Tag Archives: US Federal Reserve

US interest rates: Ignore the scaremongers, non-farm payrolls aren’t enough to derail Yellen

When Janet Yellen speaks in Philadelphia later today, everyone will have just one question on their minds – when will the US Federal Reserve next raise interest rates?

Fed members had been hinting at another rate hike over the summer, but equities are today trading higher – and the dollar is weaker – in anticipation of no change over the summer months, following last Friday’s highly disappointing non-farm payroll (jobs) numbers.

Official data on Friday showed that the US economy added 38,000 jobs last month – the fewest in more than five years – which pushed back expectations of a rate rise until later in the year.

But NFP data is a very small part of the story – and Fed chair Yellen knows it. The surprisingly low figure has been seen as an anomaly by some market commentators, contrasting with broader signs of a US economic recovery.

“Something about the NFP numbers don’t add up for me, when you compare them to more positive recent data such as regional reports from the Beige Book,” said Kully Samra, managing director of Charles Schwab in London.

“Two Fed members have already implied that the figures were an anomaly and I expect Yellen will do the same. I don’t think the NFP data would change the stance of the Fed.”

Perhaps a bigger factor in the expected no-change result at the 15 June meeting of US policymakers is the imminent risk of Brexit, ahead of Britain’s EU referendum vote on 23 June.

“I was amazed as to the degree of importance the Fed puts on the EU referendum,” said Samra. “It was mentioned in the minutes of the last meeting due to its potential impact on the global financial markets.”

Augustin Eden, research analyst at Accendo Markets, agreed. “Suffice to say that a US rate hike seems unlikely either in June or July given the iffy print and added headwinds provided by an intensifying Brexit whirlwind,” he said.

“[But] there remains an outside chance the FOMC will act despite the dire jobs number – it was after all just one number – since to do so would at least signal that US economic conditions are right and that the Federal Reserve is not hiding anything from us.”

While a rate rise now looks more likely later in the year, this should not simply be put down to the NFP number and certainly does not mean the US economy is doing badly. It’s actually faring pretty well, the Fed just needs to convince the markets, as Samra explains.

“There is a difference between where the Fed and where the market wants rates to be,” he said. “Rates have been low for so long and there is a disparity about how strong the economy is.

“It’s all about the consumer – they’re at the heartbeat of the domestic economy,” he added. “Data shows they are continuing to spend and they’re slowly borrowing more. The US is the strongest developed economy. It’s forecast to grow at well over two per cent this year.”

Brexit and the Fed: stock market investors should brace themselves for a bumpy June

This week, Mike van Dulken and Augustin Eden of Accendo Markets tell Hot Commodity why we should brace ourselves for a bumpy June…

An optimistically cautious end to May was punctured by a surprise surge for the Leave camp in the latest UK Brexit poll. Whether this says more about what Guardian readers are thinking as they pack their bags and buggies in preparation for this summer’s festival season, or does indeed reflect a wider swing in sentiment is unclear – and will surely remain so until the result is announced. Remember how polls at the last UK general election showed that they’re not always spot on? Nonetheless, polls are seldom ignored and two markets that certainly didn’t ignore this one were cable (the GBP/USD exchange rate) and the FTSE 100.

The two are only really semi-co-dependent. The FTSE 100 contains so much international exposure as to be almost entirely US dollar sensitive, but the fact that these two markets got a big dose of volatility at the end of May and into June says much about current market sentiment: it’s cautious and it’s jumpy. Cautiously nervous? Nervously cautious? Whichever it is, it doesn’t like loud bangs!

Whoever chose June as the month in which the UK would vote on its future relationship with, let’s face it, the rest of the civilised world could not have predicted that we’d also find ourselves once more staring down the barrel of the US Fed’s proverbial interest rate cannon. And while a mere 25bp rate hike is surely nothing to be worried about, now we’re here, it’s natural to wonder what effect one will have on the other. Might the Fed hold off because of Brexit risk? After all, last September it held off because of “international headwinds”. International headwinds have been a feature of the world for, like, ever. Yet Brexit has no real precedent. On the other hand the Fed went ahead in December, right in the middle of a hideous time for stock markets, just because some jobs were added in the US economy.

The dilemma that faces policymakers right now is hardly a subtle one. June is sure to be a tumultuous month because, right in the middle of it, there’s a potentially paradigm-shifting referendum in the UK. Whatever the outcome, the potential for considerable political unrest in both the UK and Europe is very real indeed, so July may also throw up the sorts of international headwinds the FOMC loathes so much.

All that considered, June might actually present the more realistic opportunity. Will the US simply get it out of the way and adopt the brace position for what will surely follow?! Whatever happens, we can be sure that the FTSE 100 index and the GBP/USD pair will find themselves with few hiding places, if any, for the remainder of the year. It’s time to buckle up.

This commentary was provided exclusively for Hot Commodity by Accendo Markets: https://www.accendomarkets.com.

Oil price: can $50 be conquered?

Can oil make it back up to $50 a barrel? And what does this mean for US rate rises? Mike van Dulken and Augustin Eden of Accendo Markets give their take on this pivotal day in the recent recovery…

A stronger US dollar is showing no signs of hampering the oil price rally towards $50, even after a trio of Fed speakers (non-voters we must highlight) spiced things up by jumping on a few bright spots of macro data to send the US dollar basket back to 3-week highs, suggesting a June US rate hike remains a possibility.

Wording is surely key here, with a rate hike technically possible at every meeting. Whether one is likely or not is a very different matter. Markets may now be pricing in a slightly higher likelihood, but they are by no means pricing in a hike. It’s generally accepted that the Fed prefers to avoid surprising markets – it’s not a good look for the central bank of the world’s reserve currency and number one economy. Better warm ‘em up and hint for a while before delivering the killer blow. And anyway, last night’s speakers (Lacker, Williams Kaplan) are all non-voters, which suggests this evening’s Fed Minutes will be more important in terms of deciphering the FOMC rate-setting committee’s most up to date views.

As it stands, we just don’t see June on the cards for a hike, even if some US data is surprising to the upside (did the trio miss May’s Empire State Manufacturing data cratering on Monday?). Certainly not with a UK referendum on EU membership set to take place less than a week after the Fed next meets. It’s assumed that a Leave vote would ‘pound’ sterling even more than jitters already have, which would only go to put unwelcome upward pressure on the dollar – in essence delivering a rate hike of sorts.

Surely the Fed would be better holding off. If a Remain vote prevails, a relief rally in GBP could provide more room for manoeuvre via a corresponding drop in the dollar. Furthermore, as if that wasn’t enough, with each day that passes it looks increasingly possible (scarily so) that Donald trumps his democrat rival Hilary in the race for the a White House. Is that a geopolitical environment the Fed really wants to be hiking into? Of course not. The committee knows its choices have far-reaching implications. It was given a timely reminder in January via an aggressive market selloff in response to its December decision to go for it and deliver that first major post-crisis hike.

Which brings us to the non-currency drivers of the price of oil, the stuff we should really be concentrating on. THE FUN-DA-MENT-ALS. Supply disruptions have been a major issue of late, with Canada and Nigeria tagged as major reasons for prices continuing their 2016 reversal recovery. But these are likely short-term issues, in which case supply perceptions could be set to calm, thus hindering oil prices.

Extra help came from last week’s surprise drop in US weekly crude stocks (which suggests that consuming more = good) coupled with continued drops in US rig counts and stateside production as Opec-competing frackers call it a day. Opec mouthpiece Saudi Arabia remains stubborn within a divided cartel. All have helped usher prices ever higher and, as we write, there is the possibility (borrowing from Fed terminology) that another big drawdown in stockpiles is delivered this afternoon, sealing a test by oil prices of that key $50 level. Add to this improving, if patchy, US data and a better than expected rebound in Japanese GDP (big oil importer) and fundamentals are supportive of the near-term uptrend.

The question now is whether the current trend has legs? How close is US production to a turning point as shale and frackers return to bring production back on-line at more sustainable prices? They had been talking about $45-50 which is where we are. Those nasty 18-month term downtrends have been overcome to take us back to six-month highs. Can a major psychological level in $50 really be conquered too?

This commentary was provided exclusively by Accendo Markets for Hot Commodity: https://www.accendomarkets.com.

There’s more to Glencore’s agri sell-off than meets the eye

This week, Mike van Dulken and Augustin Eden from Accendo Markets explain why Glencore is still keen on the agriculture sector despite selling off its business…

Deleveraging in the mining sector continues, with Glencore managing to offload 40 per cent of its agricultural business to Canada Pension Plan Investment Board (CPPIB). But Glencore’s situation is rather different from that of sector peer Anglo American, which we discussed a while back.

Glencore struggled through the latter part of 2015 with a massive debt burden, the result of huge over-investment just around the time when commodity prices began turning over, and its shares were part of a group that weighed heavily on the FTSE 100 index last year.

While we’ve seen action taken by the blue chip miner to reduce its debt load before now, the partial sale of its agricultural arm is an indication that there are indeed buyers for mining assets. Sure, the $2.5bn price tag fell short of analysts’ expectations, but it was bang on Glencore’s guidance and has put some much-needed funds into the coffers, which the company says it will use to… expand its agricultural assets. Wait a minute. Glencore is selling part of its agricultural business in order to buy other agricultural businesses? Mad as it sounds, that seems to be correct.

Glencore is currently – despite this deal – a major exporter of grains in Russia, Canada and Australia. It shifted around 44 million tonnes of the stuff in 2015 but saw profits cut in half by an oversupplied and stagnating market. So what Glencore may be engaged in here is a clever marketing ploy – those being somewhat of a speciality of the commodity trading giant. It clearly still sees value in agricultural commodities, otherwise it wouldn’t be looking at South America and Brazil (the world’s #1 soy bean exporter) for potential acquisitions in that sector, right?

The other market in which Glencore lacks a big footprint is the US, and understandably so – the strength of the dollar making US exports less competitive means it’s not a priority right now. But what about the outlook for US monetary policy? If the Fed continues to be dovish – stamping down the hawkish dissenters – then the outlook for the dollar would be bearish, which would strengthen the Canadian Dollar and make Canadian exports less competitive. While Glencore shouldn’t and probably isn’t making a call based on FX forecasts, isn’t it a little funny that it’s sold a 40 per cent stake in its agricultural business to the Canadian Pension Plan Investment Board?!

This commentary was provided exclusively for Hot Commodity by Accendo Markets: https://www.accendomarkets.com.

Good news! The US economic revival is definitely on its way

This week, Mike van Dulken and Augustin Eden from Accendo Markets tell Hot Commodity why the US is on the up…even if the rest of the world isn’t.

Equity markets went to town yesterday on positive US data and hopes of more stimulus from the European Central Bank (ECB) and China’s People’s Bank of China (PBoC). Yet this is surely supporting the case for the US Federal Reserve to deliver further interest rate hikes this year – something likely to stifle US growth.

So was the market reaction simply increased confidence in the US economic recovery, coupled with a realistic belief the Fed won’t dare hike this year for fear of a repeat of January’s volatility? This should maintain a nice accommodative tilt to global monetary policy to spur economic recovery elsewhere.

US interest rates have risen only a touch to regain 0.5 per cent and equal the historic lows of its peer across the pond – the UK’s Bank of England (BoE). However, US macro data has blown too hot and cold since then for the Fed’s Federal Open Market Committee (FOMC) to be comfortable hiking again anytime soon. Mixed Fed chat of late, with some quite noticeable changes of heart by long-term committee hawks (Bullard), adds to our belief.

With markets already building up to Friday’s US Non-Farm Payroll numbers, it’s worth noting that jobs data has been anything but a worry for the Fed for a good while now, with net monthly additions averaging around 225,000 since 2013. Unemployment at 4.9 per cent remains in a downtrend towards 10 year lows, but wage growth is still lacking.

News that US Q4 2015 GDP growth was revised up to one per cent quarter-on-quarter from 0.4 per cent last week was welcomed by markets, but it still showed a slowdown from previous quarters.

US Consumer Price Inflation (CPI) expectations have also faded quite dramatically (just 1.4 per cent for the next decade, suggestive of another oil price plunge), and sit way below the Fed’s two per cent target. Core CPI figures (excluding food & energy) may have accelerated back to target but for this to hold up oil prices must fall no further, allowing the influence of their 2014 price plunge to dissipate.

So aside from the fact that Friday’s US jobs figures are sure to deliver the traditional monthly market volatility, for us it will only serve to bolster confidence in the US economic revival. Good news. This in turn may further support the case for policy normalisation, but it’s not going to be enough for the Fed to consider the stars truly aligned for another press of the big red button. Even better news for risk appetite. Enjoy the first Friday’s usual fun ‘n’ games, but other data is far more important.

This commentary was provided exclusively for Hot Commodity by Accendo Markets: www.accendomarkets.com.

Accendo Markets: will the Fed release the doves?

In the first of Accendo Markets‘ regular market commentary for Hot Commodity, Augustin Eden and Mike van Dulken discuss whether the Fed is having cold feet and why gold is good…

This week’s main event is sure to be this evening’s US Federal Reserve policy statement and whether it dares issue some form of dovish mea culpa regarding its December decision to hike, especially given the market turmoil that has greeted us in 2016. While credibility was on the line after such a protracted warm-up, it probably felt obliged to hike rates on US data improvement.

However, it at least has the option to tone down its opening message of 2016 (with no press conference or Q&A) about how many more hikes we might expect this year. From a lofty three, markets are now pricing in one at best. What’s clear is that while the US may have been ready, the global markets were not.

Will the Fed’s focus lie with the US economy’s continued recovery progress or recent financial market volatility? It should be the former, but the latter can’t be ignored. Arguments may dwell on how it was right to move then, but hold now.

Financial markets have neither enjoyed the second half of 2015, nor the tricky start to 2016, but the same needn’t necessarily be said about all asset classes. While equities are hindered by persistent commodity price weakness after an 18-month rout, and a slowing and troubled China, many ask whether the worst is priced in and the doom and gloom overbaked.

So far so gold…

What’s this got to do with the price of gold? Well, it’s having a cracking start to the year, bouncing from 5/6yr lows on talk of output having peaked. Also, as a safe-haven, it needn’t worry about US dollar strength. If people are that fearful (unless they’re Warren Buffett) they’ll probably be yellow-metal bound. The zero-interest bearing asset has seen rising demand from market volatility and technical drivers as well as hopes the Fed will go all dovish on us after December’s ‘mistake’ to raise rates from record lows.

If this does happen, we could well see a pullback in recent USD strength. It’s almost as if the dollar has been simply resting near its 2015 all-time highs, waiting for its next pointer, which could well be revised US monetary policy guidance for 2016. There’ll arguably be a knock-on for the entire commodities sector from that. Even oil could gush a little higher from the FX benefit, despite a more meaningful recovery surely needing moves to cut output and reverse its own supply glut.

This commentary was provided exclusively for Hot Commodity by Mike and Augustin at Accendo Markets – https://www.accendomarkets.com.

Do you agree with Mike and Augustin or do you have a different take on the Fed’s next move? Email info@hotcommodity.co.uk with your comments.