Friday, 03 March 2017

ISM Non-Manufacturing Index, Fischer & Yellen Speeches

The main event of the day is not an indicator, but rather a speech by Fed Chair Janet Yellen. She will speak on the economic outlook at an Executives Club of Chicago event. There are two key points here: 1) various Fed officials have recently given surprisingly hawkish statements, including NY Fed President Dudley and Gov. Brainard, who are usually two of the more dovish Fed officials (Dudley made an unscheduled appearance on CNN to warn of imminent rate hikes, while Brainard Wednesday said “it will likely be appropriate soon” to raise rates). 2) Monday is the last day FOMC members are able to comment on the economy before the Fed enters its “blackout” period ahead of the 15 March FOMC meeting, thus Yellen’s comments come almost as close as possible to the meeting. Furthermore there are no Fed speakers scheduled for Monday, meaning this is the last we’ll hear from Committee members before the meeting.

The market’s view on a March rate hike has changed dramatically in recent days, as the graph shows. Just a few weeks ago, investors thought that there was less than a 50% chance of a rate hike this month; now they see it as almost a sure thing.

However, while the market has been moving forward its estimate of when the rate hikes are likely to come, investors still do not fully believe the Fed’s forecasts. The current December futures contract implies an end-2017 rate of 1.225%, up 10 bps or about half a rate hike from the implied forecast of 1.12% at the end of 2016. By contrast, the median FOMC forecast is for 1.37%. In my view, there is still room for the market to raise its estimate of where US interest rates are headed and for the dollar to advance further as a result.

Separately, Fed Vice Chair Stanley Fischer will be talking about Fed monetary policy decision-making at Chicago Booth School's annual monetary policy forum in New York. It’s not clear whether he will make any comments about the outlook, but it wouldn’t surprise anyone if he did. He recently (16 Feb) said that the US economy seemed to be “on the path that we more or less expected,” which would imply 3 rate hikes this year.

And just in case people don’t get the hint, Chicago Fed President Evans and Richmond Fed President Lacker may also have something to say on the matter when they appear on a panel discussion at the same forum as Fischer.

As for today’s indicators, the only ones out are the service sector and composite PMIs: first the final one for the Eurozone, then the UK service-sector PMI, then the US ISM non-manufacturing PMI. Although the service sector is much larger than the manufacturing sector, it’s not as cyclical and therefore the PMIs tell us less about where the economy is headed.

The UK service-sector PMI is expected to be lower, which could be negative for the pound, but then again yesterday’s construction PMI was expected to be down too and it actually rose, so we could be in for a surprise.

The ISM non-manufacturing index is expected to be unchanged, which would probably not give much of an impetus at all to the dollar. Nonetheless, it would be unchanged at a relatively high level, and so the lack of a gain in the index wouldn’t necessarily be seen as something negative.


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