Well it’s time to deal with Fed fallout. Depending on who you ask, the FOMC was either nearly as boring as expected (i.e. it was basically a non-event) or more hawkish than anyone figured (i.e. “it’s the dots stupid”) in an effort to get out ahead of the new president’s fiscal stimulus policy proposals.
Generally speaking, quite a few observers thought it was worth noting that previously, participants had indicated that due to the indeterminacy surrounding Donald Trump’s policies, the Fed would wait for more details before incorporating an expected fiscal boost into their analysis of the economy and inflation. Not so apparently. When the proverbial rubber met the road, more than a few participants apparently couldn’t help themselves and felt it necessary to go ahead and take Trump at his word with regard to fiscal stimulus.
This will of course come with consequences in today’s increasingly interconnected markets. Below, find some fresh commentary from Bloomberg’s Richard Breslow on exactly what those consequences might ultimately be.
Well, this Fed, that used to be described as hoping to communicate well enough as to be boring, was anything but. I wonder if they’ll get what they hope for? During the whole of the press conference, I couldn’t help but think this was not so much a declaration of victory for the economy. But a not so subtle declaration of “we did it… and not thanks to you and your fiscal stimulus”. We’re all human after all, even when showing a thick skin in public.
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Now, of course, will come the interesting part. The markets heard what was said, and, quite understandably, had some pretty dramatic reactions. You can’t look at, yes, global markets and not realize this was up there in taking people by surprise
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The short end of the curve was not able to bring itself to match the change in the dot plots. It pretty much ended the day just on the plus side of two
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We’ve seen this before. Experience has created the concern that certain regional presidents have a tendency to get ahead of themselves with their year-ahead forecasts
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But loads of other asset classes have been thrown into play. And while global headwinds and emerging markets were relegated to the bench for now, it’s hard not to expect them to come back into play. I’d be remiss not to mention that the CNY, Shanghai composite and govvies are all getting hammered today
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Perhaps the committee can ask the president-elect to tweet currency-management advice to his new BFF
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Or that the MSCI emerging currency index has given up the ghost after trying to claw its way back above the 200-day moving average. Its Fibonacci retracement chart has gone from looking cautiously optimistic to a classic fail. Consider their reserve situation with rising yields and sinking currencies
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It’s hard not to cynically wonder whether, if the economy is this far along (and I hope it actually is), the September pass was dubious
And here’s the daily summary from Deutsche’s Jim Reid:
People in my profession have perhaps been guilty of over analysing the Fed in recent years when every small nuance was over examined when in reality they really haven’t done much over this period. However last night’s statement and press conference was full of interesting remarks and certainly landed on the hawkish side with the dots edging up with the median dot now showing 3 hikes for 2017 rather than 2 beforehand. Last night’s meeting broke a trend as prior to this, the last six FOMCs have seen treasury yields fall with the last seven seeing the dollar fall against the Euro. Not this time. The meeting fits in with our view that markets are vulnerable to a bond yield spike next year. Rates vol could be the main talking point of 2017. The first takeaway was some of the subtle tweaks in the tone of the statement. The committee highlighted the “considerable” pickup in inflation compensation and also the “decline” in the unemployment rate. Risks were still referenced as being “roughly balanced” which is something DB’s Peter Hooper believes is the committee’s way of recognising the fact that risks may never be perfectly balanced. Meanwhile, there was a subtle shift in the way the committee recognises how accommodative policy is now, toning down the extent to which it is accommodative by adding “some” to the observation that it is enough to support some further strengthening in the labour market. The signalling of a gradual pace of rate hikes was left as is. The dots caused the most excitement however. As highlighted at the top the median dot for 2017 rose to 3 hikes from 2. In fact the number of committee members now forecasting just 2 hikes or less next year is only 6 out of 17. It had been 10 committee members at the last forecast. In other words 4 committee members shifted to 3 or more hikes. So a fairly convincing move. The 2018 and 2019 median dots were left at 3 hikes apiece while the longer run dot moved back to 3% after having been split between 2.75% and 3.0% last time out. Economic projections were a bit more of a non-event with growth and inflation forecasts revised up slightly and unemployment revised down. Fed Chair Yellen’s press conference offered the final few interesting snippets. She made special mention in particular to the change in the dots being “really very tiny” which was seen as her way of softening the hawkishness of them. She also added that she never said that she favoured “running a high pressure” economy and wanted to make it clear that she has “not recommended running a hot economy as some sort of experiment”. A reminder that back in October Yellen had said at a speech in Boston that there might be benefits to temporarily letting the economy run hot with robust aggregate demand and a tight labour market to reverse adverse supply side effects. Meanwhile, when asked about fiscal stimulus Yellen said that “fiscal policy is not obviously needed to provide stimulus to help us get back to full employment”. When asked about the Fed’s response to fiscal, DB’s Peter Hooper highlighted that she did not explicitly say they would raise rates faster, but rather left that implicit in her response. In terms of the market the immediate reaction function came in rates where the Treasury curve bear flattened in response. 10y yields smashed through 2.50% to close up +9.9bps on the day at 2.572% which is the highest since September 2014. 5y Treasury yields went through 2% and closed +13.9bps higher on the day at 2.049% which is the highest since April 2011. 2y yields finished up +10.4bps at 1.269% and the highest since August 2009. Futures also moved to price in a bit more than 2 rate hikes by December 2017. Also noticeable was the 2y Bund/Treasury spread which has now blown out to 205bps and the widest since 2000 while the 10y Bund/Treasury spread hit 227bps and is, amazingly, the widest since 1989. Currency markets weren’t to be ruled out with the US Dollar index touching highs last seen in 2003. That came largely at the expense of emerging market currencies which plummeted anywhere from -1% to -2%. Risk assets suffered meanwhile. The S&P 500 (- 0.81%) had its worst day since October 11th while credit spreads finished wider with CDX IG nearly 2bps wider by the end of play. In commodities Gold (-1.35%) tumbled below $1150/oz while WTI Oil, weighed down by the rally for the USD and also some bearish supply data in the US, plummeted -3.66% and back to $51/bbl. This morning in Asia the bond sell-off has continued with benchmark 10y yields in the antipodeans 10-11bps higher and 10y JGB yields also back up +2.5bps to 0.073%. Equity markets have followed the Wall Street lead and retreated. The Nikkei (-0.15%), Hang Seng (-1.69%), Shanghai Comp (-0.29%), Kospi (-0.04%) and ASX (-0.62%) all down. In credit the iTraxx Asia is 4bps wider currently. Moving on. Today brings another central bank into focus with the BoE MPC meeting outcome due around midday. Both the market and our economists expect no surprises with current policy settings to stay as is. Indeed our economists expect the BoE to maintain the broadly neutral stance that they adopted at the November MPC meeting. Firstly, they highlight that the economy appears to be holding up well and consensus expectations for 2017 GDP growth have risen to 1.3%, albeit no higher than the MPC’s own forecast (1.4%). Secondly, sterling’s recent appreciation may reduce peak inflation marginally, although there is still a net 15% depreciation relative to late 2015 and recent data shows increasing evidence of pass through into core goods prices. Ultimately our colleagues think that the MPC will not rush to judgement this week and the neutral bias will remain. Their baseline view is that UK monetary policy won’t change in 2017 and sovereign QE will be allowed to end in Q1. However, with the real income shock coming they see a higher probability of the next move being an easing rather than a tightening. Staying in the UK, yesterday Brexit Secretary David Davis spoke and didn’t rule out the possibility of a transitional deal ‘if necessary’ as a kind of ‘bridge’ for the UK leaving the EU. Putting him more on side with Chancellor Hammond, Davis also indicated that ‘an implementation phase’ could be a possibility. He also noted that the Government will not reveal Brexit plans before February. In any case the overall rhetoric from Davis clearly favours the recent move towards a softer exit. Sterling had initially been as much as half a percent stronger before the post-FOMC Dollar rally saw the Pound finish weaker. Before we look at the day ahead, it was also a fairly busy day for economic data yesterday. In the US the primary focus was on the November retail sales report. Headline sales were up less than expected during the month (+0.1% mom vs. +0.3% expected) while the ex auto and gas component was also softer than expected (+0.2% mom vs. +0.4% expected). The GDP-sensitive control group component also missed (+0.1% mom vs. +0.3% expected) which will likely create some downside risks to Q4 GDP although by now the focus may have already turned to 2017 growth. Meanwhile there was also some softness in last month’s industrial production print (-0.4% mom vs. -0.3% expected) with capacity utilization also declining four-tenths to 75.0%. Elsewhere, producer prices were reported as rising more than expected. Headline PPI rose to +0.4% mom (vs. +0.1% expected) helping to raise the YoY rate to +1.3% from +0.8%. In the UK the ILO unemployment rate was reported as holding steady in October at 4.8% although employment did decline a modest 6k with the statistics office noting that the labour market ‘appears to have flattened off in recent months’. There was better news in the earnings data however with average weekly earnings rising one-tenth to +2.5% yoy. Ex-bonuses rose to +2.6% yoy which is the fastest pace since August last year. Finally in France there were no last minute surprises in the November CPI report with consumer prices reported as unchanged during the month. For completeness in markets yesterday, European equity markets were generally weaker across the board with the Stoxx 600 finishing -0.50% prior to the Fed. Sovereign bond markets were firmer, albeit also pre-Fed clearly. Looking at the day ahead the early focus in Europe this morning is on the December flash PMI’s where we’ll get manufacturing, services and composite readings. In the UK we’ll also get more data in the form of the November retail sales numbers while around midday the focus then turns over to the BoE MPC meeting outcome. No change in policy is expected there. Later on in the US the main highlight data wise will likely be the November inflation report. The market is expecting headline CPI to increase +0.2% mom and the core to also increase +0.2% mom, a view also shared by our US economists. Meanwhile, the latest weekly initial jobless claims data will be out alongside Empire manufacturing and the Philly Fed manufacturing reports for December. Lastly the NAHB housing market index reading will be out too. Away from the data, Japan PM Abe and Russia President Putin are scheduled to hold a meeting aimed at proposing economic cooperation between the two countries. The ECB will also publish the net take-up for TLTRO II. Finally EU leaders are also due to gather to discuss migration and security issues, as well as debate the Brexit process in Brussels this morning.
