Yellen on policy path and negative rates

February 12, 2016

FX News Today

German Q4 GDP came in at 0.3% q/q, in line with expectations and matching the growth rate from the third quarter of the year. This translates into a growth rate of 1.7% for the full year 2015. Still, the calendar adjusted rate decelerated to just 1.3% y/y in Q4 last year, after 1.7% y/y in Q3, which ties in with weakening confidence numbers. The statistical overhang, which gives the growth rate for this year if the economy stagnated at Q4 2015 levels, amounts to 0.4%. So official data will still benefit from the recovery last year, but global headwinds will make it a challenge for the economy to continue growth at a solid pace, even if so far consumption and domestic demand are helping to compensate for the slowdown in emerging markets.

Yellen on policy path and negative rates: Senator Corker asked whether the Fed is out of ammunition and if the adoption of negative rates is a viable alternative. Yellen indicated the Fed had previously contemplated such action in 2010, and they are looking at them again in light of their use by other central banks. She won’t take negative rates off the table, but there’s a lot to consider before implementing such. The most reliable tool for the Fed’s policy operations is varying short term interest rates, she said. And on whether there are any other rules based systems the Fed could use other than current guidance, she made a distinction between a systematic approach to policy, which the Fed and other central banks employ, and a mathematical rules based system, the latter with which she doesn’t support. The FOMC makes projections every 3 months on the economy and inflation, as well as the expected policy path, and Yellen suggested that should be sufficient. Yellen also agreed that labor force participation is “somewhat depressed,” but she expects wage growth will continue to increase somewhat. She indicated that the aging population also impacted the participation rate. She also indicated that the Fed is going to wait to shrink the balance sheet until short-term rates are somewhat higher and that managing the short-term rates remains the preferred course for now.

US Initial jobless claims fell to 269k. The 16k initial claims drop to 269k in the first week of February followed a smaller 8k bounce to 285k to leave a notable undershoot of the elevated claims levels through the period of holiday distortions that ended with the 277k MLK weekend reading. The drop is encouraging, though we’ll need another tight reading next week before we discount the significance of the December and January claims rise. Claims are entering February below the lofty 284k average in January and near prior averages of 277k in December, 270k in November and 263k in October.

Oil extended losses yesterday and is trading near a 12 year low in the wake of EIA data that showed that stockpiles at Cushing oil-storage hub increased last week. Producers seem to be still competing for market share and Iran reportedly offered its crude to Asia at a discount compared to Saudi Arabia.

 Main Macro Events Today

EU Gross Domestic Product: The Q4 2015 Year on Year change in the economic output is expected to come in at 1.5% slightly below the previous number of 1.6%.

US Import and Export Prices: The January trade price report is out today and should show import prices declining by a further 1.5% (median -1.5%) on the month while export prices fall by 0.5%. This compares to December figures which had import prices down 1.2% and export prices down 1.1%. Tumbling oil prices have led to depressed data in this release and we expect this trend to continue as WTI prices declined 14.8% in January. For more information read our preview.

US Retail Sales: January retail sales data should reveal a 0.1% (median 0.1%) headline increase for the month while the ex-autos aggregate remains unchanged. This comes on the heels of a 0.1% decline in both of these measures in January. Despite an increase in January auto sales the retail sales data faces numerous downside risks including weaker chain store sales and softer construction employment data.

US Michigan Consumer Sentiment: The first release on February Michigan Sentiment is out today and should reveal an increase to 93.0 (median 92.5) from 92.0 in January. The IBD/TIPP poll for February showed an increase to 47.8 from 47.3 and we expect initial claims data to improve to a 273k February average, down from 284k in January. Both of which should help support the later month consumer confidence releases.

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