Trading conditions were relatively tight for the most part last week, but one thing was clear – the Greenback was the one currency to rule them all and its forex rivals couldn’t do anything but grovel at its feet (figuratively speaking), as y’all can see on the table below.
Market analysts attributed the Greenback’s broad and overwhelming strength during the previous week to hawkish comments from several Fed officials. So, who are these Fed officials and what exactly did they say? And while we’re at it, let’s take a look at the final estimate for U.S. Q4 2015 GDP as well.
Hawkish Fed Officials Speak
1. James Bullard (Voting Member)
St. Louis Fed President James Bullard caught the attention of forex traders, especially interest rate junkies, when he said on a Bloomberg interview last week (Wednesday, March 23) that:
“You get another strong jobs report, it looks like labor markets are improving, you could probably make a case for moving in April.”
At this point, it has to be said that Bullard is a bit of a flip-flopper. And his current monetary policy stance is yet another blatant switch from his more dovish position just the previous month when he said that he “regard[s] it as unwise to continue a normalization strategy in an environment of declining market-based inflation expectations.” Moreover, Bullard voted to keep rate on hold during the March FOMC decision.
Getting back to Bullard’s current stance, he also said during the Bloomberg interview that a rate hike is justified because he fears that inflation will “overshoot” and he then stated in a March 24 discussion that “[n]ot following through on a proposed action can damage a policymaker’s credibility” and that “[t]he relatively minor downgrades contained in the March SEP suggest that the next rate increase may not be far off provided that the economy evolves as expected.”
And when The Nikkei asked him if there’s a chance of a rate hike in April or June, Bullard replied that:
“the April meeting and the June meeting are definitely live meetings, and the committee could move at those meetings, but we’ll see what the data looks like at that point.”
2. Patrick Harker (Non-Voting Member)
Moving on, Philadelphia Fed President Patrick Harker said back on March 22 that the U.S. Fed needs “to get on with it,” referring to another rate hike. He justified his hawkish views by saying that:
“[The U.S.] economy is really quite resilient to a lot of the headwinds (including the strong dollar), so if that continues I would be supportive of another 25 basis point rise.”
Harker also said that he expects three rate hikes instead of the two rate hikes projected this year. And with regard to the timing of another rate hike, he said that: “Barring some unforeseen headwinds which are always possible, then I think it’s appropriate to consider every meeting live … and to consider another 25 basis-point rise.”
3. Dennis Lockhart (Non-Voting Member)
Federal Reserve Bank of Atlanta President Dennis Lockhart expressed in a March 21 speech that:
“There is sufficient momentum evidenced by the economic data to justify a further step at one of the coming meetings, possibly as early as the meeting scheduled for end of April.”
As if that wasn’t an upbeat enough statement, Lockhart also said that he is “reasonably confident the first quarter [of 2016] will represent something of a bounceback from the fourth quarter of last year.”
4. John Williams (Non-Voting Member)
Another non-voting member who expressed his hawkish views on March 21 was San Francisco Fed President John Williams. In his statement, Williams said that:
“All else equal, assuming everything else is basically the same and the data flow continues the way I hope and expect, then April or June would definitely be potential times to have an increase in interest rates.”
Yep, we’ve got another non-voting hawk in the bag.
5. Esther George (Voting Member)
Okay, Kansas City Fed President Esther George didn’t really say anything after the March FOMC decision, but she is the only one who voted to hike the Federal funds rate by 25 bps to 0.75% during the aforementioned FOMC decision.
In other words, she’s actually the most hawkish among the lot given that she voted for a rate hike then and there. And since she hasn’t said anything that contradicts her vote during the March FOMC statement, we can probably assume that she’s still pretty hawkish.
Final Q4 2015 U.S. GDP Estimate
Q4 2015 U.S. GDP was revised higher yet again, from the advanced reading’s 0.7% to 1.0% for the preliminary reading, and then finally to 1.4% for the third and final reading. It’s still pretty disappointing when compared with Q3’s 2.0% growth, but the upgrade was enough to put U.S. GDP growth for the entire year to around 2.4%, which is the same pace of growth in 2014.
The biggest contributor to the upward revision was consumer spending or “personal consumption expenditure,” which was upgraded from an expansion of 2.0% to 2.4%, with the actual contribution to GDP growth now at 1.66% (+1.38% for previous estimate). Another major component was the 2.7% contraction in exports being revised to only show a 2.0% contraction, which meant that net exports was less of a drag on the U.S. economy, subtracting only 0.14% from GDP growth (-0.25% for previous estimate). Other GDP components only had minor changes in contribution.
On the surface, the final estimate for Q4 2015 GDP looked pretty awesome, but the GDP report also conceded to something a bit more worrisome. Specifically, the GDP report showed that corporate profits slumped hard by 3.1%, which is the biggest drop in seven years, according to Bloomberg. Ouch!
If corporate profits continue to drop, then that could mean that companies may be forced to either cut back on investment spending or cut down on employment (or both). And both scenarios by themselves are not ideal for hiking rates.
However, it is highly likely that market players have already priced-in the lower business investment scenario since that was one of the reasons given by the Fed as to why growth projections for 2016 were downgraded from 2.4% to 2.2%, as I highlighted in a more in-depth article. The weaker employment scenario is likely not priced-in yet, though, since the Fed always says (or boasts to be more precise) that employment in the U.S. has been pretty robust.
Summary & Final Thoughts
We had a bunch of hawkish Fed officials last week, of which only James Bullard is the only voting member. Although it’s also probably safe to count Esther George as part of the hawkish camp given that she was the only one who voted for a rate hike during the March FOMC decision. All of these hawkish statements came out before the final estimate for Q4 2015 U.S. GDP, though. And while the final estimate was revised higher, corporate profits dropped hard, which has negative implications for the U.S. economy, especially if corporate profits continue to drop.
With that said, Fed Chairperson Janet Yellen will give a speech on Tuesday (March 29) while New York Fed President William Dudley is scheduled to speak this Thursday (March 31), so mark your forex calendars for that since both Fed speakers are obviously voting members and they may present a different voting bias. Also, we’re gonna be having another NFP Friday this week, so keep an eye on that as well, just in case we finally see some negative effects from the drop in corporate profits.