Weekly Market Update: Fed's patience is gone but not forgotten
As expected, the FOMC altered its forward guidance this week, replacing the "patient" line with broad language that emphasized its core policy principle of remaining data dependent. Fed Chair Yellen couched the change in pretty stark terms: "just because we removed the word patient from the statement doesn't mean we're going to be impatient." The FOMC also lowered its economic forecast for 2015-16, hinting that the data might not be as rosy as required for a normalization of interest rates. Nearly every global asset class saw big moves on the decision: equities soared, the euro saw an astonishing move across five big-figures (EUR/USD made a round trip from 1.0580 to 1.1050 and back to 1.0650, the second broadest one-day range seen since 2000), and the 10-year UST yield dropped as low as 1.90% and remained below 2% through the end of the week. By Friday, the Shanghai Composite posted a fresh multi-year high, the FTSE index surged above 7,000 for the first time ever, while the Nasdaq approached its all-time closing high of 5048 set in March 2000. For the week, the DJIA added 2.1%, the S&P500 rose 2.7% and the Nasdaq gained 3.2%.
The FOMC replaced patient with a statement that policy tightening would be appropriate when the Fed "has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term." Maybe more importantly though the updated economic forecasts revealed officials now foresee the rising US Dollar serving as a significant headwind to exports and thus a potential drag on growth as well as inflation. Officials also adjusted their outlook for remaining slack in the labor market; forecasts for the long-run level of the unemployment rate shifted down a couple of tenths of a percent. Yellen affirmed that every meeting starting in June will be a "live" meeting for considering rate lift off, but indicated a number of reservations about wage growth, low inflation, and the strong dollar, leaving most analysts saying she was more dovish than they had hoped.
The impact of the brutal winter weather in the US showed up in housing data this week. February housing starts dropped 17% from January to an annualize rate of 897K, while building permits hit a nine-month low of 1.09M. Permits grew slightly over the January rate, although the bulk of permits were for multi-family units, with continued softness in single-family permits. Homebuilder confidence dipped lower than expected in March. The NAHB index of homebuilder sentiment fell for the third straight month and missed expectations. Despite the data homebuilders KB Home and Lennar reported solid Q1 results and suggested the spring selling season is getting off to a solid start.
Greece and its European patrons remain locked in contentious negotiations. Greece is at the very edge of solvency, a position the Europeans appear to be using for maximum advantage to squeeze more reforms out of Athens and beat back Syriza's electoral pledges to end austerity. Right now the consensus is that Greece has enough funds to pay debt coming due in March but may run out of cash in April, though it may unlock a few billion more euros at next week's Eurogroup meeting. On Friday, German press sources were reporting that German Finance Minister Schaeuble expected Greece to be ultimately forced out of the Eurozone even as Chancellor Merkel still wanted to keep Greece in the monetary union for political reasons.
On Monday Russian President Putin appeared at a press conference with Kyrgyz President Atambayev, breaking an 11-day absence from public life. During the period, wild conspiracy theories circulated in media and the internet about a possible power struggle among the various political factions in the Russian leadership, with some analysts suggesting that a slow-motion coup was underway. Responding briefly to the chatter, Putin noted "without gossip, life would be boring."
Iran and the P5+1 group appeared to edge closer to a nuclear deal. Diplomats suggest the two sides should iron out most of their remaining differences over weekend, but another round of talks likely will be needed to seal any deal. Despite the prospect of Iranian oil spilling back onto the market, Brent moved higher this week, from lows around $55 as high as $56.80 on dollar weakness stemming from the Fed decision. WTI slipped into the low $40's on Tuesday but closed out the week at around $46/barrel.
Scandinavian central banks behaved unpredictably this week in rate actions. On Wednesday, Sweden's Riksbank delivered an unscheduled interest rate cut and expanded its QE bond purchase plan. The Riksbank cut its benchmark repo rate to -0.25% from -0.10% and expanded its bond-buying program by 30 billion kronor, adding to the 10 billion kronor in purchases that started last month. Norway's central bank arrested the slide in its currency by refraining from an expected 25 basis point rate cut on Thursday. Governor Olsen explained that the economy has performed better than was feared, and while rates could still be cut if needed, the central bank has not considered any additional measures beyond a rate action.
Valeant clinched its deal to acquire Salix Pharmaceuticals, raising its offer by about a billion dollars in a new deal that knocked out rival bidder Endo International. Valeant hiked its all-cash bid to $173/share, or about $11.1 billion total, up from its original offer of $158/share. Mall operator Simon Property raised its offer for Macerich to $95.50 from $91 just three days after it rejected Simon's earlier offer and adopted measures to prevent a hostile takeover. Analysts had suggested Macerich would not be satisfied with much less than $100/share, and shares of MAC fell as low as $84 as investors doubted the board would embrace Simon's "best and final" offer.
The Shanghai Composite had its best week of the year, rising over 7% to close above 3,600, the highest level in nearly 7 years. China Premier Li helped spark the rally at a press conference on Monday, promising more substantial fiscal support if the economy slows too much, especially given that recent measures were not considered very potent. February power consumption, which is one of Premier Li's favored economic indicators, slowed to just 2.5% from 3.3% last month and 3.8% in 2014. The Premier's promise to build more affordable housing was also particularly timely as this week's price data showed growing imbalances in the property sector - across the top 70 cities, February prices fell m/m for the 10th straight time and the y/y decline widened by 0.6pts to -5.7%.
In Japan, the BOJ policy statement was largely a reiteration of the prior month, maintaining annual rate of monetary base increase at ¥80T, and reiterating the economic assessment as continuing a moderate recovery trend. The biggest change in the statement pertained to inflation, as the BOJ scaled back its current CPI view to 0.0-0.5% from around 0.5% and the outlook for inflation to around 0% from prior assessment of "slow for time being." On Friday, Governor Kuroda reiterated his more optimistic stance that inflation will achieve the 2% target by the end of the intended FY15/16 period, just as the minutes from last month's meeting showed some growing concern related to the sustainability of the central bank's monthly JGB purchases. On Monday, the cabinet office is set to release its monthly economic assessment which local press speculated will show the first upgrade 8 months.
