Fed members water down dovish expectations

Summary:

• Two prominent Federal Reserve members do not think the Fed will have to cut rates any time soon despite the yield curve inversion
• A lot of data from the Japan’s economy
• Another “not” meaningful Brexit vote to take place in London

The end of policy normalisation

Over Asian hours trading we were offered two noteworthy speeches from two prominent Federal Reserve members - John Williams and James Bullard. The former played down market fears about a possible recession being derived from the bond market (the yield curve inversion in some segments). Federal Reserve Bank of New York added that the most likely case was for US growth of 2% with the economy continuing to add jobs amid low unemployment, as Bloomberg reports. Thus, he does not see the elevated probability of a recession this year or next year relative to any year. Alluding to the inverted yield curve as a harbinger of an impending recession Williams said that it was telling us that growth would be pretty modest in the US and global economies going forward. Similar remarks were conveyed by Federal Reserve Bank of St. Louis Bullard who said that while the normalisation process in the US could come to an end, it was premature to contemplate a rate cut currently. Bullard suggested that he would need a wider variety of Treasury spreads to invert and stay there for several months before concluding that it is sending a clear recession signal. He sees economic growth likely to rebound in the second quarter and the rest of this year with the economy being still in good condition.

The US dollar treads water this morning with both Antipodean dollars leading the gains in the G10 basket. Technically the EURUSD keeps moving close to its crucial support just above of 1.12. Source: xStation5

Mixed data from Japan

A bunch of macroeconomic releases we were offered from Japan turned out to be mixed. First of all, the inflation data from Tokyo for March stood at 0.9% in annual terms, up from 0.6% but in line with expectations. Core measures came in also as expected, the data is often viewed as a leading indicator for nationwide figures but it does not point to any acceleration in the foreseeable future. Retail sales for February disappointed producing a 0.2% MoM increase compared to a 1% MoM rise expected. A bit more encouraging data came from the labour market where the unemployment rate fell in February to 2.3% from 2.5% whereas the job-to-application ratio stood at 1.63. There is no doubt that the labour market is one of the brightest spots in the Japan’s economy, albeit it has yet to translate into higher price pressures to push price growth toward a more desirable level. Moreover, it is highly unlikely the tight labour market will finally do so, the same issue is faced by other advanced economies (to a lesser extent obviously). Last but not least, eagerly watched industrial production rose in February 1.4% MoM, as expected, producing the largest monthly increase since October. The data seems to bode well for industrial output in other economies in the world, including Euopean ones.

Japan’s industrial output bounced back in February producing the highest monthly increase since October. Source: Bloomberg

In the other news:

• RBNZ’s Orr said the bank remained focused on inflation and employment objectives

• UK Parliament is scheduled to vote on the withdrawal agreement as it seeks a longer deadline extension (beyond April 12)

• China’s Shanghai Composite rises 3.2% just before the close