Overview and expectations for September 26, 2018

Overview and expectations September 26, 2018 including ANZ Business Confidence

This overview highlights the most important economic events taking place today: Australia and New Zealand Banking Group Limited (ANZ) Business Confidence, US Crude oil inventories, Federal Open Market Committee (FOMC) Economic Projections, FOMC Statement, Federal Funds Rate and FOMC Press Conference. Traders can benefit from anticipating and understanding how these data releases can affect the markets.

Today’s overview focuses on ANZ Business Confidence, US Crude oil inventories, FOMC Economic Projections, FOMC Statement, Federal Funds Rate and FOMC Press Conference. Traders can benefit by anticipating the effects of those releases on the currencies of those countries and trading accordingly.

ANZ BUSINESS CONFIDENCE

The ANZ Business Confidence measures the current business conditions in New Zealand. It enables analysis of the economic situation in the short term. A rising trend indicates increased business investment which may lead to higher levels of output.

A high business confidence reading is bullish for the NZD. A low reading is seen as bearish. Above 50% indicates optimism, below indicates pessimism.

The ANZ Business Outlook Survey headline business confidence for New Zealand dropped with 50% of all businesses surveyed expecting general business conditions to worsen in the year ahead. Firms’ perceptions of their own prospects are a “much better gauge of actual economic outcomes” which is stable at 4% but considerably below the long-term average of 27%.

There has been a particularly sharp reversal in the manufacturing sector. It was the most optimistic sector in April but it fell behind to be the most pessimistic sector in August, with a net 4% of firms expecting lower activity.

A net 5% of firms are expecting to reduce investment and employment intentions fell by 6%. If this is maintained, it is not a good sign for GDP growth. This is the lowest the survey has recorded since 2009.

The economy is in a delicate position. However, it seems more certain that firms will be more cautious and defer investment and employment decisions.

Finance Minister Grant Robertson is “unsurprised by these results.” However, he’s optimistic as data emerging from the “real economy continues to show that things are in good shape.”

He emphasises a strong surplus, low unemployment, GDP growth forecast to average at roughly 3% and strong company earnings.

The fundamentals are in place for ongoing growth at a slower pace. This is a bullish indicator for the NZD.

US CRUDE OIL INVENTORIES

US Crude oil inventories are measured weekly by the Energy Information Administration (EIA) to identify changes in stock held by US firms. The level of stocks affects the price of petroleum products, which can have an impact on inflation.

If the increase in inventories exceeds expectations, it indicates lower demand for petroleum products and is bearish for crude prices. The same applies when a decline is less than expectations. If the increase in crude is less than expectations, it indicates greater demand and is bullish for prices. The same applies when a decline in inventories is more than expectations.

EIA reported the fifth consecutive weekly decline in US crude supplies. Oil prices climbed on September 19 after supplies fell by 2.057 million barrels for the week ending September 14. The latest decline is less than the 2.6 million barrels forecasted.

According to Olivier Jakob at Petromatrix, the biggest fear is the effect of US sanctions on Iran. These will remove at least 1 million barrels a day from the market at a time when supplies are tight.

“I can understand why producers might want to wait to see if Iran has a short-term price impact they could sell into,” Jakob said. However, he warned that any gains from the Iranian sanctions could be temporary.

J.P. Morgan said in its latest market outlook that “a spike to $90 per barrel is likely” for oil prices in the following months due to the Iran sanctions. It expects Brent and West Texas Intermediate to average $85 and $76 per barrel, respectively, over the next six months.

FOMC ECONOMIC PROJECTIONS

This report includes the Federal Open Market Committee’s (FOMC) forecast for inflation and economic growth over the next 2 years. A significant part of the report is the breakdown of individual FOMC members’ interest rate forecasts.

The Federal Reserve is on course for a further increase in short-term interest rates as soon as next month as it emphasised the strength of America’s economic expansion alongside inflation that is lingering close to target. During its August meeting, the Fed kept the target range for the federal funds rate at 1.75% to 2% in line with expectations.

The Fed gave a bullish assessment of the economy in its post-meeting statement, describing US activity growth as coming in at a strong rate and evaluated that household spending and investment had “grown strongly” and job gains had also been “strong”.

New York Fed President John Williams considered the current situation of continued growth, steady jobs gains and modest, close-to-target inflation “as good as it gets” for the slow rate increases began by former Chair Janet Yellen to continue.

However, Fed Chairman Jerome Powell will decide how much further to go. More hikes risk pushing short-term interest rates on US Treasury securities above long-term ones. This will reverse the usual behaviour of bond markets which rewards investors who invest long-term. This usually signals a recession is coming because investors doubt long-term economic prospects.

Meanwhile, the current unemployment rate of 3.9% is pushing its own historic boundaries as “full employment” is generally around 4.5%. The unemployment rate has been below 4.5% for 17 months, and Powell faces risks around rising global tariffs, strengthening wages and growing concern about the stability of financial markets.

If projections fall within targets, this would be a bullish indicator for the USD.

FEDERAL FUNDS RATE

The federal funds rate is the interest rate at which banks lend reserve balances to other banks for overnight loans.

According to analysts’ expectations, the US Federal funds rate is expected to be 2.25% by the end of this quarter. Looking forward, the expectation is for interest rates to rise to 2.75% in 12 months’ time. The long-term projection is for the rate to trend around 3.00% in 2020.

A higher than expected rate is a bullish indicator for the USD, while a lower than expected rate is bearish.

FOMC PRESS CONFERENCE

The FOMC Press Conference is the public release of decisions made by the Federal Open Market Committee (FOMC).  The FOMC makes the monetary policy decisions public via press conference following an official meeting. Markets are highly sensitive to the FOMC press conference as the questions often result in unscripted answers.

Markets expect the Federal Reserve to raise its benchmark interest rate by 0.25% taking the rate from 2% to 2.25% where it was more than 10 years ago.

Morgan Stanley economists state: “The message from this meeting will be continued gradual hikes, with a watchful eye toward risks – to both the upside and downside.”

The upside risks to the economy are continuous growth and may even contradict the sceptics who say the rapid 2018 pace is a result of temporary fiscal stimulus. There is also the possibility of inflation, both in price pressures and market valuations, that could force the Fed into hiking even more aggressively than the market expects.

The downside risks are the ongoing trade war with China. Also, concern that global growth could slow due in part to central banks like the Fed beginning to normalise policy.

If the interest rate is below expectations, this would be bearish for the USD.

For more information about how to use the analysis of economic data to make the most out of your investments, contact FXB today.

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