Wednesday, 15 March 2017

Netherlands Elections, FOMC Meeting, BoJ Meeting

Today is a big day both politically and economically. In Europe, the Netherlands elections will be closely watched as a precursor to the more important French elections next month. The key point is how well Geer Wilder’s euroskeptic PVV Party does. The more votes the non-mainstream parties get, the more acceptable it will seem to voters in other countries to vote for one of these parties. That could raise existential fears about the future of the euro and weigh on the single currency.

Note though that there is almost no chance of the PVV being in the government, much less forming a government, plus the Netherlands has no legal framework for holding a referendum on EU membership, so the prospect of a “Nexit” vote is not on the cards regardless of who wins – which is probably why the focus is more on France than on the Netherlands.

Later in the day, the FOMC is totally expected to hike rates 25 bps. The big question is what will happen with the dot plot, the graph that shows the FOMC members’ forecasts for where they think the fed funds rate will be at the end of the year (see below). The December version showed that the median FOMC member expected three rate hikes each year for the next three years; will they front-load that to four this year, three next and two in 2019? Or maybe four each this year and next? Or perhaps even if the median stays unchanged, the mean (average) might move up. In fact, only two dots need to move higher to shift the 2018 median up by 25 bps, which would imply one more rate hike than previously expected. That could prove significantly positive for the dollar.

Overnight, the Bank of Japan will also conclude its two-day Monetary Policy meeting. Most market participants anticipate no change in policy targets, including the 0% target for 10-year JGBs despite the rise in US bond yields. The US moves will simply be welcomed by the BoJ as aiding their efforts – so far fruitless -- to get inflation back to the 2% target.

In fact, the market sees an 80% probability that the BoJ will keep rates unchanged for the entire year. It’s unlikely that this meeting will cause any major change to those expectations and therefore the meeting might not have a dramatic impact on JPY.

Before that, the UK labor statistics will be announced. The unemployment rate is expected to stay at 4.8% while the growth in average weekly earnings may slow to 2.4% yoy from 2.6%. That’s likely to be neutral to negative for the pound.

Note that from this month, the UK Office for National Statistics (ONS) will no longer include the claimant count rate and jobless claims change in its statistical bulletin, so economists are no longer forecasting them. That’s because the series “may now be providing a misleading representation of the U.K. labor market,” the ONS said. As a result, all headline data is now for two months ago, whereas before the claimant count rate and jobless claims change were for the previous month.

In the US, a number of indicators will be released that normally would be quite significant for the markets but today will probably cause only a slight ripple. The two most significant ones are the consumer price index (CPI) and retail sales.

The headline CPI figure is expected to move further above the Fed’s 2% target, which normally would be quite bullish for USD. However, the core CPI – which excludes oil prices – is expected to slow a bit on a yoy-basis. That makes the two almost a wash, especially considering that the Fed targets core inflation (in fact, the core personal consumption expenditure deflator, not the CPI).

There are various methods of measuring retail sales, but this time all of them are forecast to be weaker than in the previous month (and indeed below the six-month moving average). That should be negative for the dollar. But here too, it’s unlikely that anyone will take a big position 5 ½ hours before the FOMC announces its decision.

As for the weekly Dept of Energy US crude oil inventories, the market is forecasting yet another large increase. This could put oil prices under further pressure if once again it comes along with increased production and rising US exports.

Finally, it’s a small point (now) but the US will hit up against its debt ceiling today and will have to start taking “extraordinary measures” to keep funding the US government. Leading Republicans in Congress have said that they’ll extend the ceiling, but that remains to be seen – rebellious members of the party have in the past forced a shut-down. In any event there are still several months before the government runs out of money so it’s not going to be a market factor -- yet.


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