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Fed Contemplating Tapering

Daily Analysis - 13/01/2017

Comments From Key Officials Signal Unanimity on Raising Rates During 2017

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With many US Federal Reserve officials taking to the stage ahead of the quiet period that precedes the next interest rate decision slated for February 1st, remarks confirm that the Central Bank is onboard with rising rates gradually throughout the calendar year despite no hints about the timeline for such efforts.

Fed Officials Hint at Gradual Unwind


After leaving interest rates at a record low for an extended period of time, hawkish momentum from the Open Market Committee continues to gain as evidenced by the latest slew of policy speeches from key officials.

Referencing economic activity, Federal Reserve Chair Janet Yellen remarked that, “short-term, I would say I don’t think there are serious obstacles.”  Echoing her remarks was Dallas Fed President Robert Kaplan who indicated that the biggest disagreement raging amongst members of the FOMC was the pace at which rates should be raised.  Adding to the possibility of further tightening was Philadelphia Fed President Patrick Harker who indicated that the focus could be on unwinding the massive balance sheet once rates reach 1.00%.

In the meantime, Dow futures remain shy of the 20,000 level, retreating steeply on Thursday before rebounding modestly during the American cash equity session.

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Swedish Inflation Climbs


In a sign that the highly accommodative monetary policy environment is paying off for the Swedish economy, consumer price figures for the month of December showed that inflation is gradually rising towards the 2.00% targeted by the Riksbank.

At 1.70%, the CPI figure contrasts sharply with the decision in December by the Central Bank to extend quantitative easing through the first half of the year, adding SEK 30 billion in purchases.  The decision split policymakers, with the latest inflation prints likely to sway thinking on tapering purchases in the coming months, especially if inflation reaches the target.

With this backdrop, the Swedish Krona rose to the highest point against the US dollar since November amid expectations that loose policy may be tightened sooner than previously anticipated, paving the way for a rebound in the Swedish currency.

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China Trade Surplus Shrinks to Lowest Since March


In the latest report from the Chinese General Administration of Customs, trade has once again found itself under pressure as evidenced by the narrowing trade surplus recorded during December.  According to the data, the surplus fell to $40.82 billion, missing forecasts of $46.50 billion and printing well below the $44.61 announced during November.

One of the predominant reasons behind the fall was the steep annualized decline in exports.  Year over year through December, exports fell by -6.10% after managing to climb into positive territory for the first time since July of  2015 back in the month of November.

On the whole, Chinese trade denominated in US dollars fell by -6.80% for the calendar year, with the slide in exports outpacing the losses in imports over the same period.  The Yuan is once again on the move higher, with USDCNH retreating since the surplus numbers were released.

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Natural Gas in Storage Tumbles More Than Anticipated


After a smaller than expected drawdown reported a week prior, natural gas inventories fell by 151 billion cubic feet last week according to the Energy Information Administration.  This development comes on the heels of a significant cold front that has blanketed the United States, helping to reverse a recent decline in prices that arrived on the back of forecasts for warmer weather conditions to prevail for the coming few weeks.

With the gas glut continuing to ease, producers that shuttered projects when prices were near multi-decade lows have gradually reopened frozen output, leading to a climbing gas rig count across the United States.

Nevertheless, even if production gradually climbs, seasonal factors such as weather will continue to play an outsized role in pricing.  Gas prices are modestly higher during Friday trade, extending Thursday’s gains.

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