US Fed dampens expectations of a rates rise

Thursday, April 30, 2015

The US Fed moved to dampen expectations of an imminent rates rise as the recent string of weaker than expected economic data showed that growth was gradually losing momentum. After yesterday’s disappointing GDP data, which saw the US economy expand 0.2% q/q in Q1, significantly slower than the 2.2% q/q in Q4, Fed officials raised concerns regarding the pace of economic growth as well as hiring momentum, prompting market participants to speculate that an interest rates rise would be unlikely by the middle of the year. Having entered 2015 in a bullish mood after both Q3 and Q4 2014 GDP data surprised on the upside policy makers have had to contend with weaker than expected data and with the expectation of inflation which continues to “run below” the FOMC 2% objective market participants are expecting the Fed to hold off until evidence of a rebound is seen in forthcoming data before stronger wording on an increase in rates is given.

Chinese interest rate swaps headed for their biggest decline since 2008 this month as the PBOC ramped up its stimulus efforts in a bid to support the economy. The fixed cost of one year interest rate swaps in return for a floating seven day repo rate dipped below 2.5% yesterday and has fallen over 100 basis points since the start of the month as central bankers embark on additional monetary easing. The seven day repo rate, a gauge of interbank funding availability fell towards 2.45% yesterday, dropping back towards lows seen in March last year, having fallen by 155 basis points since the start of the month.

The Bank of Japan held off from additional stimulus this month opting to hold the expansion of the monetary base at 80tn yen this year despite the abating pressure of rising inflation. However, BoJ governor, Haruhiko Kuroda, commented that while inflation had subsided he expected it to resurface later in the year as the effects of cheaper crude oil dissipate. With both the eurozone and China embarking on significant monetary stimulus and with weaker growth in the US it seems as if policymakers are choosing to hold off from any additional stimulus in Japan until a clearer outlook can be ascertained. The yen experienced some modest strengthening after the decision, trading towards 118.50 against the dollar early on this morning.

Brazil’s central bank increased its benchmark interest rate by half a percent bringing a fifth consecutive increase to the key rate. The increase to 13.25%, its highest level since the beginning of 2009, was widely expected by market participants as the government fights an uphill battle to put the largest economy in Latin America back on the path to growth while combatting higher inflation, which rose to 8.13% y/y in March. The move by the central bank was accompanied with a brief statement and market participants have welcomed the successive increases, with the expectation of a further increase at its next meeting in June.         

Chinese 1 year IRS drop over 100bp this month

CCSWO1 Curncy CNY IRS 7D REPO 2015 04 30 07 30 26

JPY strengthens modestly against USD

JPY Curncy Japanese Yen Spot 2015 04 30 07 50 58

Brazilian inflation spikes higher

BZPIIPCY Index Brazil CPI IPCA 2015 04 30 07 55 52

Events for today

0005

UK

Apr

GfK Consumer Confidence

1000

EZ

Mar

Unemployment Rate

1330

US

Mar

PCE & Personal Income

1330

US

Q1

Employment

1330

US

w/e

Jobless Claims

1445

US

Apr

Chicago PMI

1530

US

w/e

EIA Nat Gas

FN:

May    Copper, Gold, Silver (COMEX) 

Topics: GDP, US Fed, JPY, BoJ, PBOC
More from: Kash Kamal