Fed: Everything is Improving, Hence We Lower Growth Forecasts

Thursday September 22: Five things the markets are talking about

Can we shout deja vu loud enough? The Fed came with the same story, just inserted different figures and months.

Chair Yellen and company left rates unchanged yesterday, but pointed to an increased likelihood of a hike in November or December – if they don’t, their credibility is shot.

Near term risks are roughly balanced. The three FOMC members who dissented (George, Mester, and Rosengren) in favor of a hike were offset by continued revisions lower to Fed’s economic forecasts (lower 2016 GDP forecast – 1.7-2.0% vs. prior 1.8-2.0%).

In her press conference, Chair Yellen noted that they chose not to raise rates mostly because of continued labor market slack and low inflation, a complaint that all G7 central banks lean on.

The market reaction has been somewhat benign. The event risks are running out this calendar year to break the monotony of current forex trading ranges.

Next up is the U.S presidential election. Will that two-horse race have stamina unlike the U.K Brexit surprise?

1. Global equities rally on Fed decision

The era of cheap money remains and is providing support for stocks, bonds and commodities.

Asian and European shares have rallied overnight; getting the green light from the Fed who left interest rates unchanged and slowed the pace of future hikes yesterday – its projection for increases in 2017 was trimmed to two from three. A weaker dollar is also helping to lift commodity prices.

Markets in Asia were mostly closed with small gains, with Hong Kong adding +0.4% and Australia adding +0.7%.

In early trading in Europe, the Stoxx Europe 600 has rallied + 0.7%, led by gains in oil and gas and mining companies. Similar story with the FTSE 100, commodity and mining stocks are leading the gains.

U.S futures are little changed after yesterday’s rally of +1%.

Indices: Stoxx50 +1.0% at 3,017, FTSE +0.7% at 6,880, DAX +1.2% at 10,563, CAC-40 +1.1% at 4,459, IBEX-35 +1.2% at 8,862, FTSE MIB +1.2% at 16,543, SMI +0.5% at 8,270, S&P 500 Futures flat]

2. Commodities find support from different sources

Oil prices have rallied overnight, lifted by a weaker dollar and by an unexpected industry draw reported by the U.S’s DoE.

Brent crude futures are up, gaining +39c, or +0.8% to $47.22 per barrel ahead of the open stateside. While U.S light crude (WTI) is trading at $45.76 per barrel, up +42c, or +0.9%, from yesterdays close (crude contracts gained +3% Wednesday).

Aiding WTI is yesterday’s U.S. EIA report revealing a -6.2m drawdown in inventories last week to +504.6m barrels. The market had been expecting a +3.4m barrel build. While Brent’s continues to be supported by an oil workers’ strike in Norway, which is threatening to cut North Sea crude output.

Market focus will now shift to next week’s informal meetings by OPEC and other producers in Algeria (Sept 27). Current consensus does not expect producers to reach a deal to support prices.

Gold prices are under pressure as the market books some hard earned profits after yesterdays near +2% rally. Investors seem more comfortable shifting into riskier assets like equities with the Fed’s loose monetary policy remaining intact. Spot gold is down -0.3% at +$1,332.70 an ounce.

3. Sovereign yield curves flatter

Fed-fund futures suggest a very modest pickup in expectations for a rate increase in December – the current odds trade a tad north of +56%.

The Fed’s inaction yesterday has seen many sovereign yield curves flatten after first steepening when the BoJ scrapped its monetary base framework in favor of “yield-curve control” earlier on Wednesday.

With looser monetary policy to remain in vogue for sometime, the search for yield will continue to dominate. Expect fixed income dealers to concentrate on Euro periphery and commodity sensitive debt product.

Kiwi 10-year bond prices fell by the most in three-month overnight, pushing their yield down -13bps to +2.49% after the RBNZ kept their overnight rates on hold (+2%) and announced that further policy easing is expected. Similar yields in Australia dropped by -8bps to +2.04%.

In Europe, German bunds slid to -0.05%, having ended yesterday’s session near zero. U.S 10’s have fallen –1bps to +1.64%, after falling -4bps on Wednesday.

4. “Big” dollar under pressure from no action

Overnight, the dollar has lost ground against most G10 pairs, adding to yesterday’s losses, as the Fed stood firm on its monetary policy.

Ahead of the U.S open, the EUR is trading at €1.1247, up from €1.1185 late Wednesday, while the GBP is at £1.3081, up from £1.3032.

The outlier amongst the majors is JPY. Outright, the USD has managed to gain ground, changing hands at ¥100.71, compared with ¥100.31 late yesterday. The move comes after the BoJ made its own policy announcement on Wednesday ahead of the Fed, taking the “unique” step of committing to keep their 10-year JGB’s interest rates trading atop of zero rather than go deeper into negative territory in the front end.

Note: Markets in Japan were closed for a holiday – MoF said that Japanese officials are planning to meet later today to discuss global markets. Is Yen still too high?

5. Norway’s Norges bank provides no surprises

Earlier this morning, Norges Bank left its main interest rate steady at +0.5%, after officials judged that marginally brighter growth prospects would keep their inflation close to its +2.5% target.

The decision was not a surprise to the market. Nevertheless, the following communiqué is considered somewhat “hawkish” as dealers price in a lower likelihood of interest rates reductions than previously thought. NOK has rallied hard outright to a six-week high– EUR/NOK trades down at €9.11 from €9.23 pre statement.

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