Sterling and Kiwi dollar forge ahead of Dot Plot release

Wednesday September 19: Five things the markets are talking about

Global equities remain unsettled, sovereign bonds trade mixed and G10 (ex-sterling) currencies are mostly drifting ahead of today’s Federal Reserve’s rate decision and press conference.

Along with the market strongly anticipating that the Fed will get more specific about balance sheet unwinding, U.S policy makers will be releasing their so-called dot plot.

The infamous dots, which forecast medium-term rates stateside, will have the most influence on the dollar rather than what the Fed may be signaling for the remainder of this year – market expectations of another hike in 2017 are at about +50%.

The key risk to the dollar is a large enough shift in the distribution of dots translating into a downgrade of median interest rate projections.

1. Stocks mixed results

In Japan, stocks traded mainly flat overnight, a day after scaling new highs in two-years, as investors stayed cautious before today’s Fed announcement. The Nikkei edged up +0.1%, while the broader Topix traded flat. On Tuesday, the index soared +2.0% supported by a weaker yen (¥111.40) and hopes for a snap election.

Down-under, Australia’s S&P/ASX 200 and the S. Korea’s Kospi index closed slightly lower.

In Hong Kong, equities traded up, with the benchmark index hovering around 28-month highs, as shares of Chinese metal producers continued to rally. The Hang Seng index rose +0.3%, while the China Enterprises Index gained +0.4%.

In China, stocks edged higher, supported by strong gains in consumer stocks and car manufacturers. The blue-chip CSI300 index rose +0.3%, while the Shanghai Composite Index gained +0.2%.

In Europe, regional indices trade mixed in a quiet session ahead of the Fed announcement. The FTSE 100 has reversed its early losses on the back of a strong U.K retail sales report (see below).

U.S stocks are set to open little changed.

Indices: Stoxx600 flat at 382.3, FTSE -0.1% at 7270, DAX +0.1% at 12573, CAC-40 +0.1% at 5243, IBEX-35 -0.5% at 10327, FTSE MIB -0.1% at 22408, SMI +0.2% at 9110, S&P 500 Futures flat

2. Oil higher on hints of OPEC extension, gold shines

Oil has rallied overnight and is set for its largest Q3 gain in a “bakers dozen” years after the Iraqi oil minister said OPEC and its partners were considering extending or deepening supply cuts to erode an existing global surplus.

Note: OPEC’s technical committee meets in Vienna today.

Brent crude futures rose +29c to +$55.43 a barrel, while U.S West Texas Intermediate (WTI) crude futures were up +42c at +$49.90 a barrel.

Note: Oil prices are on course for a rise of +15.5% this quarter, which would make this year’s performance the strongest for Q3 since 2004.

OPEC and other producers are supposedly considering a range of options, including an extension of cuts, beyond next March’s deadline.

API data yesterday stateside showed crude stocks rose last week while gasoline and distillate stocks decreased – crude inventories increased by +1.4m barrels in the week to Sept. 15 to +470.3m.

Note: The U.S Department of Energy will release official data on inventories and refinery activity later this morning (10:30 am EDT).

Ahead of the U.S open, gold has inched higher in range-bound trading as the ‘mighty’ dollar wavers ahead of today’s Fed rate announcement. Spot gold is up +0.2% to +$1,313.50 an ounce.

3. U.S Treasuries bracing for disappointment

Fixed income traders have been bracing themselves for today’s Fed statement and updated economic projections, with the 10-year Treasury yield backing up for seven consecutive sessions.

Higher U.S yields are not necessarily suggesting a rate hike today, but it is providing insurance for the expected rollout of details on balance-sheet shrinkage.

Note: The yield gain for 10-year product has not been huge at +18 bps – the move has basically unwound the Treasury rally which pushed the 10-year debt to fresh 2017 low of +2.06% earlier this month.

For investors, the most important thing today is whether the Fed will signal another rate hike this year and three more in 2018.

The yield on 10-year Treasuries fell less than -1 bps to +2.24%. In Germany, 10-year Bund yields fell less than -1 bps to +0.45%, while U.K 10-year Gilt yield were unchanged at +1.329%, the highest in more than seven months.

4. Sterling and Kiwi dollar forge ahead

Major currency pairs, ex-sterling and Kiwi dollar, are trading in a relatively tight range as investors wait for the Fed to provide details about trimming its balance sheet. The EUR (€1.2002) hovers atop of the psychological €1.20 threshold, and yen (¥111.33) trades within sight of this week’s lows.

Ahead of the open, sterling trades stronger after U.K retail sales (see below) came in much better than expected. GBP/USD trades up +0.7% at £1.3593 after the data, up from £1.3516 before the announcement. EUR/GBP is down -0.5% at €0.8843.

Elsewhere, the New Zealand dollar (NZ$0.7364) has surged after a poll put the ruling National Party back in the lead ahead of the main opposition Labour Party ahead of this weekend’s election (Sept. 23).

5. U.K. retail sales post strong August

Data this morning showed that U.K. retail sales rose by more than expected in August as consumers splashed out in department stores and on home improvements, but sales look set to be weaker in Q3 than they were earlier in the year.

Retail sales rose +1.0% on the month in August, a faster rate of growth than the +0.6% recorded the previous month, and much faster than the +0.3% that was forecasted.

Spending in pharmacies and jewellers, and on floor coverings and gasoline, the ONS said, buoyed sales. Sales overall were +2.4% higher year on year.

Note: August’s figures follow two consecutive months of weak sales as households cut back in response to rising prices. Annual inflation hit +2.9% last month, well above the BoE’s target of + 2% target.

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