Markets Today: Are you ready? (The market is.)

It’s been a rather uneventful night as the offshore markets did some more final positioning ahead of tomorrow morning’s FOMC meeting.

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It’s been a rather uneventful night as the offshore markets did some more final positioning ahead of tomorrow morning’s FOMC meeting.  The USD has been whipped around a little, rallying earlier in the session, sold lower, but then making a comeback later in the session.

The one piece of meaty news out of the US was the NFIB Small Business Optimism Index for November, and it was strong, the strongest in fact for almost two years.  You could be forgiven for thinking that US small business think that the economy is “going to be great”.  (I had to use that line somewhere and sometime.)  The Index came in at 98.4, up from 94.9 when the market was expecting an improvement, but to 96.7.  Most of the report’s inner metrics were better, with the exception of “net compensation” and “net compensation plans” that pulled back, if still at higher levels and countered by “plans to hire” that rose to +15% from +10%.  The one detail that really stood out was “expect a better economy” that swung up from -7% to +12%, having averaged -4% in the previous six months.

The Pound was bought in the aftermath of the November CPI report that saw headline inflation pick up to a stronger than expected 1.2% (1.1% expected), the highest for two years and with core inflation also ticking higher to 1.4% from 1.2% (1.3% expected).  Pound strength persisted into the US session when some appetite for the USD returned, taking Sterling down from over 1.27, currently trading at 1.2655.  US bond yields have also been pushing back up late in the session later in the session, lending some support to the big dollar.

The US bond market is as well aligned for the FOMC as it has been for quite some time.  Through this year, the market (rightly) has been much more cautious on the extent of Fed tightening (zero to date).  This time last year, the median FOMC Fed funds projection for the end of this year was 1.4%.  It will close the year at 0.5-0.75%.  The market is expecting that this time next year the Fed funds rate will be 1-1¼% which was the median Fed dot point projection in their September forecasts, a forecast that embodies two more rate hikes in 2017, an expectation that also aligns with NAB’s forecast. We’ll either be all right or all wrong!  The market continues to fully price in a hike for tomorrow.

The AUD this morning is continuing to hug 0.75, having tested the 0.7520 area overnight.  Yesterday’s NAB Business Survey for November and the Chinese November economic data came and went without too much market fanfare, the Survey revealing some slowing in Business Conditions (to average levels) but Chinese growth in industrial production, retail sales and fixed assets investment mostly a little better than expectations.  The AU bulk resource prices overnight showed iron ore down 15 cents and steaming coal up 30 cents, but met coal off a larger $7.50.  We did note in the Chinese data that the early sizeable annual declines in Chinese coking coal production are now beginning to ease up on more lenient production guidance.

Coming up

Ahead of the FOMC tomorrow morning, there will be some interest in today’s W-MI Consumer Sentiment Index (10.30 AEDT) and the BoJ Tankan Survey (10.50 AEDT), the latter previously a big indicator when Japan was absolutely Australia’s number one trading partner.  The Tankan Survey is expected to reveal some improvement in the main large and small company net balance indexes, the Large Manufacturers’ Index to improve from 6 to 10, aided no doubt by the stronger USD/weaker yen over recent weeks.

Tonight in the London session, there is the UK labour market report for October/November, then EC Industrial Production for October, but likely more interest in BoE Governor Mark Carney’s speech and any comments on the economy.  Then comes US Retail Sales for November, PPI, Industrial production and Business Inventories.  T

For the FOMC, the market will be looking to see the rate hike and then turn its attention to the details of the Statement and the forecasts.  Likely, its forecasts for two further hikes in 2017 (the September forecasts) will not be altered much at all and its longer term forecast of 3.0%.  Then, the tone and tempo of Fed Chair Yellen’s comments on the economy, inflation and policy at her press conference 30 minutes after the release of the FOMC Statement and Projection Materials (forecasts) at 6.00AM AEDT.  Markets will be interested in her comments on the economy’s growth and inflation tempo, tolerance to the rise in the USD as well as their thinking on the appropriateness and possible reaction to Trump fiscal stimulus.

Overnight

On global stock markets, the S&P 500 was +0.69%. Bond markets saw US 10-years +0.93bp to 2.48%. In commodities, Brent crude oil -0.14% to $55.61, gold-0.7% to $1,156, iron ore -0.2% to $83.42, St. Coal +0.4% to $86.00, Met. Coal-2.7% to $270.00. AUD is at 0.7497 and the range since yesterday 5pm Sydney time is 0.7477 to 0.7519.

Good luck.

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