The rest of the world would have been able to obtain more dollar liquidity since 2010 if not for the structural changes in the energy sector (chart 4).  The drop in oil prices should however help the US trade deficit to widen as the US shale industry lowers its oil production (when?), which would then prompt wider trade and current account deficits.

EM FX reserves held in custody at the Fed have been declining since September, in a manner reminiscent of what happened after then-Fed chairman Bernanke triggered the global taper tantrum in 2013 (chart 5).

In this light, maybe Singapore’s recent move to ease monetary policy, or China’s decision on liquidity and its changes to CNY fixings are just natural consequences of the rest of the world trying to compete for now less ample USD liquidity.

If true, we should expect further broad USD appreciation, and for the US to import more of the world’s disinflation as a result. Keep an eye on EM FX reserves, if they start growing briskly it should be a sign of a positive turning point as the consumer of last resort – the American one – will finally be back to bail us all out.


January 29th, 2015 6:36 am

Via Marc Chandler at Brown Brothers Harriman:

Dollar Firmer after FOMC

- The FOMC meeting was a non-event
- German state CPI data started to come out
- RBNZ kept rates steady at 3.5%, as expected, but introduced possibility of rates going either up or down
- South Africa Reserve Bank meets and is expected to keep rates steady at 5.5%
- Banco de Mexico meets and is expected to keep rates steady at 3.0%

Price action:  The dollar is mostly firmer against the majors in the wake of the FOMC meeting.  The antipodeans are underperforming.  Kiwi is sharply lower after the RBNZ moved to a more neutral stance regarding rates, trading below .7300 for the first time since March 2011.  It has dragged Aussie below .7800 ahead of next week’s RBA meeting. The Scandies are outperforming. The euro is trading near $1.13, while cable is trading near $1.5150.  Dollar/yen initially rose after weaker than expected Japan retail sales, but has since fallen back below 118.  EM currencies are broadly weaker, with RUB, TRY, and KRW underperforming.  MSCI Asia Pacific was down 1.4%, with China underperforming, weighed down by talk of further curbs to margin trading accounts.  Euro Stoxx 600 is down 0.2% near midday, while S&P futures are pointing to a lower open.

  • As we expected, the FOMC meeting was a non-event.  Policy was kept steady, and the Fed retained “patient” with regards to starting the tightening cycle.  Note that the two dissents from December (Fisher and Kocherlakota) are not on the FOMC in 2015.  Thus, this vote was unanimous.  Looking at the side-by-side comparisons with the December statement, economic activity was upgraded from “moderate” to “solid” while jobs growth was upgraded from “solid” to “strong.”  It added a new phrase about “international developments” that suggests a possible delay to rate hikes.  But short of full-blown crisis in the rest of the world, we don’t think the Fed will alter their timeline very much.  If we had to characterize this statement, we’d say it leans more towards being hawkish than being dovish.  
  • It’s worth noting that the dollar ended Wednesday at or near the highs against most of the majors and EM, the yen being the main exception.  With the dollar maintaining or extending those gains, we think our hawkish take is the right one.  That is, the Fed has upgraded growth and jobs outlooks, and remains on track to hike near mid-year.  US equities ended Wednesday near the lows and futures are pointing to a lower open today, also suggestive of a more hawkish Fed take.
  • There was a lot out on the data front, and here is a summary.  German state CPI data was on the soft side, pointing to a growing risk of deflation at a national level.  Nationwide CPI is due out later today, expected at -0.1% y/y (-0.2% y/y EU harmonized).  Germany also reported steady December unemployment rate at 6.5%.  Eurozone M3 rose 3.6% y/y in December, slightly higher than expected and enough to bring the 3-month average to 3.1%, up from 2.7%. Of note, this was the first increase in bank lending since July 2012.  Spanish retail sales for December rose sharply to 6.5% y/y from 1.9% in November, a far larger increase than expected.
  • Before that, Japan released a set of very weak retail sales figures.  The December readings came in at 0.2% y/y, down from 0.5% in the previous month and well below the 0.9% expected. The rate was -0.3% on a m/m basis.  Dollar/yen initially rose on the weak data, but has since drifted lower.  During the North American session, weekly jobless claims and December pending home sales will be reported.  
  • The RBNZ as widely anticipated adopted a more neutral tone.  Its more aggressively hawkish comments about the currency led to a sharp drop in the New Zealand dollar.  It fell below $0.7300 for the first time since March 2011.  It traded just below $0.7900 on January 15, just to put the move in context.  The Australian dollar was dragged lower, even though the terms of trade figures were not as poor as feared.  A well-known local RBA watcher stuck with expectations for the RBA to ease next week, even though the slightly firmer than expected CPI figure Wednesday had appeared reduce the chances.
  • South Africa Reserve Bank meets and is expected to keep rates steady at 5.5%.  After the lower than expected CPI print for December, Governor Kganyago said the bank was assessing the impact of lower oil prices before making a call on whether to cut interest rates.  This meeting seems too soon, but there is a chance of a dovish surprise.  If not, we think a cut at the March 26 meeting is almost certain if current disinflation trends continue.  Before the policy decision, South Africa reports December PPI, expected to rise 6.0% y/y vs. 6.5% in November.  For USD/ZAR, support seen near 11.40 and then 11.20, resistance seen near 11.60 and then 11.80.
  • Banco de Mexico meets and is expected to keep rates steady at 3.0%.  Inflation is falling sharply, and suggests that Carstens will likely reevaluate his outlook for higher Mexico rates in 2015.  Indeed, we look for a fairly dovish statement again, same as the last one.  After being consistently dovish this past year, Carstens warning of higher rates really caught markets off guard.  However, 1-year swap rates have moved back to the lows after a brief Carstens-related spike higher in late December/early January.  We still think the risk is tilted towards lower Banxico rates, not higher.  For USD/MXN, support seen near 14.50, resistance seen near 15.00.
  • The Philippines Q4 GDP surprised on the upside, rising by 6.9% y/y and translating into a 6.1% growth for the year.  This was the best three year expansion since the mid-1950s.  It appears as if the industry-friendly policies of President Aquino are bearing fruit, but certainly lower oil prices are helping as well.  For USD/PHP, support seen near 44.00 and then 43.50, resistance seen near 44.50 and then 45.00.