Yellen confirms rate hike
(Peter Rosenstreich, head of market strategy)
Fed Chair Yellen’s Friday message all but confirms a rate hike in March (following a string of hawkish Fed comments), barring any unexpected developments. As if the Fed Chief needed any support, Vice-Chair Fischer stated that economic data was strong with no data “coming in badly in the last three months.” The USD weakened marginally as the rate market was already pricing in a near 98% chance of a 25bp March 14-15th hike. Markets are now focused on the steepness of the forward policy path as additional rate hikes are under-priced. Our current view is for an increase in policy rates in March, June and September. The highlight of the US economic data week will be the jobs report on Friday. A solid NFP read above 200k, unemployment rate at 4.7% and wage growth up 2.7% y/y will increase the probability of three rate hikes in 2017 and force USD demand. We do not anticipate that 75bp on tightening will derail the current equity markets rally. However, should the USD rally become too aggressive or Trump’s pro-growth policy fail in congress we could see sudden deceleration in Fed hiking path expectations. For the FX markets, yield differentials will dominate pricing. On this thinking yield-sensitive USDJPY remains a strong candidate for a further rally. Trade will need to discount Trump’s political nonsense (budget plans and ACA reforms are “expected” to be released) and remains forced on economic data. In addition to payroll, we will get factory orders, durable goods (today) and trade balance. Elsewhere, this week’s ECB meeting will be a non-event as policy will remain unchanged and forward guidance will be limited ahead of political uncertainty. EURCHF remains the trade to handle increased European risk.
ECB meeting in focus this week
(Yann Quelenn, market analyst)
This Thursday, the ECB will deliver its rates decision with many expecting them to remain unchanged. However, we expect to see several announcements regarding monetary policy. Recent fundamental data has indicated an improvement. Industrial Production growth is also positive (+2% in December) and inflation has surged since the start of the year. Eurozone HCPI is now above the target of 2% according to Eurostat. It is the first time in four years that the central bank’s target has been reached even though core inflation is stalling around 0.9%. We believe that ECB-Fed monetary policy divergence is becoming a reality while a US rate hike next week is now very likely. The ECB for the time remains largely all-in. We recall that from April the ECB will start buying €60bn bonds instead of €80bn until the end of the year. This should not last forever, because of bonds scarcity and the better data. This is why we believe that the ECB should start calling for a new monetary plan for 2018. Lower unemployment data and greater inflation should push policymakers to envisage tightening in the medium-term. At the meeting, political uncertainties should remain at the centre of attention and it is clear that further developments from the French and Dutch elections will prevent the ECB from making changes to this year’s monetary policy.