rate Archives - Out of WACC

Ugly Jobs Report Is Just Temporary

Last Friday (April 3, 2015), March non-farm payrolls came out very negative. Non-farm payrolls slowed in March to a seasonally adjusted 126,000, slowest since December 2013. Unemployment rate held unchanged at 5.5%. The downturn in the jobs report could delay the Federal Reserve’s plan on raising the interest rates. Federal Open Market Committee (FOMC) have said in the past that continued improvement in labor would be a key factor on the timing of the rate-hike. I, now, believe there is a little chance of rate-hike in June.

What caused the downturn in the labor market? I believe it was because of the bad weather, plunging oil prices, and the strong dollar. The bad weather have caused businesses, especially in construction, to lose profits and to halt hiring. However, weather is a transitory factor. Plunging oil prices have left the oil industry in the dust. Oil companies are not being able to make revenue/profit. As a result, they had to layoff some of their employees. Strong Dollar is putting pressure on export-driven manufacturers, resulting in lower sales leading to layoffs. It’s also making it harder for U.S. businesses to sell goods aboard. I believe majority of U.S businesses’ revenue or earning per share (EPS) will less than expected, for the quarter.

Not only did we get to see March jobs report, but there were revisions to February and January jobs reports. January job creation was revised lower to 201,000 from 239,000 (-38,000). February job creation was revised lower to 264,000 from 295,000 (-31,000). I believe March jobs report will also be revised.

The labor-force participation rate was at 67.8%, lowest since February 1978. It shows that there’s less confidence in jobs market. Therefore, people have stopped looking for jobs. Average hourly earnings rose 7 cents or 0.3% to $24.86. The earnings can be a indicator for inflation. If it increases, inflation is more likely to increase too. Walmart and McDonald are increasing wages for majority of its employees, if not all of them.

Reactions to the report:

U.S Dollar (foreign exchange, or Forex) reacted negatively. U.S Equity markets were closed for Good Friday. We will get to see the reaction of equity market in the morning (Monday, April 7, 2015). I believe it will rise since negative jobs report could delay the rate-hike, since low interest-rate environment can very attractive to investors, including me.

If you have any questions, feel free to contact me anytime and/or 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

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.

Reserve Bank of New Zealand (RBNZ) “unjustified” and “unsustainable”

Last Wednesday (January 28, 2015), Reserve Bank of New Zealand (RBNZ) left interest rate or Official Cash Rate (OCR) unchanged at 3.5%. In a statement, two key words “unjustified” and “unsustainable” left Kiwi tumbling. In the statement, “While the New Zealand dollar has eased recently, we believe the exchange rate remains unjustified in terms of current economic conditions, particularly export prices, and unsustainable in terms of New Zealand’s long-term economic fundamentals. We expect to see a further significant depreciation.” They said that NZD or Kiwi exchange rate is too high and they expect it to decline further.”We expect to see a further significant depreciation” signals to me that RBNZ is planning to interfere in their currency, Kiwi. (or they just said that to make their currency to decline). Kiwi fell to the lowest March 2011.

In 2014, RBNZ raised Official Cash Rate (OCR) from 2.50% to 3.50%, increase of 1%. They raised OCR by 0.25% in four consecutive months in 2014; March, April, June and July. That was around the time oil plunge began, which is June. From September to today, they did not raise OCR. Since oil declined more than everybody expected, RBNZ stopped raising OCR. RBNZ’s tone on the interest rate shifted to a neutral stance, “In the current circumstances, we expect to keep the OCR on hold for some time. Future interest rate adjustments, either up or down, will depend on the emerging flow of economic data.”

I would be short on kiwi. If you want to go short on kiwi, I would suggest waiting until it rebounds little bit. I’m already short on it and have been since the beginning of January. If you want to know, where and when I went short, the chart below will tell you. These small lines you see are fit for 1H (Hourly) chart. What you see below is daily chart.

Federal Reserve – January, 2015

Last Wednesday (January 28, 2015), the Federal Reserve released its meeting statement for January 2015. They kept interest rates unchanged, for now. They maintained the key word “patient” on interest rate hike. “Patient” says that FOMC is not in a rush to raise the interest rates. Federal Open Market Committee (FOMC) in the statement said “…economic activity has been expanding at a solid pace. Labor market conditions have improved further, with strong job gains and a lower unemployment rate.” They viewed the economy in a good shape overall. Regarding inflation, they said ” Inflation has declined further below the Committee’s longer-run objective, largely reflecting declines in energy prices.” They are blaming declining oil prices for the decreasing inflation. They also said “Inflation is anticipated to decline further in the near term, but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate.” They expect inflation to decline as oil continues to decline in the near term. “Near term” can be about 6 months. They’re also saying that they expect oil prices to increase in “medium term”, which also can lift inflation. “Medium term” can be around 2 years.

In the statement, they are giving us some clues of future rate hike. “…readings on financial and international developments.” can account for rates. If the future financial reports are positive and international situations cools down, they might go for rate hike. Therefore, “…the Committee judges that it can be patient in beginning to normalize the stance of monetary policy.” What they said in 3rd paragraph of the last 2 sentences can be very helpful in predicting timing of rate hike, “Based on its current assessment, However, if incoming information indicates faster progress toward the Committee’s employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated. Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated. If the future financial reports come out very positive and way better than expectations, we can conclude that rate hike is nearing. If, it’s worse than expectations, then we can conclude that rate hike is too far, but reachable.

All 10 FOMC members agreed with the statement (unanimous) since June 2014. If a certain situation slightly changes. Some, but not all might change their views. If a certain situation changes dramatically, all of FOMC members might be unanimous in the future statements.

Financial markets’ reactions to FOMC statement.

USD-JPY reaction to FOMC Jan 2015 — Hourly Chart

I will be watching future financial reports such as ISM Manufacturing PMI and jobs reports, which are coming out next week. Using these types of reports and more, I will try to time the rate hike. As of right now, I believe it’s coming in the summer.