Trade The News Weekly Recap; It’s JANET’s World

The Fed tapered again in
Wednesday’s rate decision and dropped its 6.5% unemployment threshold,
surprising nobody. But during the post-decision press conference, Yellen
suggested the Fed would consider hiking rates as soon as six months after the
end of QE3. Under a strict interpretation, if asset purchases end in November
of this year as expected, rate hikes would arrive in the second quarter of
2015. 

Global markets were very choppy in the remainder of the week as
participants recalibrated positions and worked out the implications of Yellen’s
verbal guidance. 

In other news, Russia absorbed Crimea and incurred retaliatory
sanctions from the US and EU. 

In China, the PBoC widened the daily yuan trading
band to 2% from 1% and appeared to continue its campaign to halt hot money
inflows. The impact of data reports was pretty muted overall. For the week, the
DJIA gained 1.4%, the Nasdaq rose 0.7%, and the S&P500 added 1.3%, touching
a fresh record level on Friday before retreating from highs.

– In the statement accompanying Wednesday’s rate decision, the FOMC formally
dropped the 6.5% unemployment threshold. In its place, the FOMC said that in
determining how long to maintain ultra-low rates, assessment of progress
“will take into account a wide range of information, including measures of
labor market conditions, indicators of inflation pressures and inflation
expectations, and readings on financial developments.” Many observers
seemed to believe that Yellen’s six-month comment was a slip of the tongue and
was not intended to reshape forward guidance, especially after the Fed just
dropped its quantitative unemployment threshold. Moreover, Yellen was emphatic
that markets should not make strict interpretations and reiterated what all of
her colleagues and former chair Bernanke have repeated again and again: the
first rate hike is highly data-dependent and will reflect a “balanced
judgment” about prospects both for labor market slack and inflation pressure.

– Minneapolis Fed President Kocherlakota was the sole dissenter to the FOMC
decision. Kocherlakota has tended toward the dovish end of the spectrum and his
dissent was rooted in concerns about the labor market. He warned that the new
guidance weakened the Fed’s commitment to its 2% inflation target and does not
provide any information on the speed at which the Fed wants to reach full
employment. St. Louis Fed President Bullard said that Yellen’s comments on the
timing of rate hikes was not a change in policy and was simply referring to
market expectations about what was meant by a “considerable period.”

– US bond traders reacted to the Fed statement swiftly by aggressively selling
the middle and short end of the US curve. Ultimately the Fed offered up very
little in the way of new information regardless, expectations have crept in for
a little tighter policy next year; 2015 fed fund futures are now fully pricing
in at least a 50 basis point rise in rates to begin by mid-summer. Previously
traders had seen a greater likelihood of only 25 basis point hike to come
sometime in the middle part of the second half. The 5-year/30-year spread has
compressed to its flattest level since the summer of 2012. For the week the
rate on the 30-year has climbed only marginally and the 10-year continues to
hold near 2.75%, backing up a modest 10 basis points, while the 5-year is up
some 20 basis points. Supply looms next week: $96B in 2-, 5- and 7-year notes
could be challenging and keep pressure on the belly of the curve. Note that
spot gold sank in the second half of the week, giving up 3.5% after the FOMC
decision.

– The Fed released the first component – stress test results – of its
Comprehensive Capital Analysis and Review (CCAR) this week. Twenty nine of 30
banks passed the severely adverse scenario, which included a 4% jump in the
unemployment rate, 4.75% negative GDP growth, a 50% decline in equity prices
and a 25% decline in real estate prices. Zions Bancorp was the only institution
that would not remain well-capitalized with Tier 1 common equity ratios of at
least 5.0% under the stress scenario. The second component of CCAR, including
the Fed’s evaluation of each firm’s capital plans, dividends and buybacks, will
be disclosed Wednesday, March 26. Thanks to CCAR and higher rate expectations,
both regional and tier-one banks saw robust gains this week, with the exception
of Zions, whose shares lost nearly 5% on Friday.

– Russia formally absorbed Crimea this week, drawing US sanctions against
various high-level Russian officials and a few selected institutions, most
notably Bank Rossiya, a key firm used by the Putin regime and Geneva-based
Gunvor, the world’s No. 4 oil trading company. The European Union discussed
possible sanction options but has taken little concrete action against Russia
besides freezing military ties and sanctioning a few individuals. The EU also
signed the political sections of the association agreement with Ukraine. Both
S&P and Fitch have cut their sovereign outlooks on Russia to negative.

– FedEx missed earnings and revenue expectations in its third quarter report,
and like so many firms before it blamed the weather. FedEx’s CEO stated that
“historically severe winter weather significantly affected our third
quarter earnings. On days when the weather was closer to normal seasonal
conditions, our volumes were solid and service levels were high.” Nike
reported very good third quarter results, but made troubling comments during
its conference call, warning that FX headwinds would continue to reduce EPS in
Q4 and into 2015, and would reduce FY15 earnings. Oracle missed top- and
bottom-line expectations slightly in its third quarter and its fourth quarter
outlook was also a bit soft. Analysts highlight the firm’s high spending levels
to catch up with a horde of cloud computing rivals.

– Ahead of March quarter earnings season, AK Steel and Nucor both offered their
customary pre-earnings guidance statement. Both firms warned that EPS would be
well below expectations, citing extreme weather that has disrupted customer
demand. AK also cited a planned blast furnace outage and legal settlement
charges.

– EUR/USD made a few last stabs at 1.3950 early this week before the FOMC
decision reversed sentiment and strengthened the greenback. The pair hit
two-week lows around 1.3750 on Thursday. The yen weakened in a more restrained
fashion after the FOMC, rising from 101.60 to around 102.60 before
strengthening a bit through week’s end.

– The Chinese Yuan has now given back all of its 2013 gains as the PBoC lets
the currency weaken further to curb hot money inflows. Last weekend, the PBoC
widened its daily yuan trading band from 1% to 2%. USD/CNY spent most of the
week above 6.20, raising concerns about a specialized financial product,
originally used to hedge foreign exchange risk, called a trade redemption
forward contract (RFC). The contract pays investors if the yuan remains strong
and will start costing dearly as USD/CNY weakens past 6.20. In a report out
recently, Morgan Stanley wrote there had been $350 billion RFCs sold since the
beginning of 2013 and $150 billion might still be outstanding.

– Japan announced another trade deficit which was wider than expected but still
smaller than the past three months on adjusted basis. Both exports and imports
were up in high-single digits, for a 12th and 16th consecutive rise,
respectively. Trade components also showed some improvement, with double-digit
y/y exports increase to Asia, China, and Europe as well as a 6.4% drop in the
bill for crude oil imports.