Ok, so it’s Fed day and by all accounts you can probably just skip this one. A hike is supposedly fully priced in and it would be some surprise indeed if we got some kind of clean or even a messy relent.
The FOMC won’t want to fall too far behind the curve here what with expectations for a Trump-inspired economic miracle running high. As noted here on Tuesday, it won’t take a whole lot for the dots to shift so that may be something worth watching. Bloomberg’s Richard Breslow talks a bit about that in his daily missive reprinted below. Breslow also notes that any forecast changes will be analyzed for what the Fed ultimately thinks about Trump’s chances of actually passing his policies through Congress. This is one time when “proposed policies” are just that (“proposed”) until they’re actually accepted given unconventional nature of Trump’s leadership.
Yellen’s speech will of course also be parsed for signs the Fed is prepared to push back against any attempt by the new administration to strip the committee of its independence via Twitter bullying.
As Deutsche’s Jim Reid notes, we’ll also get a look at retail sales data in the US today. Happy trading.
From Richard Breslow:
We all know how this is supposed to go. The Fed delivers the goods, everyone waits for the dot plots, Chair Yellen reassures everyone she isn’t going, cautions on central bank independence and does her best to avoid all the inevitable attempts to bait her on politics. There you go. And all in one breath.
The first, hopefully, will be the least interesting. If not, they will make Google searches for Strother Martin go viral. And you’ll see droves of STIRP traders stumbling out of taverns mumbling, “What we’ve got here is a failure to communicate”
The dot plots really could be more interesting. They’ll be misunderstood by the market whatever they show. Probably misapplied by the committee given wholly incomplete information. Overreacted to, walked back, ultimately unhelpful
To my mind they should leave them at two. And explicitly say this was done on purpose. The market can live with that. It’ll give the board a chance to update in February in preparation for March. It’s more intellectually honest
Any changes to forecasts by the voters will be interpreted as a measure of the extent to which they buy into or have hesitations about not only the current markets’ reaction to the election, but the body of tweets
This time is indeed different. In past years, the Fed was willing to update its forecasts, even on proposed policies. There was a reasonable assumption they would come to pass in some reasonable facsimile. But this is an administration with many generals yet few specifics. Not to mention, we’ve no idea if the Republican congress has truly had a change of religion on deficits and fiscal spending
Equally, maybe more important, and urging caution, we talk a lot about waiting to see the whites of inflation’s eyes given the long, interminable road to recovery. The same should go for worker productivity and output gap. Getting a little better? Yes. Still in the sewer? Most definitely. And if there has been one plea making a regular appearance in Fed speeches it’s for the promised fiscal stimulus to, please, please, do something about the frightening problem of anemic worker productivity
It was in October when Yellen, Fischer, et al were discussing the efficacy of letting the economy run hot. Even if the mandates had to be temporarily exceeded. It will be interesting to see if more recent events poured cold water on that theory
From Deutsche’s Jim Reid:
If the tone of this email comes across as frustrated this morning it’s because I last night took on what looked a seemingly easy task of building a “Princess Cosy Coupe Car” for Maisie’s Xmas present. I haven’t been so baffled following instructions since I put up an IKEA bunk bed (long story for another day). It looked easy but required an electric screw driver, a hammer and a lot of swearing. Now it’s been assembled I don’t think it would pass its MOT though and I’ve still got to deal with a protruding screw which saw the thread destroyed as I desperately tried to get it in. Hopefully Maisie won’t fall out the side on Xmas Day!! As we count down to Xmas, today’s FOMC decision has been overshadowed by some big events over recent weeks. Indeed in all my many 2017 outlook meetings today’s outcome has barely registered on people’s radar as a potential macro event. It seems the consensus is the expected 25bp hike but with a wait and see approach from Yellen where she’ll reiterate that it’s too early to second guess potential upcoming fiscal changes. However DB’s Peter Hooper does think that the overall message will be modestly hawkish given the shift in risks toward higher growth and inflation ahead. The more hawkish signs should come from a mention of the decline in unemployment and further increase in market based measures of inflation compensation while near term risks should now be noted as fully balanced rather than roughly balanced. The interesting and more uncertain element will be how they treat forward guidance. Peter thinks that it’s quite possible that they add ‘changes in fiscal policy’ to the list of factors that will determine ‘the timing and size of future adjustments to the funds rate’. More important is whether they decide to change expectations of ‘gradual’ increases in the fed funds rate and rates remaining ‘for some time’ below levels expected to prevail in the long run. The economic projections and the dots are clearly the other big focus. Peter expects only modest upward revisions to growth and possibly inflation forecasts, and unemployment to be revised down. In terms of the dots, Peter highlights that while it will take only two dots moving up to raise the median from two to three rate increases next year, he does not expect the Committee leadership to change their view significantly just yet. He notes that they will need to see more about how events unfold with the new Administration and the new Congress before making appreciable changes. All that to look forward to later this evening. In the mean time one of the events which has overshadowed the Fed for now is the twist and turns in the Italian banking sector saga. The sector got a big boost yesterday however after Italy’s largest lender, UniCredit, announced a bumper €13bn rights offer to shore up its balance sheet. In conjunction, the bank also announced a host of restructuring, cost cutting measures and an €8bn NPL clean-up. Despite the share price initially opening some -6% lower, it rallied back over the course of the day and closed up nearly +16%. That helped the sector surge higher with the FTSE Italia All-Share Banks Index closing up +5.83% which puts it about +30% above the intraday lows at the end of November. Yesterday’s move is in the Stoxx 600. Credit indices in Europe were also tighter although financials didn’t particularly outperform. The iTraxx Main and Crossover indices finished 1bp and 7bps tighter respectively while Senior Fins and Sub Fins were 1bp and 3bps tighter respectively. The Italian banks were unsurprisingly at the front of the pack though with the average sub-spread of the 4 banks 11bps tighter. In rates BTP’s were also the big outperformer with yields -12.1bps lower at 1.870% versus -7bps for the rest of the periphery and -4.0bps for Bunds. It’s worth also noting the new Italy PM candidate, Gentiloni, comfortably won the first of two confidence votes from Italian Parliament yesterday. The Senate vote is this afternoon. Meanwhile, it was back to business as usual for US equity markets yesterday afternoon where we saw the Dow (+0.58%) come within 100pts of the 20,000 level and the S&P 500 (+0.65%) record a fresh new record high. It’s impressive to note now that since Trump was confirmed the election winner, on the 24 trading days the S&P 500 has risen on 16 of those days has returned +6.18%. 10y Treasury yields hovering just shy of 2.5% (closing at 2.472% and little changed last night) failing to dampen spirits while commodity markets were mixed. WTI rose +0.28% and was up for the fourth session in a row while Gold (-0.32%) edged a bit lower ahead of the Fed. Refreshing our screens this morning it’s been a fairly subdued session for Asia equity markets. That said most bourses are currently in positive territory including the Nikkei (+0.13%), Hang Seng (+0.51%), Shanghai Comp (+0.06%) and ASX (+0.69%). Only the Kospi (-0.05%) is in the red. There’s been a bit of action in JGB’s though after the BoJ offered to buy more longer-dated debt at today’s reverse auction. The Bank offered to buy 200bn Yen of debt due in 10- 25 years which is up from 190bn previously and also 120bn Yen of bonds maturing in more than 25 years, versus 110bn Yen previously. The >25y buyback also drew 3.06x of interest, which is up from 2.39x last week. The JGB curve has bull flattened as a result. 2y yields are down 0.6bps at -0.203% while 10y yields are down -2.0bps to 0.050% having crept up as high as 0.096% just yesterday and the highest since February. 30y yields are down 3.4bps at 0.761%. Meanwhile the Q4 Tankan survey was also out in Japan this morning. The survey revealed improvement for large manufacturing companies (to +10 from +6) while non-manufacturing companies were stable at +18. Meanwhile there was some modest improvement in the data for both manufacturing and nonmanufacturing small companies. Moving on and wrapping up the dataflow yesterday. In the US the NFIB small business optimism reading in November was reported as rising 3.5pts to 98.4 (vs. 96.7 expected). That post-election reading is in fact the highest reading since December 2014 with firms reported as being significantly more optimistic about the outlook for sales and also plans to hire. The other data in the US was the import price index reading for November (-0.3% mom vs. – 0.4% expected) which was clearly weighed down by the strengthening US Dollar over the month. Meanwhile the latest inflation data in the UK was out yesterday. Headline CPI printed bang in line at +0.2% mom for November, helping to raise the YoY rate to +1.2% from +0.9%. The core also rose to +1.4% yoy from +1.2%. Yesterday’s data means that headline CPI is in fact now running at the highest level since October 2014. Elsewhere, there were no surprises in the final revisions to the inflation data in Germany where CPI was confirmed as rising +0.1% mom and +0.8% yoy in November. There was some upside surprise from the latest ZEW survey however. The current situations index was reported as rising to 63.5 this month from 58.8 and to the highest level since September however. Looking at today’s calendar, this morning in Europe we’re kicking off in France where the final November CPI revisions will be made. Shortly after the focus turns to the UK where we’ll get the October and November labour market data. Industrial production data for the Euro area will also be released. It’s a packed afternoon for data in the US meanwhile. The early focus will be on the November retail sales figures. Market expectations are running at +0.3% mom for the headline and +0.4% for the core. The control group component is expected to come in at +0.3%. Also released today is the November PPI report along with last month’s industrial and manufacturing production prints (both expected to decline modestly). Business inventories data for the month of October will also be out. All that comes before the aforementioned main event this evening (7pm GMT) with the conclusion of the FOMC meeting. As a reminder, Fed Chair Yellen will host a press conference shortly after.