Wednesday

March 8, 2017

  March 8, 2017

 

ADP Private Payrolls; 4Q Productivity, Unit Labor CostsBy Ben Baris and Geoff King

What to Watch: Economists surveyed by Bloomberg forecast the ADP private rose by 187,000 in February, down from a 246,000 advance in the first month payrolls

of the year, 8:15 a.m. The final print of fourth-quarter is expected nonfarm productivityto show a 1.5 percent increase from the previous quarter, up from 1.3 percent as initially reported, 8:30 a.m. are forecast to have risen 1.6 percent, down from Unit labor coststhe initial 1.7 percent print. The final release of January is wholesale inventoriesexpected to match the initial release, which showed a 0.1 percent decline from a month earlier, 10 a.m.

Economics: The Economist hosts its , bringing together Argentina Summitgovernment and business leaders to evaluate the country’s progress in 2016 and plan the year ahead. Speakers include Energy Minister and Treasury Juan Jose ArangurenMinister .Nicolas Dujovne

Government: U.K. Chancellor of the Exchequer presents his first Philip Hammondannual statement in the House of Commons at 7:30 a.m. Few policy budgetannouncements are expected, but the chancellor will give new forecasts for growth and the budget deficit. Follow the TOPLive blog for real-time coverage .here

Energy/Commodities: The U.S. Energy Information Administration releases its weekly report after 10:30 a.m. Follow the TOPLive blog for real-crude oil inventorytime coverage on the Bloomberg .terminal

Markets: headed for the longest losing streak in five years before a U.S. Treasuriesdebt auction today and as the market prepares for the Federal Reserve to raise interest rates as early as next week. The rose, while extended its decline U.S. dollar sterlingahead of the U.K. budget.

(All times local for New York.)    

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Commentary in This Issue

Bloomberg Intelligence Economics has revisedits forecast for the pathof interest in 2017ratesto three hikes, most likely occurring in March, June and December: Yelena

andShulyatyeva Carl Riccadona.

Improving financial conditions coupled with moderate inflation gains are helping keep BI Economics’ Fed BiasIndex above neutral: Michael McDonough.

The Trump administration’s initial efforts to attack financial regulations will include directing federal agencies to changes that have been reversemade through guidance rather than formal rule-making, , Mark CalabriaVice President ’s chief Mike Penceeconomist, said yesterday.

Contrarian View

What bearish Brazilian analysts realfail to realize, according to ING

and , Groep NV Prestige Economicsis that Brazil’s already-improving domestic economy is poised to get a dramatic lift from a pickup in global growth and higher commodities prices. An improved outlook for fiscal accounts amid government efforts to dial back spending is also supportive, they say.

1.63 Percent

The drawn by yesterday’s $24 yieldbillion 3-year UST auction, the highestfor the maturity since April 2010. (link to terminal)

Big Picture

Gauges Show Markets May Glide Through Next Fed Decision

Does the market like certainty or what? In the wake of President Donald Trump’s speech to Congress last week and with odds of a March rate hike all but baked in, cool heads prevail in the bond- and currency-trading spheres. The Merrill Lynch Option Volatility Estimate index, a gauge of expected price swings in U.S. debt, fell on Monday to the lowest level since October. Similarly, JPMorgan’s Global FX Volatility index dropped to the lowest since the U.S. election.

— Brian Chappatta

  Economics 2  March 8, 2017

Big Picture

Fed Embarks on Tightening Path, But Risks LoomBy Yelena Shulyatyeva and Carl Riccadonna, Bloomberg Intelligence economists  Federal Reserve officials have clearly communicated that they plan to raise interest rates this month, a move that is already reflected in the markets with a high degree of certainty. Bloomberg Intelligence Economics has revised its forecast for the path of interest rates in 2017 to three hikes, which would cumulatively increase the fed funds rate by 75 basis points to 1.25-1.5 percent by the end of the year. Rate hikes will most likely occur at the March, June and December meetings.

At the time of lift-off in December 2015, the Fed foresaw four rate hikes in the following year, as the Summary of Economic Projections indicated at the time. However, concerns about the Chinese economy and the Brexit referendum resulted in slower-than-anticipated monetary policy tightening. Risks have receded since then and financial conditions have eased substantially, allowing the Fed to return to the steeper tightening path that they had previously anticipated.

In her March 3 speech, Fed Chair Janet Yellen reiterated her colleagues’ recent calls for a rate hike occurring “relatively soon” and specifically mentioned the March 15 meeting, if employment and inflation continue to meet policy makers’ expectations.

This leaves the February jobs report, scheduled for release on March 10, and to a lesser extent February’s CPI report, released the same day as the Fed’s announcement, as the only potential stumbling blocks to a March rate hike. However, the bar is extremely high for the data not to deliver, with Yellen noting the longer-run trend in labor-force growth of between 75,000-125,000 per month. Fed fund futures are pricing in an 98 percent chance for a rate hike this month, up from less than 40 percent two weeks ago.

The change in Fed rhetoric from an earlier more patient tone, according to

 

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Yellen, reflects the “same strategy” but with “new tactics.” She outlined three basic principles of conducting monetary policy: “goal driven,” “forward looking” and “risk sensitive.” She said this strategy has been the same throughout the extremely gradual policy accommodation of the past few years. Yet circumstances have now changed, particularly with respect to risks. In the absence of major negative surprises, “the process of scaling back accommodation likely will not be as slow as it was during the past couple of years.”

Fed officials seem to be willing to look beyond the tepid pace of economic growth, which is currently tracking below 2 percent. Furthermore, policy makers may become more willing to hike rates in June if growth follows a familiar trajectory of a weak first-quarter reading followed by a stronger second quarter, which has been the case in recent years due to seasonal adjustment issues.

To be sure, while global risks have receded, they have not been completely eliminated. Political jitters in Europe couldresurface over the next few months amid elections in the euro area. Likewise, if theTrump administration does not make

meaningful progress on the tax and regulatory reform in the next few months, the markets’ optimism could significantly fade and financial conditions could tighten, which could make it difficult for the Fed to deliver its second rate hike of 2017 in June. Nevertheless, BI Economics believes that the Fed will be able to hike rates in June and December.

Yellen, during her March 3 speech, stated that the goals of the dual mandate have been met, in essence: “The economy has essentially met the employment portion of our mandate and inflation is moving closer to our 2 percent objective.”

The Fed is willing to embark on policy tightening while the global environment allows them to currently focus on domestic goals. However, given a lot of uncertainty in terms of the global political climate as well as domestic fiscal policy, the Fed wants to retain flexibility, stating that policy is not on a preset course.

While policy tightening appears to be set on a steeper path, it will remain “gradual” and will unlikely resemble the “measured pace” of the last tightening cycle.

 

Monetary Policy

Financial Conditions Eased

  Economics 3  March 8, 2017

Monetary Policy

Fed Bias Index Supports Gradual TighteningBy Michael McDonough, Bloomberg Intelligence economistImproving financial conditions coupled with moderate inflation gains are helping keep Bloomberg Intelligence Economics’ estimated Fed Bias Index above neutral. This coincides with a U.S. jobless rate that has remained at a level close to or consistent with full employment.

In January, the bias index registered a reading of 0.37, unchanged from a month prior. Core PCE, the Fed’s preferred measure of inflation, rose 1.74 percent year-on-year in January, up slightly from 1.71 percent in December. The fact that the core PCE deflator remains below 2 percent gives policy makers the leeway to remain patient about the future path of tightening and also helps to explain why the bias index isn’t pushing further into positive territory.

The estimated Fed Bias Index is constructed by applying a Probit model to a modified Taylor rule that includes a measure for financial conditions. For each period, the dependent variable ranges from minus 3 to 3, with zero indicating no growth or inflation bias and no change in the Fed funds target rate during that month. A negative reading implies an easing bias, while a positive figure could signal tightening.

So far in March, the Bloomberg Financial Conditions Index has averaged 0.38, compared with 0.067 in February and 0.013 January. Leaving the inflation and unemployment components constant

 

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— official data is not yet available — this would push the bias up to 0.74 in March, which would be its highest reading since before the 2008 financial crisis. If core PCE reached the Fed’s goal of 2 percent, with financial conditions at their current levels, the bias index would jump to 1.4, its highest level since the Fed’s last tightening cycle that occurred between 2004-2006.

It should be noted that while global riskshave receded and optimism surrounding President Trump’s fiscal agenda has helped ease financial conditions, storms may be building on the horizon. Political jitters could resurface over the next few

months amid elections in the euro area, especially in France. Likewise, if the Trump administration does not make meaningful progress on the tax and regulatory reform in the next few months, the markets’ optimism could fade and financial conditions could tighten. This could prevent a sharper rise in BI Economics’ estimated Fed Bias Index.

Nevertheless, it appears increasingly certain that the Fed is going to take advantage of current conditions to hike rates in March. BI Economics now expects a March hike will be followed by two additional hikes this year in June and December.

 

   

Data & Events

Fed Tightening Bias Above Neutral, Likely to Go Higher

  Economics 4  March 8, 2017

 

Data & Events

 

TIME COUNTRY EVENT SURVEY PRIOR

7:00 Brazil Industrial Production YoY 1.00% -0.10%

7:00 Brazil Industrial Production MoM -0.40% 2.30%

7:00 U.S. MBA Mortgage Applications — 5.80%

7:30 U.K. U.K. Spring Budget — —

8:15 U.S. ADP Employment Change 187k 246k

8:15 Canada Housing Starts 200.0k 207.4k

8:30 U.S. Nonfarm Productivity 1.50% 1.30%

8:30 U.S. Unit Labor Costs 1.60% 1.70%

8:30 U.S. Revisions: Productivity and Costs — —

8:30 Canada Labor Productivity QoQ 0.40% 1.20%

8:30 Canada Building Permits MoM 3.00% -6.60%

10:00 U.S. Wholesale Inventories MoM -0.10% -0.10%

10:00 U.S. Wholesale Trade Sales MoM 0.50% 2.60%

20:30 China CPI YoY 1.70% 2.50%

20:30 China PPI YoY 7.70% 6.90%Source: Bloomberg. Surveys updated at 5:10 a.m. in New York.

 

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Calendar

Click on the to see the full range of economists' forecasts on the terminal.   highlighted releases

Overnight

German industrial productionrebounded in January, reaffirming the country’s favorable economic outlook after factory orders slumped the most in eight years. Output, adjusted for seasonal swings and inflation, rose 2.8 percent from December, when it dropped a revised 2.4 percent, the

said today. The Economy Ministryvolatile indicator’s reading compares with a median estimate for a 2.7 percent increase in a Bloomberg survey. Production was unchanged from a year earlier.

China’s surged in importsFebruary from a year earlier with the nation posting a rare as trade deficit

slipped. Analysts said exportsseasonal factors mostly explain the swings. Imports rose 38.1 percent in U.S. dollar terms, almost double economist projections, while exports dropped 1.3 percent versus an estimated 14 percent increase in a Bloomberg survey. The trade deficit was $9.15 billion, the first negative reading in three years. That compared with projections for a $27 billion surplus.    

Japan’s was economic growthrevised upward for the fourth quarter of 2016, as export-driven business spending offset sluggish consumer demand. GDP expanded 1.2 percent on an annualized basis from the previous quarter in the three months through December, according to data released today by the Cabinet Office.This compares with a preliminary figure of 1 percent and a median estimate of economists for 1.5 percent. Measured quarter on quarter, GDP rose 0.3 percent, up from a preliminary figure of 0.2 percent, but below an economists’ forecast for 0.4 percent.

Europe

Asia

Market Indicators

Feb. ADP May Temper From Jan., Eclipse 4Q Average

By most measures, the labor market appears to be strong. All of the employment components of the regional Fed surveys, including the ISM manufacturing and non-manufacturing reports, are in positive territory and signal favorable job creation. Similarly, the level of claims for unemployment benefits is lingering around multi-decade lows. This is consistent with consensus for an increase of 185,000 for ADP, softer than the 246,000 posted in January, but stronger than the fourth-quarter average of 167,000, and 175,000 for all of 2016.

— Yelena Shulyatyeva and Richard Yamarone, Bloomberg Intelligence economists

  Economics 5  March 8, 2017

 

Market Indicators

Source: Bloomberg. Updated at 5:30 a.m. New York time.

  Economics 6  March 8, 2017

 

 

Bloomberg Brief: Economics

 

 

 

 

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