World Week Ahead: Reading the Fed’s tea leaves

Monday 21st March 2016

Several Federal Reserve officials will add context in the days ahead, and perhaps greater clarity for investors, on the central bank’s revised path to higher US interest rates.

Richmond Fed President Jeffrey Lacker is on a panel with Bank of France Governor Francois Villeroy de Galhau to discuss central bank outlooks in Paris today.

Atlanta Fed boss Dennis Lockhart and St Louis Fed's James Bullard are also set to speak at separate events today, followed by Chicago Fed's Charles Evans and Philadelphia Fed's Patrick Harker on Tuesday. Bullard speaks again on Thursday.

The Fed’s hint at fewer—two, instead of the four predicted in December—rate hikes in 2016 bolstered sentiment on Wall Street. Last week, the Dow Jones Industrial Average climbed 2.3 percent, while the Standard & Poor’s 500 Index gained 1.4 percent, and the Nasdaq Composite Index rose 1 percent. Both the Dow and the S&P 500 now have erased losses for the year.

“The tone of the market has clearly improved since the early days of February,” Michael Sheldon, chief investment officer of Northstar Wealth Partners, told Bloomberg. “The big story for this quarter will probably turn out to be that the US economy is not heading over a cliff and that energy markets are showing signs that maybe we’re past the worst.”

US Treasuries advanced last week too, pushing yields on the benchmark 10-year note 11 basis points lower to 1.87 percent while yields on the two-year note fell 12 basis points to 0.84 percent, according to Bloomberg.

The US dollar fell, however, on the prospect for fewer rate hikes this year and posted its third consecutive weekly slide.

Some analysts believe the greenback’s recent weakness is overdone.

“After we get through this two-day hiccup, the knee-jerk to the policy move, I would expect the [US] dollar to resume its rally,” Michael O’Rourke, chief market strategist at JonesTrading in Greenwich, Connecticut, told Reuters, highlighting the difference in US interest rates versus those in the euro-zone and Japan.

"Our policy rate is going one way, theirs is going the other way, that spread is going to continue to widen, no matter what,” O’Rourke noted.

US dollar strength might be limited though.

“The dollar’s been absolutely crushed across the board, so you would expect, tactically, somewhat of a bounce from here,” Christopher Hine, a foreign-exchange strategist in New York at Credit Suisse Group, told Bloomberg. “It’s how much can it actually reclaim, and for us it has to be a lot for it to change our more defensive bias."

On Friday US financial markets are closed for Good Friday.

First, the latest clues on the US housing market will arrive in the form of data on existing home sales today, the FHFA house price index on Tuesday, and new home sales on Wednesday.

Other reports slated for release this week include the Chicago Fed national activity index, due today; PMI and Richmond Fed manufacturing indices, due Tuesday; durable goods orders, and PMI services, due Thursday; and gross domestic product, and corporate profits on Friday.

Shares of Starwood Hotels & Resorts Worldwide jumped 5.5 percent on Friday after the company said it plans to accept a revised US$13 billion takeover offer from a group led by China’s Anbang Insurance Group, deeming it a “superior proposal” as defined in Starwood’s merger agreement with Marriott International.

“Starwood’s board intends to terminate the Marriott merger agreement and enter into a definitive agreement with the consortium,” Starwood said in a statement.

Dan Wasiolek, a hotel industry analyst at Morningstar, said Marriott could still counter with a higher offer. Marriott has until March 28 to do so.

"Marriott can increase their offer because they have the balance sheet flexibility," Wasiolek told Reuters, suggesting it could sweeten its offer by US$700 million in cash.

However, Marriott probably won’t engage in a protracted bidding war, Bloomberg reported, citing analysts including Robert W Baird & Co’s David Loeb.

“While we expect Marriott to counter the consortium’s proposal, we believe Marriott will remain disciplined, and it appears increasingly likely, in our opinion, that Starwood will be acquired by the consortium,” Loeb wrote in a research note Friday, according to Bloomberg.

In Europe, a 0.3 percent advance in the Stoxx 600 Index on Friday wasn’t enough to avoid a decline for the week.

BusinessDesk.co.nz

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