ECB Nowotny fretting over market expectations

17 February, 2016

FX News Today

ECB’s Nowotny fretting over market expectations. The Austrian central bank head said central banks must watch markets but not be guided by markets and told Swiss financial website Cash that he is concerned market expectations ahead of the March 10 meeting could become as excessive as in December, when expectations had “lost touch with reality”. Nowotny added that the turbulence in global markets is mainly driven by emerging market developments, an sovereign funds aiming to ensure liquidity. He admitted that market turmoil constitutes “a massive destruction of value, which is very negative for overall sentiment”. However, Nowotny stressed that monetary policy can only improve conditions for growth and was very successful in preventing deflation and keeping credit markets intact, but that actual investments have to be made by investors.

Boston Fed dove Rosengren said the Fed would be “in no rush at all” to hike rates if US inflation does not rise and would cut rates if missing 2% growth, unemployment rising and significant weakening in U.S. labor markets was seen. That’s about par for the course from the regional Fed president. Fed’s Kashkari said that staff will continue to analyze NIRP (Negative Interest Rate Policy) as a potential policy tool, while noting that global economic and financial developments will be important inputs at the March FOMC. That said, the Fed expects a gradual increase in interest rates to be the base case. The Fed still seems quick to deny NIRP, while mulling its options for the timing of a second hike.

A third of energy companies could go bankrupt according to a report released by Deloitte, as credit risk zooms to a record high as low commodity prices cut access to cash and debt. “The roughly 175 companies at risk of bankruptcy have more than $150 billion in debt, with the slipping value of secondary stock offerings and asset sales further hindering their ability to generate cash. These companies have kicked the can down the road as long as they can and now they’re in danger of kicking the bucket, said William Snyder, head of corporate restructuring at Deloitte, in an interview. ‘It’s all about liquidity,'” noted a Reuters report.

 Main Macro Events Today

FOMC minutes will be scrutinized for clues on Fed’s thinking last month. However, the report will be a little out of date following Yellen’s testimony last week, and given the volatility in the markets since the policy meeting. Indeed, recent events have taken a March rate hike off the table, and have pretty much pushed out the next tightening into later in the year. Nevertheless there were a couple of interesting changes in the policy statement which will make for a worthwhile read, and especially the discussions on growth, inflation, and the importance of international developments. First the Fed downgraded its growth outlook somewhat, so we’ll look to specifics on the extent of policymakers’ worries over growth. Additionally, the FOMC revealed diminished confidence that inflation would be picking up toward the 2% target over the medium term, and it will be interesting to see how widespread that angst was. Also, the Fed removed its “balance of risk” stance as it wanted to monitor global economic and financial developments for guidance.

US Industrial Production: January industrial production is out today and should reveal a flat (median 0.3%) headline following the 0.4% decline in December and the big 0.9% drop in November. Despite some rebound in manufacturing employment, hours worked declined 0.2% in January and mining sector data continued to face headwinds from the drop in oil prices. Capacity utilization should tick down to 76.4% (median 76.6%) from 76.5% in December.

US Produces Price Index: January PPI data is out Wednesday and is expected to reveal a 0.1% (median -0.2%) decline for the headline with the core index up 0.1% (median 0.1%) for the month. This comes on the heels of respective December figures of -0.2% for the headline and 0.2% for the core. Oil prices declined further through January which should continue to weigh on price measures.

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