Monetary Policy

  • Investors will have to wait a little longer for ECB action.

    The ECB's Draghi Gets Dovish

    ECB President Draghi sent an unambiguous signal to investors. Although the economic data from the region has been largely stable, the downside risks have grown, and the ECB will take action at its next meeting, which is in early December.

    In the past, Draghi has indicated that the negative 20 bp deposit rate exhausted the scope for rate cuts.  However, he did reveal that the possibility of another cut in the deposit rate was discussed.  The key takeaway point is that the "degree of easing" would be re-examined at the December 3 meeting in its entirety.

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  • It's Draghi's turn to explain the ECB's take on future QE.

    The ECB Steps Up to the Plate

    The main event today is the ECB meeting.  Many observers expect a dovish tilt as Draghi prepares to expand QE in December.  A Bloomberg survey conducted last week found that 80% of economists expect the ECB to eventually do so, with 56% expecting it at the December 3 meeting.  The survey found 86% expect a move by the end of Q1 2016.  Every central bank that has tried QE has had to do more than initially anticipated.

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  • One shouldn't over-analyze Fed funds rate change probabilities.

    A Warped WIRP

    Bloomberg created a function that claims to give the odds of a Fed move by interpolating from the Fed funds futures and options contracts. It is widely used, but I remain a skeptic.

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  • Barring a surprise, a divergent monetary policy theme could carry into 2017.

    Updating the Divergent Monetary Policy Theme

    The main thrust of our bullish US dollar outlook is the divergence in monetary policy trajectories. We do not think the divergence has peaked and anticipate it to persist through next year and into 2017.  

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  • Fed chair Yellen reiterates her FOMC statement that rates can rise in 2015.

    The Fed Chair Speaks and the Dollar Reacts

    The Fed's Chair seemed to have surprised the market with her comments after North American markets closed yesterday.  She reiterated what the Fed said last week.  It is still on the path to hike rates before the end of the year, barring a significant economic surprise.  She did put the concerns about the global environment in a larger perspective, suggesting that, based on current information, if does not look like developments abroad will have a material impact on policy. 

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  • U.S. and U.K. rate raises unlikely this year while Europe forges on with QE.

    BOE Rate Hikes, Like the U.S., are now Less Likely in 2015

    The US dollar is trading heavier after extending its post-FOMC gains that saw the euro and sterling record two-week lows yesterday.  The euro extended its recovery that was marked by yesterday's outside session.  Its gains have stalled in front of the 20-day moving average (~$1.1235) and the first retracement objective of its decline since last Thursday. 

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  • The Fed's curve ball was that they looked at market-based measures.

    Market-Based vs. Survey-Based Measures

    The Federal Reserve threw investors a curve ball last week.  Until then, Fed officials have shown a clear preference for survey-based measures of inflation expectations.  Last week, seemingly out of the blue, that Fed made reference to market-based measures of inflation expectations.  It implied that the decline in the break-evens (difference between conventional and inflation-linked bond yields) got officials' attention. 

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  • Fed Chair Yellen speaks at Amherst and three governors close out the week.

    Fed Speak Began over the Weekend it Continues All Week

    The US dollar started softer in Asia, where Japan is on holiday for the first half of the week, but has come back bid in Europe.  The key issues now seem to revolve around intentions and implementations.  Those are the key unknowns. 

    Intentions refer to the major central banks.  Three Fed officials spoke over the weekend.  Williams, Ballard, and Lacker (who dissented) all said a hike before the end of the year may, still be appropriate.  US interest rates are a couple basis points firmer today. 

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  • There will be no rate hike on this day.

    The Fed Decides to Not to Decide

    The Federal Reserve left the Fed funds target at 0-25 bp.  It recognized continued improvement in the US economy but raised the level of concern over international developments.

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