Month: July 2016

There is no expectation for a rate hike Wednesday, but the market odds for a September rate hike have risen to nearly 30 percent on a spate of recent data. That includes Tuesday’s new home sales for June, which grew at the best pace since early 2008.

This follows a string of better than expected indicators, such as retail sales for June and the employment report. Traders have been tracking a move up in the widely watched Citigroup economic surprise index for several weeks now, and that has been signaling the Fed could move to hike rates this year after all.

Following the Brexit vote, expectations in the Fed funds futures market were at a low point, where the market bets were even pointing to a rate cut in December and no rate hike for next year. As of Tuesday, expectations turned much higher, to a near 30 percent chance of a hike in September and a 49 percent chance for December.

“I think they at least need to put the rhetoric out there that a hike is on the table. My sense is their line of thinking before Brexit has been restored. That would mean there’s at least one hike on the table this year for them,” said Jack Ablin, CIO at BMO Private Bank.

The Fed may not tweak the language in its statement too much or put any new emphasis on timing. Robert Tipp, Prudential Financial head of global bonds and foreign exchange, said the Fed will also not want to trigger market volatility or a move higher in the dollar that could hurt the US economy, in anticipation of a rate hike.

“I think they’re going to want to try to open the door for rate hikes later in the year. It’s a delicate balancing act. They don’t want to sound so grim about the outlook that would lead people to believe the Fed knows something the rest of us don’t,” he said. “At the same time, they need to exude enough optimism to make the case that a hike is something they could get away with, but in the best interest of everyone.”

The Fed is also preparing to swim upstream against a group of central banks that are expected to keep easing. The Bank of Japan this week is expected to take more action, including ETF purchases, and the Bank of England said it could ease in August while the European Central Bank may move in September.

“I think the Fed is probably not altogether happy in sensing that equity markets around the world are trading largely on expectations that no central bank will have the courage to exercise policy any time soon. We’re back to the Greenspan put,” Tannenbaum said.

Tipp said while he sees slightly less than a 50/50 chance of a 2016 hike, it’s more likely that it will be December rather than September.

“December is much more likely than September. I think by just leaving the door cracked open to hiking interest rates, they’ll be trying to keep their options open,” he said. “In all likelihood, they’re probably expecting European data led by the UK to tip over in the next couple of months,” he said. “I think optimistically they would see US growth powering right through and Europe getting less worse than feared.”

Some analysts believe there could be market volatility around the November presidential election, and that’s another reason the December meeting would be more likely.

Some Fed watchers said there could be better opportunities than the meeting statement to find out what the Fed was thinking. Fed Chair Janet Yellen should be at the Fed Jackson Hole Symposium at the end of next month, and that should be a good forum if she wants to tweak the message, since more data will be available.

“They could come up with other ways to make it sound like they’re more confident. I think the statement is going to sound a little less dire, but I’m not sure it’s going to sound so strong,” said Michael Hanson, senior economist at Bank of America Merrill Lynch. “The minutes matter more.”

Besides the 2 p.m. release of the Fed statement, there are durable goods orders at 8:30 am. and pending home sales at 10 a.m.

Earnings are expected in the morning from Boeing, Coca-Cola, Deutsche Bank, GlaxoSmithKline, Comcast, Mondelez, Fiat Chrysler, Nissan, Norfolk Southern, Northrop Grumman, Dr. Pepper Snapple, Six Flags, Anthem, State Street and Nintendo.

After the bell, results are expected from Facebook, Amgen, Marriott, Vertex Pharmaceuticals, Whole Foods, Groupon, The Cheesecake Factory, GoPro and Pioneer Natural Resources.

After jumping over 20 percent in the second quarter of the year, oil prices hit three-month lows on Monday, threatening to put the brakes on a fragile recovery.

“It’s not just in the US In Asia, if you look at Chinese gasoline demand growth, it was 10 percent last year. This year, it’s tracking the mid-single digits,” said Scott Darling, JP Morgan’s Asia Pacific oil and gas head of research.

On Tuesday in Asia, crude oil futures were mostly flat after the rout overnight.

US Western Texas Intermediate crude oil futures were up 0.2 percent at USD 43.20 a barrel while Brent crude oil futures were up 0.4 percent at USD 44.88 a barrel.

Meanwhile, US rig count increased slightly quarter-on-quarter, while confidence over geopolitical risks in Libya also improved.

WTI crude fell to an intraday low of USD 42.97 a barrel overnight, its lowest since April 26, while Brent crude hit USD 44.55 a barrel, the lowest since May 10.

JP Morgan was forecasting global oil demand growth slightly under 1 million barrels a day for the year.

Darling said prices were likely range-bound currently and the bank’s forecast for Brent this year averages USD 47 a barrel while its forecast for next year was USD 57 a barrel.

The final week of July is expected to be a busy one in Asia Pacific, with the region entering the thick of its earnings season while monetary policy decisions from central banks in the United States and Japan are due.

At the G20 meeting in China which concluded over the weekend, BOJ governor Haruhiko Kuroda said he was prepared to further ease monetary policy, if necessary, to achieve the central bank’s 2 percent inflation target, reported Reuters.

“Japan will report inflation figures on Friday, which is expected to show the economy fell further into deflation,” said Mohammed Apabhai, head of Asia Pacific Trading Strategies at Citi in a note on Sunday.

Kuroda also dismissed speculations about “helicopter money” – essentially printing money and distributing payouts -, saying it would be prohibited by law if it meant the BOJ directly underwriting government debt, said Reuters.

Analysts at Societe Generale said on a Monday note the BOJ faced myriad problems that would likely influence its monetary policy decisions. These include weak output growth, deflationary pressures, stronger currency and intense speculation about additional policy easing.

“We expect the BOJ to expand its asset purchases yet again, as well as cut the policy rate by another 10 basis points to negative 0.2 percent,” the Societe Generale analysts said.

The market also expects forthcoming fiscal stimulus to prop up Japan’s anemic growth, limit deflationary pressures and counter possible drawbacks from global events such as the UK’s decision to leave the European Union.

The Japanese government is compiling a stimulus package of at least 20 trillion yen (USD 188 billion), Japan’s Kyodo News reported on Thursday, citing sources close to the matter.

In Asia Pacific, earnings are due from a number of companies including Hyundai Motor, Nissan, Nintendo, Samsung Electronics, Singapore Airlines and LG Electronics.

Stateside, the Federal Open Market Committee (FOMC) is due to meet on Tuesday and Wednesday, with traders largely expecting the Fed to stand pat on rates. But traders will closely watch the policy statement for clues for the timing of the next hike.

“After a very dovish tone in June, the FOMC statement this time may translate a more upbeat flavor amid recent data strength and put back a rate hike on the table this year,” said Cynthia Kalasopatan from Mizuho Bank.