Mid-year rates lift off delayed? That was the question many were left pondering following the release of the January FOMC minutes earlier this morning with the committee, on balance, striking a more dovish tone that what had been envisaged by the markets. The full document can be accessed here. Key phrases on the labour market, inflation and timing of policy normalisation can be found below:

Labour market – ‘Participants saw broad-based improvement in labor market conditions over the intermeeting period, including strong gains in payroll employment and a further reduction in the unemployment rate. Some participants believed that considerable labour market slack remained, especially when indicators other than the unemployment rate were taken into account, including the unusually large fraction of the labour force working part time for economic reasons’.

Inflation outlook – ‘A number of participants observed that, with anchored inflation expectations, the fall in energy prices should not leave an enduring imprint on aggregate inflation. Several participants remarked that inflation measures that excluded energy items had also moved down in recent months, but these declines partly reflected transitory factors, including downward pressure on import prices and the pass-through of lower energy costs to the prices of non-energy items. Nonetheless, several participants saw the continuing weakness of core inflation measures as a concern. In addition, a few participants suggested that the weakness of nominal wage growth indicated that core and headline inflation could take longer to return to 2 percent than the Committee anticipated’.

Policy normalisation timeframe – ‘Several participants noted that a late departure could result in the stance of monetary policy becoming excessively accommodative, leading to undesirably high inflation. It was also suggested that maintaining the federal funds rate at its effective lower bound for an extended period or raising it rapidly, if that proved necessary, could adversely affect financial stability. Some participants were concerned that a decision to delay the commencement of tightening could be perceived as indicating that an overly accommodative policy is likely to prevail during the firming phase. In connection with the risks associated with an early start to policy normalisation, many participants observed that a premature increase in rates might damp the apparent solid recovery in real activity and labour market conditions, undermining progress toward the Committee’s objectives of maximum employment and 2 percent inflation. In addition, an earlier tightening would increase the likelihood that the Committee might be forced by adverse economic outcomes to return the federal funds rate to its effective lower bound. Many participants indicated that their assessment of the balance of risks associated with the timing of the beginning of policy normalisation had inclined them toward keeping the federal funds rate at its effective lower bound for a longer time. Some observed that, even with these risks taken into consideration, the federal funds rate may have already been kept at its lower bound for a sufficient length of time, and that it might be appropriate to begin policy firming in the near term’.

US housing starts and building permits disappointed in January. Starts fell to an annual pace of 1.065m, 2.0% below the upwardly-revised 1.087m level of December, while building permits, a lead indicator for the former, slipped 0.7% to 1.053m. Weakness in single-family housing, both for permits and starts, was enough to offset improved readings for units during the month. While partially impacted by adverse weather in January 2014, putting the declines into perspective, from a year earlier permits rose by 12.4% with starts recording a larger increase of 18.7%.

US industrial output rose by 0.2% in January, higher than the downwardly-revised 0.3% contraction of December but below expectations for an expansion of 0.3%. Manufacturing and utilities logged increases of 0.2% and 2.3% respectively, overshadowing a 1.0% decline in mining. The decrease in the latter was due to ‘a substantial drop in the index for oil and gas well drilling and related support activities’.

US producer price inflation plunged in January. Prices fell by 0.8%, double the decline expected, with the annual rate falling to 0.0% from 1.1% in December. While not as weak as the headline figure core prices, that which excludes food and energy items, fell by 0.1% leaving the annual rate 0.5% lower at 1.6%. Energy, led by 24% plunge in gasoline prices, fell by 10.3% while that for food slipped 1.1% following a 0.1% decline in December.

US mortgage applications fell heavily again last week with the MBA mortgage market index sliding 13.2%. Both refinancing and loans for new purchases suffered declines, down 16% and 7.2% respectively, as the average 30-year mortgage rate leapt 9bps to 3.93%.

The UK labour market is improving, rapidly. Unemployment fell to 5.7% in December, below the 5.8% level of November, with the rate now the lowest seen since August 2008. Elsewhere average weekly earnings including bonuses rose 2.1% from a year earlier, above the 1.8% pace of November and expectations for a decline to 1.7%, with the reading the strongest seen since June 2013. Stripping out inflation real wages growth is running at 1.6%, a level last seen in April 2008. Total employment rose to 30.9m, an increase of 608,000 from a year earlier, while the total number of unemployed fell to 1.86m, some 486,000 less than December 2013. The employment rate, the proportion of persons aged 16 to 64 in work, rose to 73.2%, the equal-highest level on record. Building on the December data the number of citizens claiming unemployment benefits fell by 38,600 in January, a figure higher than the upwardly-revised 35,800 decrease of December and expectations for a decline of 25,000, with the contraction the largest recorded since June 2014.

The Bank of England MPC voted unanimously to keep their key bank rate and asset purchase program steady (0.5%, £375b) during their February policy meeting. The minutes can be accessed here.

The ECB’s governing council overnight approved a 2-week, €3.3b increase in emergency funding to Greece in order to support the nation’s banking system. Greek lenders can now access up to €68.3b in funding from the Emergency Liquidity Assistance facility, known as the ELA, allowing them to function normally following the decision by the ECB earlier this month to exclude Greek sovereign debt as acceptable collateral for financing operations. Despite the extension the main area of concern, longer-term funding arrangements for the Greek government, as yet remains unresolved.


The Day Ahead (AEDT)

China, Hong Kong and Singapore will be closed for the Lunar New Year holiday.

The ASX 200 looks set to start the session flat with SPI futures pointing to a decline of 1pt at the open. Look for the energy sector to come under pressure following steep falls in the crude price overnight. AMP, Crown Resorts, Origin Energy and Wesfarmers headline today’s domestic earnings calendar.

The AUDUSD recovered ground following the release of the FOMC’s January meeting minutes overnight with the pair rising over 60 pips to a high of .7837 before easing into the New York close. While the minutes have pushed back market expectations for the timing of policy normalisation, something that should in essence assist the AUD, with most of Asia on holidays the movements today are likely to be limited in nature. Support is found below .7780, .7750 and .7720, resistance at .7825, .7840 and .7880.

Regional data releases today include Japanese trade data for January along with New Zealand producer price inflation. On the policy front the Bank of Japan will release their monthly economic report.

Data releases this evening include initial jobless claims, Philadelphia Fed manufacturing index and crude oil inventories from the States, consumer confidence and current account figures from the Eurozone, French CPI along with UK industrial orders.


Market Map Feb 19 2015


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