Fed Less Hawkish, More Data-Dependent Than Before Last Two Hikes

  • Monday, March 6, 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.

Central Bank Data Analytics Forecasting

Federal Reserve
Forecast: Likely to remain silent (aside from Kashkari speech on March 6), watch jobs numbers
Analysis: Janet Yellen’s speech on Friday scored somewhat hawkish* (residual** 0.24), adding to the Fed’s steeply rising trend (momentum 0.21). Nevertheless, aggregate trend has not reached the highs it did preceding the December 2015 or December 2016 hikes. Although the Fed is likely to hike rates on March 15, it is not as clear-cut as it was with each of the last two hikes. Given the Fed’s current tone, even the slightest economic weakness could cause them to hold rates instead. This increases focus on the jobs numbers released on March 10, as well as any indication that financial conditions may be softening. With the Fed at a tipping point, weak labor market or financial market data could delay a hike, but continued strength in these numbers—coupled with rapidly rising Fed sentiment—suggests a hike is imminent.

Federal Reserve Data Analytics Forecasting

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European Central Bank
Forecast: Likely to hold rates on March 9
Analysis: With momentum slightly hawkish (0.20) and inflation above target for the first time in four years, the ECB is likely to be somewhat hawkish in its March 9 policy meeting. After Bundesbank President Weidmann indicated that the ECB would not suddenly end asset purchases, the bank is unlikely to make any abrupt moves. However, the March 9 statement will likely contain a further nod to tapering.

Reserve Bank of Australia
Forecast: Likely to hold rates and express concern about real estate bubble on March 7
Analysis: Despite a growing trade surplus, rising GDP, and an inflating real estate bubble, the RBA continues trending dovish (momentum -0.84). These countervailing signals suggest that the RBA is likely to hold rates while simultaneously addressing the rising upside risks in the Aussie economy. This is likely to be one of the least dovish RBA statements in the last year.

Bank of England
Forecast: Inflation Attitudes Survey likely to express concern over rising inflation
Analysis: The annual BOE Inflation Attitudes Survey appears poised to indicate concerns about rising inflation in the UK. Although this may prompt hawkish policy signals, BOE trend (momentum -0.04) is likely to remain fairly neutral.

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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