Fed is Cautiously Optimistic, Turkey Cuts Rates | Weekly Review And Preview

  • Monday, March 28, 2016

Prattle is proud to add our “Weekly Review and Preview” to our regular content lineup. In this report, we analyze the most important communications from the previous week and forecast our take on upcoming releases.

Review

We see cautious optimism emerging from the Federal Reserve, the Reserve Bank of Australia, and the Bank of Canada. The Bank of Japan defended their choice to extend rates into negative territory while the European Central Bank admitted that negative interest rates will not solve all that ails their economy. Finally, the Bank of England exhibited their nerves from recent Brexit politics, and the Bank of Turkey’s rate cut only expanded ongoing questions about their long-run growth.

The Federal Reserve had five speakers last week whose general mood trended hawkish. This trend provided some indications that a rate hike might be on the table for April’s meeting (this, however, is a remote possibility).

fedspeak_collat

[Evan’s recent speech hasn’t been posted, so it is currently unavailable for scoring]

Jeffrey Lacker of the Reserve Bank of Richmond and Dennis Lockhart of the Reserve Bank of Atlanta kicked off the week with hawkish talk that nudged the dollar higher. Lacker was the more hawkish of the two with a raw score of 1.15.

On Tuesday, Patrick Harker of the Reserve Bank of Philadelphia provided more support for hawks by reiterating the possibility of an April hike. In fact, Harker was significantly more hawkish than Lacker and Lockhart, earning a score of 1.79. This sentiment was (somewhat) countered by a (characteristically) cautious and dovish speech by the Chicago Fed’s Charles Evans, highlighting why the committee may well wait until June for the next rate hike.

The tail end of the week was quieter with only James Bullard of the Reserve Bank of St. Louis speaking. He too suggested the possibility of an April hike, but his comments were mostly in the context of arguing for data dependency and expressing his displeasure with the dot plot.

The European Central Bank only had a couple of speakers last week, but the theme was clear: the ECB alone cannot solve all of Europe’s problems. This was perhaps best articulated in Benoît Cœuré’s speech last Monday when he asserted, “The ECB cannot single-handedly create the conditions for a sustainable recovery in growth. This requires a concerted effort in terms of economic and fiscal policies.” Governments in the eurozone need to invest in education and reign in use of leverage that leads to increased systemic risk in cooperation with the ECB’s policies.

The Bank of England had three speakers last week: Kristin Forbes, Governor Mark Carney, and Sarah Breeden. Though speaking separately across the globe, one word characterized all of the BOE speakers last week: nervous.

Forbes’ speech epitomized this attitude, heavy with concern about how the UK will finance deficit spending if Brexit passes. Policymakers are trying to stay out of the political fray, but they are nervous about the economic implications of Brexit…even if they are still relatively hawkish about the current state of the British economy.

The Bank of Japan had a speech from Deputy Governor Hiroshi Nakaso and released opinions from their monetary policy meeting earlier in the month, and all of these communications were defended NIRP. As the debate continues over negative rates, BOJ policymakers are vehemently defending their decision…suggesting that rates are not going anywhere but down.

Glenn Stevens, the Governor of the Reserve Bank of Australia, gave a speech on Tuesday where he declared that things are leveling off–and perhaps even looking up. Stevens’ communication referenced China’s rebound and the consequential increased likelihood of a strengthening economy in Australia too.

On Thursday, the Bank of Canada released their Annual Report for 2015. The forward by Governor Stephen Poloz stated that the “Bank was well positioned” to tackle the problems in 2015. Consequently, the BOC did what it needed to fend off damage from low oil prices and, with oil now rebounding, they are optimistic about future growth.

Finally on Friday, the Central Bank of Turkey cut its overnight interest rate by 25 basis points, shocking policy experts around the world. In contrast to these policy experts however, Prattle’s algorithm determined that Turkey had been trending dovish since the end of February–making easing policy no surprise to us.

In the minutes from their February meeting, the bank explicitly said that rates “would be reduced should… [evidence show] the effective use of the policy instruments laid out in the road map published in August.” Subsequently, Deputy Governor Turalay Kenc gave two speeches throughout March where he strongly suggested that the implemented August policy had been successful. These speeches, in addition to the original minutes, also scored dovish. Prattle’s algorithm detected this trend and scored every relevant communication from the Bank of Turkey since February 26 as increasingly dovish. As the graph below illustrates, there was a particularly precipitous drop in sentiment leading up to the rate cut decision, indicating a policy change may be imminent.

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Preview

This upcoming week promises to have intriguing consequences for monetary policy. The Bank of Israel has their monetary policy meeting on Monday where they are strongly expected to maintain rates. The bank is currently trending neutral and is unlikely to surprise.

isr_collat final 2

There will also be several speeches from key Fed officials: Yellen, Williams, Dudley, Evans, and Mester. Evans, who speaks on Wednesday, will likely continue his dovish tone–indicative of a hike-free April; Mester, who speaks on Friday, will probably counter, pushing for an April hike.

Tuesday’s speeches from Yellen and Williams, however, are the most important of the set. Both policymakers are likely to fall back on data dependency with Williams likely leaning towards April hike and Yellen remaining noncommittal. Prattle will publish scores for all of these critical communications as they come out.

UK financial policy minutes will be released on Tuesday and that, coupled with a speech from Mark Carney on Thursday, should give a clear picture of how nervous BOE officials really are about Brexit. Depending on the mood expressed there, we may also get a timeline for a rate hike if/when Brexit fails.

Finally, the minutes from Turkey’s policy meeting will be released on Thursday. Those who were surprised by their rate drop (not Prattle) will likely be watching those closely as well. Prattle will of course have the score upon its release.

The Prattle Team

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