Fed Analytics, Economic Data Point to Hike

  • Monday, March 13, 2017

Welcome to Prattle’s “Macrocast.” Using our proprietary central bank analytics, we provide analysis and forecasting on the market-moving releases in the week ahead.

Federal Reserve Bank of Japan Central Bank Signals Research Analytics

Federal Reserve
Forecast: Likely to raise rates 25bps on March 15
Analysis: After a month of increasingly hawkish* rhetoric, Fed momentum** has climbed to 0.24. Although aggregate trend (0.46) is lower than it was leading into the December rate hike (0.52), very strong financial conditions and a continually improving labor market put the Fed on firm footing for a rate hike. Our statistical model forecasts that the FOMC statement residual score is likely to be 0.52, which would make it the most hawkish FOMC statement in the last 5 years. If the statement residual score is over 0.3, it will likely signal at least two more rate hikes in 2017; a statement with residual score over 0.4 could indicate an even faster pace of tightening.

Market Trading Finance Analytics Signals Federal Reserve
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European Central Bank
Forecast: Speakers likely to reinforce slightly hawkish tone
Analysis: ECB momentum remains on the hawkish side of neutral (0.13), and speeches by Draghi, Lautenschlager, and Praet are likely to reinforce this slightly hawkish tone. With slightly hawkish momentum scores, all three speakers are likely to espouse optimistic views of the European economy even as political uncertainty limits the possibility of hawkish policy action in the near term.

Bank of Japan
Forecast: Likely to hold rates on March 15
Analysis: The BOJ, still in “wait and see” mode from its last round of stimulus, is starting to see positive economic results. Inflation is rising for the first time in over a year, and, although it is not yet approaching target, the conversation has turned to a question of when the BOJ is likely to cut its annual target for bond purchases, thereby curtailing stimulus. With trend fairly flat and momentum still in negative territory (-0.24), it is unlikely the bank will move toward tightening this week, but the policy statement is likely to be less dovish than other recent remarks.

Bank of England
Forecast: Likely to hold rates on March 16
Analysis: As Bank of England policymakers weigh the two countervailing forces of rising inflation and Brexit, the balance of upside and downside risks has kept momentum almost perfectly neutral (-0.02). The government could trigger Article 50 as early as March 14, thereby creating a greal deal of economic uncertainty. This means that although several BOE policymakers have expressed concerns over rising inflation, they are unlikely to tighten policy until they see the fallout from the next step in the Brexit saga.

Swiss National Bank
Forecast: Likely to hold rates on March 16
Analysis: Rising inflation in Switzerland presents a double-edged sword for the SNB. While any help weakening the Swiss franc is welcome, the SNB will be under pressure to slow their currency market interventions and raise rates out of negative territory if rising inflation accelerates. All signs suggest SNB policymakers are several months away from facing these problems head-on, so this week’s policy statement will likely echo the bank’s currently neutral momentum (0.12).

Norges Bank
Forecast: Likely to hold rates on March 16
Analysis: Norwegian inflation has cooled in recent months after rising due to rebounding oil prices. Headline inflation remains at the Norges bank’s target of 2.5%, so it is unlikely that policymakers will intervene. However, slowing price increases do suggest the central bank will edge toward removing monetary accommodation, though policymakers are likely to maintain a neutral posture for the time being. Accordingly, this week’s policy statement is likely to echo the bank’s neutral momentum (0.07).

Swedish Riksbank
Forecast: Ingves likely to signal holding pattern through 2017
Analysis: Riksbank sentiment has declined from slightly hawkish to dovish since the start of the year; momentum is now on the dovish side of neutral (-0.07). This change largely reflects concerns over the rising krona and stated plans not to tighten policy until 2018. Governor Ingves’s first speech of 2017, delivered this week, will likely echo concerns about the continued political uncertainty in the U.S. and Europe.

The Prattle Team

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* Prattle’s models are based on the historical relationship between central bank language and market reaction, which is used as the basis of evaluation for future communications. The scores are normalized around zero and range between -2 and 2, negative numbers indicating dovishness and positive numbers indicating hawkishness. Aggregate trend is the overall sentiment of the bank calculated using a LOESS fitting of trend using a 12-month window.

** Residual scores represent the tone of a communication compared to the rolling, 12-month average for that individual communication type or speaker. Raw scores represent the tone of a communication compared to the average of all communications. Momentum is the average of the last ten residual scores.

Disclaimer: the forecasts provided herein are based upon sources believed by Prattle Analytics, LLC D/B/A Prattle, to be reliable and to be developed from models which are generally accepted as methods for producing economic forecasts.

Prattle cannot guarantee the accuracy or completeness of the information upon which this Report and such forecasts are based. This Report does not purport to disclose any risks or benefits of entering into particular transactions and should not be construed as advice with regard to any specific investment or instance. The opinions and judgments expressed within this Report made as of this date are subject to change without notice.

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