Central banks back on the agenda

‘The FOMC believes that it can be patient… the committee believes it’s unlikely that economic conditions warrant an increase in the target range Fed funds rate for at least the next couple of FOMC meetings.’

Source: Bloomberg

This is a clear statement from Chairperson Janet Yellen that under current conditions the earliest the FOMC will move the target range of the Fed funds rate will be June.

Her pre-prepared remarks were broadly in line with what most Fed commentators had expected, meaning there were certainly no surprises.

However, the market tended to concentrate on the odd dovish comment around employment, such as there being ‘room for further improvement’. This saw USD weakness and a pickup in the bond and equity markets. Her general testimony around employment was that it was strong.

These wisps of dovishness continued in her testimony around inflation. Despite her suggestion the decline in inflation was down to energy prices and other short-term factors, the market picked up on her statement that, ‘wage growth remains sluggish and consumer spending, while high, is not seeing increases to inflation, which remains well below the Fed’s expectations.’. This further weakened the USD.

None of her views were actually new but the market took the testimony as slightly move dovish than before and moved the expectation of a first move in the Fed funds rate from September to October.

‘Interest rate wars’ or ‘currency wars’ – whatever market term you want to use around this issue, it has months and possibly years to run. Accommodative policy remains fixed across the world for at least the next six months.

The RBA in March

We are now a week away from the next RBA meeting and there are three major risks that would see a further rate cut on Tuesday.

Wage growth: Wage data is due today and expectations are low as wage stagnation continues. Consensus estimates are for a 0.6% increase over the quarter and 2.5% year on year. Employment and its associated conditions have become a concern for the board.

CAPEX: The key to the figures will be non-mining expectations. The medium figure is $54 billion – anything weaker will continue to illustrate the slack is not being picked up. Total CAPEX is expected to decline approximately 4.5%

AUD: Remains stubbornly higher than both the historical average and the target level of the RBA. This is despite the rate cut in February and commodity prices collapsing. As Yellen’s testimony this morning has seen the AUD back above 78 cents, will it prompt a further cut?

The interbank market at the close of business last night believes there is only a 38% chance of a cut come Tuesday.

Ahead of the Australian open

It’s the final day of the Chinese New Year celebrations today. However, we will get data from China with the flash release of HSBC manufacturing numbers. Expectations are for a further contraction from small and medium enterprises.

Iron ore traded higher yesterday to $64.04 a tonne and may continue to flow through to BHP after its results were met with optimism as the underlying numbers were well ahead of market expectations.

Countering positives in materials and the banks space is the fact 13 points are likely to come out of the market for dividends as Telstra goes ex. It will be interesting to see how it trades ex-div with CEO David Thodey stepping down and new CEO Andy Penn outlining his strategic plan for the communications giant

Ahead of the open we are calling the ASX flat, up only a handful of points to 5934.

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