Macroeconomics: The Day Ahead for 17 March

Today is indubitably all about the much anticipated FOMC meeting, though there are a number of other events and indeed some data, which will bear some scrutiny. Statistically Japan and Singapore trade, and EU 27 Auto Sales are to be digested ahead of final Eurozone CPI, US Housing Starts and Canadian CPI. On the events schedule Brazil’s BCB is expected to initiate a rate hike cycle with a 50 bps increase to 2.50, while the Bank of Japan meets tonight with some tweaks to its Yield Curve Control, ETF and REIT programmes expected, primarily to give it greater flexibility in its purchases to respond to market fluctuations. In the Netherlands, PM Rutte is expected to be re-elected to a fourth term in a general election which has unsurprisingly been dominated by the pandemic. The still growing  EU row over vaccine distribution and the uncoordinated national moves to suspend use of the AstraZeneca vaccines, as well as the sharp slide of Germany’s CDU/CSU in opinion polls  for the September Federal elections underline the extent to which the pandemic and the political management of the response to it is starting to become something of an existential crisis to the EU, which requires close monitoring. The fact that none other that Germany’s ECB board member Schnabel has overnight suggested that the EU Recovery Fund may prove to be too small only adds to the burgeoning crisis. Elsewhere the IEA completes this month’s round of Oil Market Reports, while the US House of Representatives holds a hearing on retail investing and short selling (in the wake of Gamestop, etc). Government bond supply comes via way of uk 14-yr and German 29-yr auctions. Last but certainly not least, Samsung’s warning overnight about acute semiconductor shortages, and Honda’s decision to temporarily suspend auto production in North America due to supply chain issues underline that the biggest inflation threat in the recovery (globally) looks likely to be permanent loss of productive capacity, which will lean ever more heavily against ‘just in time’ production processes, per se requiring greater stockpiling of raw and semi-finished materials, which will only add to producer costs.

U.S.A. – Feb Housing Starts

Following on from the dip in yesterday’s NAHB Housing Market Index, which was largely due to pressure on builders margins due to rising raw materials costs, with Sales Expectations steady and buyer traffic improving, today brings Housing Starts. These are expected to slip a little further (-1.0% m/m v. Jan. -6.0%), and as with yesterday’s Retail Sales and Industrial Production, a weather related outlier looks to be a strong possibility.

U.S.A. – FOMC meeting

Initially the focus will be on the FOMC’s economic forecast projections, which are likely to see upward revisions to GDP (very substantial for 2021) inflation and employment forecasts, but it will be the extent of changes to median Fed Funds rate expectations (i.e. the ‘dot plot’), above all for 2023 which will attract most attention. The consensus does not expect enough Fed members (a relatively modest swing of 4 required) to shift their views for a rate hike to be signalled in 2023, but as a cursory look at the US 2/5 year spread attests, markets are certainly attaching a substantial risk that the Fed will be forced to bring forward the timing of its first rate move. Some of this steepening move may however be due to primary dealers dumping UST holdings in recent weeks, as the Fed will have to decide on whether to extend the suspension of regulatory capital requirements for banks holding US Treasuries, currently set to expire at the end of March. As part of its package of Covid-19 emergency measures, the Fed allowed banks to exclude Treasuries and deposits at the central bank from the SLR (supplementary leverage ratio) denominator. As can be seen on the two attached charts, bank reserves at the Fed have ballooned since the start of the pandemic crisis. In strict terms the SLR exemption is a decision for the Federal Reserve Board rather than the FOMC, so a decision does not have to be announced today. In practical terms if no decision is made today, or if this is not extended in full or at least in part, there is a real risk of further UST volatility, and bank stocks are also likely to suffer.   Be that as it may Powell is expected to re-emphasize that while the outlook continues to improve, both thanks to the vaccine roll-out and the fiscal stimulus packages, there is still a long way to go achieving the mandated targets on prices and above all employment. While FOMC speakers have been putting a positive spin on the rise in yields, the key questions are: how much further real yields would have to rise to represent a tightening of financing conditions that the Fed would want to push back on in action rather than verbal terms, or is the only condition for a reaction, a tightening of financial conditions, i.e. ‘disorderly’ markets. Secondly to what extent does the additional fiscal stimulus of the $1.9 Trln Biden package represent a loosening of overall policy, such that the Fed is actually not unhappy that markets are doing some of the work that it might have had to do otherwise? In sum, the question in terms of market reaction to today’s meeting is whether markets have run out of patience with the Fed’s ‘patient’ mantra.