Treasuries Decline Before Fed’s Decision on Rate-Increase Stance

17 Dec 2014 | Author: | No comments yet »

Eerie calm amid eye of the risk-aversion storm.

Treasuries fell before Federal Reserve policy makers wrap up a meeting amid speculation they’ll look beyond Russia’s currency crisis and discuss dropping a pledge to keep interest rates low for a “considerable time.” U.S. debt pared losses after a report showed the consumer price index declined in November by the most in almost six years, depressed by falling energy prices. Here’s what to look for when the Federal Open Market Committee releases its policy statement along with quarterly economic projections at 2 p.m. today in Washington, and Federal Reserve Chair Janet Yellen holds a press conference at 2:30 p.m.AUSTRALIA’S sharemarket looked to be in the eye of a storm yesterday as risk aversion tied to the collapse in oil prices and the Russian rouble swirled through international markets before the outcome of the US Federal Reserve meeting overnight. The benchmark S&P/ASX 200 rose for the first time in seven days, up 0.2 per cent to 5161.9, with energy stocks leading gains after oil prices bounced off a fresh five-year low.

It will be interesting to see what it’s replaced with, and how the Fed is able to balance between keeping monetary policy extraordinarily accommodative, while moving toward the first rate hike.” The benchmark 10-year yield rose two basis points, or 0.02 percentage point, to 2.08 percent as of 10:14 a.m. in New York, according to Bloomberg Trader data. The FOMC will replace “considerable time” with a word such as “patient” to describe its approach to policy, according to 68 percent of 56 economists surveyed by Bloomberg last week.

McBride expects the Fed to finally jettison from its post-meeting statement the phrase “considerable period of time,” which refers to how long interest rates will be maintained at the current, near 0% levels. The rouble pared most of a 20 per cent fall after Russia’s economy minister said capital controls weren’t under consideration, yet the embattled currency was still down more than 20 per cent for the week, despite heavy foreign exchange intervention by the Central Bank of Russia and a massive rise in Russia’s benchmark lending rate.

If you make any changes right now, any reaction might be amplified,” said Jennifer Lee, a senior economist at BMO Capital Markets in Toronto. “I don’t think they want to rock the boat too much.” — Pace after liftoff: Yellen, in her press conference, is likely to stress that that the Fed’s interest-rate path will depend on how economic data evolves, said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey. “There is a fairly good chance that she will point out that once the rate hikes begin, that they will definitely not be on the same kind of predetermined schedule that they were on last time,” he said. US 10-year bond yields fell to 2.06 per cent, the lowest closing level in 18 months, as global investors flocked to the safety of US Treasuries despite a strengthening US economy and the conclusion of the Federal Reserve’s bond-buying program in October.

When the Fed began raising rates in June 2004, it did so at a “measured” pace, which translated into a quarter-point increase at every meeting for the next two years. Some Fed watchers expect to see a new word—”patience.” Stocks seesawed Tuesday, amid concerns about Russia and as oil first plunged and then stabilized. The risk of economic/debt crises in other emerging market nations, particularly Venezuela, and potential stress on emerging markets and commodity funds, could be added to the list of concerns. That’s why it may be too early to buy Australian shares on the view that the economy will benefit from lower oil prices, a weaker exchange rate and potential interest rate cuts. The volume of Treasuries traded through ICAP Plc, the largest inter-dealer broker of U.S. government debt, yesterday climbed to $425 billion, the most since Dec. 5.

Global risk aversion could continue to weigh on the resources sector until commodity production is significantly reduced and OPEC stops talking down the price of oil. Macquarie Equities expects the national average petrol price to fall to about $1.20 a litre, generating the same economic boost as cutting the official cash rate by 50 basis points. U.S. central bankers may say they’re monitoring markets carefully as Russia’s currency collapse threatens to destabilize other regions, said David Stockton, a former Fed research director who led presentations of economic and financial data for policy makers. At the same time, they will keep their focus on U.S. economic strength and probably replace the language on timing with something that says they’re going to be patient with rate increases, said Stockton, senior fellow at the Peterson Institute for International Economics in Washington.

The currency initially stabilized after the rate hike, but then went into free fall. “The major players that came in and reversed it were probably corporates that were short of dollars,” said Robert Sinche, global strategist at Amherst Pierpont Securities. While average hourly earnings picked up in November to a 2.1 percent annual pace, they were still little higher than inflation. “Any sort of sense of confidence, or lack of confidence” in the inflation outlook “is what we will be paying attention to” because it could have implications for the timing of liftoff, Berger added. The ruble has plummeted this week, losing as much as 19 percent yesterday in the biggest one-day drop in 16 years, as panic swept across Russian financial markets after a surprise interest-rate increase overnight failed to stem a run on the currency. But note that in the most recent discussion of financial stability risks in the Monetary Policy Report, the Fed highlighted narrowing credit spreads as a sign of heightened risk-taking—a concern which was echoed in the staff’s latest assessment of financial stability risks in the October minutes,” according to JPMorgan economists.

Instead, he said the Fed’s biggest challenge would be explaining its view on inflation, which is running below its target and could stay low with falling oil prices. “They’ve been pretty opaque and confusing.

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