Fed Stuck in Neutral All Over Again

April 28, 2016

FX News Today

BoJ refrained from easing policy, causing widespread disappointment in markets given the backdrop of a strong yen and low inflation. Data today showed April headline CPI unexpectedly falling back into deflation at -0.1% y/y, while the core reading — which the BoJ is mandated to target at 2% — dove to a three-year low of -0.3% y/y, down from 0.0% in March. The central bank left the deposit rate at -0.1% and the annual pace of QQE purchases at Y80 tln. The BoJ has left policy on hold in both of the meetings since its Jan-29 gathering, when it decided to introduce NIRP (implemented on Feb-12). The central bank once again pushed back its forecast for driving inflation to its 2% target to “during fiscal 2017” (once upon a time it was 2015). The statement maintained that the economy has “continued its moderate recovery trend,” but warned that growth would be lower due to weak export performance and kept the door ajar for further easing.

Reserve Bank of New Zealand held rates steady at 2.25% after cutting by 25 bps to 2.25% in March. The 2.25% rate setting is a record low. The March cut was driven by a concern over eroding inflation expectations. Low headline inflation was again noted, with a material decline in shorter term expectations still front and center at the Bank. Despite the lack of action in April, more rate cuts could be in store: Governor Wheeler said “Further policy easing may be required to ensure that future average inflation settles near the middle of the target range.” That’s a repeat from March.

Fed Stuck in Neutral All Over Again: The Fed had a few tricks up its rhetorical sleeves in April, but made few meaningful changes to the economic or policy outlooks in its steady decision. Growth and inflation remained finely balanced and any reference to the “balance of risks” was accordingly left out of the statement, as the FOMC continues to straddle the fence on the next move. Some excitement came with the apparent departure of “global economic and financial developments,” though this snuck back in later in the statement. A closer look at the details shows the Fed is cognizant of the poor outlook for Q1 GDP “even as growth in economic activity appears to have slowed.” It was also a little more downbeat on inflation “inflation has continued to run below the Committee’s 2% longer-run objective,” compared to “inflation picked up in recent months” previously.

Main Macro Events Today

US GDP The first release on Q1 GDP is out today and should reveal a 0.5% (median 0.7%) headline clip for the quarter. This would follow a 1.4% pace in Q4 of last year and 2.0% in Q3. We expect the ongoing inventory unwind to weigh on the headline but the advance trade report yesterday revealed a big 3.4% import decline which is likely an extension of this unwind. Import weakness will likely benefit net exports for the quarter which will help prop up the headline.

US Jobless Claims Claims data for the week of April 23rd should remain steady with a 247k (median 255k) headline that matches last week’s headline. Claims look poised to leave a 255k average in April which would follow a 264k average in March and 261k in February. The monthly employment report is expected to show a 210k headline from 215k in March with the unemployment rate ticking down to 4.9% from 5.0% last month.

German Unemployment
German jobless numbers have fallen to very low levels, but with growth slowing down, the improvement on the labour market is also running out of steam and we are looking for a slight uptick in the German sa jobless number for April of 4K, which should leave the jobless rate at a low 6.2% (medians same). The tight labour market has been pushing up wages and is underpinning consumption but the integration of the large number of refugees will be the main challenge for coming years.

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