Central Bank Watch

nfp - employment change just came in at 74k, much lower than expected and its lowest printing since June 2012.

Despite that, the official unemployment rate dropped to 6.7% - it was expected to hold at 7%.

The immediate reaction is negative USD due to the low nfp number but when the dust settles I think that drop to 6.7% will start to weigh on monetary policy. The fed has consistently stated that the tapering of QE will depend on this figure above all else, so this makes continued tapering much more likely at the next FOMC meeting.

Next week US inflation figures come out on Thursday, Fisher and Plosser both speak - both are hawks, so their reaction to 6.7% unemployment will be very interesting. Bernanke also speaks late in the week.

I don't think they're that shortsighted, numbnuts. I think this could be a great trade opportunity, though. The last statement read "...the Committee will also consider other information, including additional measures of labor market conditions." which I would interpret to mean that if the unemployment figure falls below 6.5% but real labor market conditions are worse than what the figures show they would hesitate pulling back stimulus too quickly. It's an undeniable fact that a lot of the improvement in US unemployment figures has been due to people just leaving the labor market. Some of that is due to a mismatch in people's skills and general labor market dynamics, but to me the persistence of the decrease in the participation rate seems like something that has to be considered when making policy decisions that are dependent on the unemployment rate.

Of course this is a speculation, but I consider it more likely that they will hold off tapering too fast considering the circumstances. Lastly I would like to leave you with a chart and a link to the article where I took the chart from. As far as the trade opportunity that I mentioned.... if the pundits on TV and the financial media in general get too carried away calling for a reduction to the QE program as soon as next meeting, I would short the dollar and collect the profits after the meeting.

You are right, I took the last statement to imply the fed may also start considering underemployment as well as decline in overall participation levels. That's why the inflation data next week is so intriguing - if inflation stays low or drops, the fed could easily shift its target from 6.5% to 6%, or even start including other employment measures in its targets to allow it to extend QE. If inflation starts rising though I don't think the fed will muck around, it will want to end QE and hike rates long before the risk of runaway inflation even rears its ugly head.

The next FOMC statement is January 29 - apart from the inflation numbers next week and retail sales covering the holiday period, not much more data is coming from the USA before then.

Indeed, but inflation has been trending lower recently. That's one of the reasons they didn't taper as much on the last meeting. It will be interesting to see what happens. I'm pretty sure you know that the Fed doesn't use the CPI measure to measure inflation, but I'm going to add some information here for others reading this thread.

The Fed often emphasizes the price inflation measure for personal consumption expenditures (PCE), produced by the Department of Commerce, largely because the PCE index covers a wide range of household spending. (source: http://www.federalreserve.gov/faqs/economy_14419.htm)

Also, see trimmed mean PCE, an alternative inflation measure used by the Dallas Fed: The Trimmed Mean PCE inflation rate is an alternative measure of core inflation in the price index for personal consumption expenditures (PCE). It is calculated by staff at the Dallas Fed, using data from the Bureau of Economic Analysis (BEA). (source: http://www.dallasfed.org/research/pce/)

From the last link you can also see the 1MO, 6MO and 1Y figures. Obviously there's no threat of immediate inflation pressure. Here's a chart for all of you reading this thread as well.

If the market is expecting taper then playing a decline the 3540/30 area on fiber should be a pretty good trade. Stop loss at about 3740. So for a total risk of 60 pips you could make 130. The purple-ish lines you see on the chart are futures volume high activity areas from last week.

Its been a while, a lot has been going on.. like the first female Fed chairman!

BoJ - Japan PM Abe's 3% sales tax just kicked in on the first. Japan's central bank was watching household spending heading in to the tax raise, expecting a surge before it kicked in, but it didn't happen. If this(sales tax) hinders the bank's goal of inflation, BoJ Gov Kuroda has stated the bank is ready to act in modification of its current QE to keep 2% inflation attainable. Imo the Jpy is fully priced in at current easing levels. Any more easing and it strengthens the short Yen trade & Usd/Jpy to 110.

RBA - In February went from a possibility of further rate cuts in their monthly MPS to a period of stability in interest rates, as the effects of Australia's super low rates are still being seen coming through the economy. A resilent housing market only strengthens the need of tightening by the central bank after this period of rate holds. Reiteration from bank members on how much the Australian dollar is over priced has been able to keep the Usd/Aud rate capped until this recent run which accelerated during Glenn Stevens comments from the last Credit Suisse's Asian investment conference in Hong Kong in late March when he didnt express a overbought tone on the Aud.

RBNZ - Only one 25bps rate hike so far, markets pricing in 2 more 25bps rate hikes in April(next week) & in May. Though the NZD is highly overvalued by historical & trade-weighed standards, the Reserve Bank still plans on raising rates, recently pushing 2017 final rate forecasts to land at 5%.

<p>Anyone wanna comment on the BoE's forward guidance based on unemployment being full of crap? (pre-Feb). Too much to type abt it on mobile. lol

BoE forward guidance was based on a target unemployment rate of 7% - until that target was inconveniently and prematurely hit. Now it needs to base forward guidance on something else, LOL.

Next meeting is May 8 - will be interesting to hear the language from the first meeting after the 7% threshold is breached. Until then everything is empty speculation I guess

Ignorance is bliss =p

A bit strange that Australia also had a big employment beat as well. Abt the UK.. Imo, the market is pricing in this rate increase way too early, and with inflation at only 1.6% it wouldn't be a good move to tighten monetary policy in this environment. Gbp setting up a good short to squeeze off these longs in 2H 2014/1H 2015

AUD: Market priced in a >3% y/y increase in Q1 inflation data, which would have put it over the RBA's max target inflation band, and pressure on the bank to start raising rates earlier than expected. Instead, CPI came in at 2.9% (vs 2.7% in Q4) and any possibility of a change in rate outlook diminished. Not only did shorts enter on bad news, but bulls positioning because of recent rises of inflation who had their eyes on the 3.2% forecast #, demanded an exit right away. This lead to a couple waves of stop-runs against Aud longs over the FX market.