Central Bank Meeting Minutes: BoE, FOMC and ECB (Update on Greece)

During the week of February 16, 2015, BoE (Bank of England), FOMC (Federal Open Market Committee) and ECB (European Central Bank) released its meeting minutes for the latest monetary decisions. Let’s go in depth of these meeting minutes and how we can apply them to our trading decisions.

 

Bank of England (BoE) – (February 18, 2015)

The Bank of England meeting minutes showed that the Monetary Policy Committee (MPC) voted unanimously (9 members) to keep the benchmark interest rate unchanged at a record-low of 0.5%. There were hints it could be lowered in the next few months (yes, decrease, not increase). Two committee members, Martin Weale and Ian McCafferty who voted in favor of rate hike previously, were in favor in holding rates this time. Regarding its inflation in which Consumer Prices Index (CPI) fell to 0.3% (lowest since decades ago) last month changed the views of MPC. Some worry that it might slip below zero in the next few months. It has caused some to suggest rate cut over the next few months. The rate cut hinted in the minutes is totally different than what the Bank of England governor, Mark Carney said last week.

Mark Carney spoke to the press at Inflation Report press conference. He signaled that BoE remains on course to raise interest rates in the U.K. next year, despite decline in inflation. He also mentioned that BoE might cut the interest rate if inflation transforms into deflation (below 0). I believe if the inflation falls below 0, the BoE will cut the interest rate by 0.25, but only for short period of time. However, he pointed out that BoE still expects its next move will be raising rates, not cut them.

There are confusions going on with BoE on interest rate. I look at this way; inflation goes below 0, rate cut will come, inflation starts to increase, rate increase will come, and watch out for future statements by BoE for more clues. I would not trade Pound (GBP) based on these interest rate talks, for now. There is no clear road for interest rate for now. But, I would trade based on other news/events and charts’ technical.

 

Federal Reserve – (February 18, 2015)

The Federal Reserve meeting minutes showed that the Federal Open Market Committee (FOMC) expressed concerns over raising interest rates too soon, which could could halt or slow the U.S economic “recovery”. They are also worried over the impact of dropping “patient” from central bank’s rate guidance. They thought that removing “patient” from the FOMC statements in the future would put too much weight on its meaning. As a result, it would cause financial markets to overreact (Unlike Swiss National Bank, Federal Reserve cares about financial markets movements). If “patient” is dropped, I would think that interest rate hike is coming in the next two meetings. They also worried about falling inflation expectations in the U.S. If the inflation drops, I believe it’s going to halt (not cut) FOMC from raising the interest rate, but not decrease the rates.

In the minutes, it’s mentioned that there are worries about international events such as Greece (Greece got 4 month bailout) and Ukraine (There’s no “truce”). But, it’s not going to keep them from raising the interest rate, backed by strong jobs reports. However, the federal reserve signaled its willingness to keep interest rates low for longer because of strong U.S dollar and “flat” housing market. Raising interest rates will only send U.S higher, making it much stronger than ever.

On February 24 and 25, Fed Chair Janet Yellen will be speaking in congressional testimony and we should look for further clues to the timing of the interest rate hike.

Any clues of earlier rate hike will send U.S. dollar to rise in which I would go short USD/JPY, USD/CAD, and/or long GBP/USD. Remember, don’t hold your trade positions for more time if you trigger market order just based on what Yellen said, unless there are other news and technical to support your trade.

 

European Central Bank (ECB) – (February 19, 2015)

The European Central Bank first ever meeting minutes showed fears of continued deflation the euro zone, which led to launch of Quantitative Easing (QE) program which starts in March. The main goal of QE is to drag the euro zone out of deflation and near to 2% inflation target. This first minutes doesn’t reveal much of anything. Since there weren’t any new details or “surprising” details, the markets, especially Euro did not move much.

Europe has agreed to extend its financial lifeline to Greece only for 4 months. The deal was stuck last Friday (February 20, 2015). This is another bailout for Greece. How long does Euro has to keep bailing out Greece from the mess Greece made? The deal is not final if Greece does not come up with its plan by Monday (February 23, 2015). Then, it will be voted by institutions involved in the bailout by April. If the institutions do not back the plan, the “deal” becomes “no deal”.

I would still keep an eye on Greece. If you trade Euro, be careful with news coming out of Greece. It will be violent and may cause you to have losing positions or touch stop loss (or make money). When picking Euro to trade, I would pick pairs other than EUR/USD.

If you have any questions, feel free to leave comments or contact. Thank you.

Microsoft Earnings and its game changer product, Hololens

On January 26, 2015, Microsoft reported their quarterly financial results for FY15 Q2 (FisicalYear 2015, Quarter 2 – ending on December 31) and it was below what analysts expected. Thomas Reuters had consensus estimates of $0.71 in earnings per share on $26.33 billion in revenue. Microsoft reported a revenue of $26.470 billion from $24.519 billion in the previous year, 8% increase. Microsoft reported earnings of $0.71 per share from $0.78 in the previous year, 9% decrease (Diluted EPS).

Microsoft stock (MSFT) dropped almost 4% after-hours or from around $47 (4 P.M) to about $45.50 (5 P.M). It continued to drop. The next day, the stock opened at $42.96 and finished the day at $42.6 7. From the announcement of financial results to the next day, the stock dropped about 10%. As of right now, it’s around $43.50. I view this as buying opportunity even it rose after almost $3 in almost 2 weeks. I will explain why MSFT is great stock down below.

MSFT - Hourly
MSFT – Hourly

Microsoft’s numbers looked weak because of currency and a restructuring charge. U.S dollar has been getting strengthening for some time now. It’s having a bad effect on international companies. Microsoft’s (International Company) international sales are being converted into fewer dollar, for now. Plus, Microsoft cannot control what happens to Forex market. In the last quarter, Microsoft had $243 million in restructuring charges, $0.02 per share negative impact. It comes from the integration of the Nokia Devices and Services business. Phone hardware revenue came at $2.3 billion, with 10.5 million Lumia units sold. It was successful. $0.04 per share loss came from IRS audit adjustment. Restructuring charges (-$0.02) and IRS audit adjustment (-$0.04) are temporary or one-time events. Succesful revenue from hardware and one-time losses are the two reasons to buy Microsoft stock (MSFT).

Last week, Microsoft showed off a product that I believe is a game-changer, HoloLens. It’s a headset with transparent lenses. What you see in reality is transformed into different world with 3-D objects floating, virtual screens, virtual characters and more. I believe it’s way better than Oculus Rift. Oculus Rift is designed for gaming only, targeting gamers only. HoloLens can be used for learning and experiencing new era of technology in a new way. Not only it targets gamers, but also non-gamers and people with dreams (creating/inventing products, etc). The price of HoloLens is unknown at this time. It should be affordable and fair if they want to get into mass-market. This is just the beginning and it has the potential to be huge. Hololens is another reason to buy Microsoft stock (MSFT). >>> Microsoft HoloLens YouTube <<<

Another reason is Microsoft’s acquisitions of small companies that has potential to grow a lot. Recently, Microsoft announced an acquisition of Revolution Analytics, Equivio and Sunrise. Revolution Analytics is a statistical software company. Equivio is startup producing test analysis software. Sunrise is a developer of calendar apps. So why is Microsoft acquiring small companies? They know that these companies will be very useful and helpful for their products. Therefore, driving up the sales. When they drive the sales (revenue) up, they will make us, the shareholders (or potential shareholders) happy.

Last reason to invest in Microsoft is its dividends. MSFT gives annual dividend of $1.24 at the yield of 2.83%. I would reinvest the dividends, known as DRIP (Dividend Reinvestment Plan). Why? There will no fees or commissions to reinvest, buying additional shares or fraction of a share. Over the long-run, it will benefit you as reinvestment adds up.

If you have any opinions, etc, feel free to leave comments or contact by email (khojinur_us@yahoo.com). Write “FMITBOOK” on subject line. Thank you.

 

UPDATE 1: I’m still watching MSFT (Microsoft stock ticker) for a good entry. I will go long on it in the future at a good entry price. Microsoft stock and other blue chip stock fell after Intel slashed revenue outlook due to weak PC demand. The decrease in the price of MSFT is still a good buying opportunity. (http://www.outofwacc.com/update-on-microsoft-rbnz-and-upcoming-events-to-watch-out/).

UPDATE 2: Microsoft FY15 Q3 earnings (http://www.outofwacc.com/microsofts-earnings/).

US Jobs Report for January 2015

Last Friday (February 6, 2015), US jobs report came out better than expected for prior month. Non-farm payrolls increased to 257,000 and the unemployment rose to 5.7% by 0.1% in January. Plus, data for November and December was “lifted”. November was revised from 353,00 to 423,000 (+70,000) and December was revised from 252,000 to 329,000 (+77,000). Over the past 3 months, U.S has created just over 1 million jobs, strongest since 1997. Only a negative side was the unemployment number. Unemployment number increased because labor force increased. The labor force participation rate rose by 0.2% to 62.9%, showing little more confidence in the jobs market. Average hourly earnings increased by 12 cents to $24.75, which took year-on-year gain to 2.2%, largest since August 2014.

Markets reactions to the report. See for yourself. If you have any questions, feel free to leave comments below.

S&P 500 - Hourly
S&P 500 – Hourly
US Dollar - Hourly
US Dollar – Hourly

 

USD/JPY - Hourly
USD/JPY – Hourly

 

Job gains took place in construction, financial activities, health care and manufacturing. It tells me that the economy is growing and businesses are hiring people for new projects. Businesses probably have positive cash flows to start new projects and hire people. Let’s hope that they are not taking debt that cannot be payed back.

When the rise in hourly wages are combined with lower oil prices, what do you get? People tend to have more money in their pockets. They can spend their money in anything such as retail, vacations, etc, which will increase the profits/revenues of the businesses. They can also pay down the debt that they may have such as student loans, mortgages, etc. Financial crisis in 2008 taught a lot of people lesson, to save money for unexpected emergencies. Young people are more likely to spend the money in areas like retail, entertainment and technology. New technologies tend to excite young people, such as drones.

Strong jobs reports increases the chance of interest-rate hike in June or earlier. Federal Reserve might wait for two more reports to get better sense of where economy is going. If FOMC (Federal Open Market Committee) drops “patient” in its next meeting, there will be higher chance of rate hike in June. The US Dollar is already strong. If FOMC drops “patient”, it will be even more stronger, hurting exports.

I believe FOMC should try to weaken US Dollar before raising interest rate. Even more stronger dollar has the power to hurt exports. Sales of international companies in the U.S can decrease due to stronger dollar. If the US Dollar continues to strength, it can effect US economy is negative way. It will slowly spread.

Feel free to leave comments. Thank you.

 

Reserve Bank Australia (RBA) cuts cash rate

Last Monday (February 2, 2015), Reserve Bank Australia (RBA) cut rates to 2.25% from 2.50%, record low. On my post “Now, Bank of Canada (Boc) Shocks by rate cut. Who’s next?”, I predicted RBA was going to be the next central bank who will cut the rates. If you have not read it, feel free to go to the post. Immediately after the announcement, Aussie fell about 100 pips. In the statement by the Governor of RBA, Glenn Stevens, “The Australian dollar has declined noticeably against a rising US dollar over recent months…remains above most estimates of its fundamental value, particularly given the significant declines in key commodity prices. A lower exchange rate is likely to be needed to achieve balanced growth in the economy.” They are basically saying that Aussie is little stronger and needs weaker currency to help their economy grow.

In the same hour RBA announces rate cut, AUD/USD dropped all the way to 0.7651, lowest since May 2009. After dropping almost 200 pips, the next day was total opposite. In the next day, Aussie absorbed all of the loses, due to short squeeze in non-dollar currencies and rise in oil prices. The rebound in Aussie is a perfect sell opportunity. I believe, in the six months, AUD/USD will drop over 300 pips, under 0.7500.

/CL (Crude Oil) - Hourly Chart
/CL – Hourly Chart
AUD/USD - Hourly
AUD/USD – Hourly

Last Thursday (February 5,2 2015), RBA released its quarterly Monetary Policy Statement, signaling another rate cut coming in the way. RBA lowered its 2015 growth and inflation forecasts. In November, they expected expansion between 2% and 3%. Now, they are expecting 1.75% and 2.75% (lowering by 0.25%). They also predicted that unemployment will rise. I believe another rate cut is coming this year. But, the question is “When?”. Again, rebound in AUD/USD is selling opportunity not to be missed.