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Patience is (not) a virtue, and other lessons from the Fed

March 19: The main one is how to be vague. Plus, Target gets a tax rebate, and Kardashian bonds make a comeback


 

MORNING-PLAYBOOK-STORYThe Fed may not be “patient”, but they swear they’re not in a rush.

That was the outcome of the monetary policy announcement of the FOMC yesterday, the group of the governors of the Federal Reserve, keeping the rate unchanged at 0-0.25 per cent, where it has been for six years. But while a rate change wasn’t expected, that word—”patient”—was a key flag for analysts looking for signs of exactly when a rate hike could come, and how fast.

The announcement, which included some careful wording on waiting to see where the economic data goes, weakened the dollar and gave a boost for markets. This morning, European indexes are hitting a 15-year high, even as a meeting by European leaders and some Greece-Germany head-butting looms. The TSX also got a 60-point boost yesterday, with the loonie gaining from the dollar’s sudden slump, closing the day a cent and a half up and almost touching the 80-cent mark.

Oil is starting the day about a dollar higher than it did yesterday, above $43, but a Fed-induced bump in oil prices yesterday is also quickly wearing off as supply stays high. More bad news for corporate Calgary: After Nexon and Talisman announced they would cut hundreds of jobs, ConocoPhillips said they would cut about 200 jobs. Thousands of jobs have already been lost in the Alberta oil patch since oil began to drop, with most of those cuts in field jobs.

EU leaders are meeting in Brussels today, with hopes progress could be made on the Greek Question, but otherwise, the calendar is fairly quiet. Apple will officially become part of the Dow Jones Industrial Index, and the U.S. will release their latest current account deficit numbers. Switzerland’s central bank also announced this morning they kept their negative interest rate steady at -0.75 per cent, despite saying the “safe haven” currency was still overpriced. But Sweden is still going, with the Riksbank cutting the rate to -0.25 per cent and extending a bond-buying program to try to stave off deflation.

The Fed’s no longer “patient.” In the lead-up to the announcement, the dollar had been on a steamrolling rise (as the euro had been sinking lower and lower) as investors anticipated they would soon be getting higher interest rates. That drop proved to be short-lived, as the dollar erases those losses today, but the sudden drop showed a rather evasive turn from chair Janet Yellen on when the rate hike could actually come. Her message: we’re removing “patient,” but don’t mistake that for being  in a hurry. A hike is “unlikely” at the April meeting, she said, and a hike thereafter would depend on how the economy seems to be doing, with more room for the economy to grow now that they’re seeing a slight “moderation” in the pace of employment. Is any of this earth-shattering news? No. Commence speculating, again.

Target is making creditors (even) angrier. The chain is going to get a $1.6-billion rebate in U.S. taxes after closing down operations in Canada, and it’s not clear that money will be passed on to a coterie of very unhappy creditors, who are owed about $400 million for goods provided in the lead-up to the closure. Target had promised $3.1 billion of its debt would go toward repaying creditors, but the debate heated up further over revelations that the biggest creditor is in fact a property company that Target created, which has a claim for $1.9 billion, diluting the credit available to pharmacists and baby goods suppliers.

The world according to the OECD: a boost for the world, a cut for Canada. The organization’s latest semi-annual forecast gave Canada a downgrade, saying growth would be expected to hit 2.2 per cent this year, down from 2.6 per cent,  and also bringing down next year’s forecast by 0.3 per cent, to 2.1 per cent. The cuts were on the basis of oil prices, which have fallen by around a third since the last forecast. But what was a drag for Canadian growth is a boon for the rest of the world, with the OECD bumping up the forecasts for global growth, including updating the eurozone’s tepid growth (which, at 1.4 per cent this year, is still less than Canada’s), and forecasting higher growth for France and Italy. India, too, got a significant boost—it’s now expected to grow faster than China this year. But the organization did leave some room for criticism, saying countries were relying too heavily on central bank monetary policy—where, in many western countries, hyper-low rates leave their hands somewhat tied anyways—and that they should start focusing more on structural reform. In other words: fewer Band-Aids, more surgery.

Investing in the Kardashians. Sovereign bonds are known for their silly, often stereotypical names, from Yankee bonds to Samurai bonds to China’s dim sum bonds. Kim Kardashian has lots of nicknames, too, none of which I will repeat here. But the two have joined in sovereign-bond harmony as American’s most famous Armenian has become a (likely unwelcome) namesake for Armenia’s sovereign bonds (FT attributes the coining to a Wall Street Journal story), just as they prepare to release a half-billion-dollar 10-year bond. Sorry, Armenia.

 

Need to know:
TSX: 14,962.24 (+63.71), Wednesday
Loonie: 79.55 (+1.28), Wedneday
Oil (WTI): $43.24, Thursday (7:00 a.m.)


 

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