Todays podcast

Overview Knock Three Times

• FOMC accelerates the taper profile, pencils in 3 hikes in 2022, neutral rate still 2.5%
• Coming up today: RBA Gov Lowe, AU Jobs, MYEFO, ECB, BoE, Global PMIs

“Oh, my darling; Knock three times; On the ceiling if you want me”, Dawn 1970

The FOMC delivered a hawkish tilt for Christmas with the Fed dot plot showing three rate hikes in 2022, while also accelerating the taper profile to $30bn from $15bn and which would see QE end by March. Markets seemingly have taken the tilt in their stride given three hikes were close to being priced into the meeting and expectations were high for an accelerated taper profile. Chair Powell also provided mixed tones in his press conference with the market seemingly paying more attention to his inflation comments with 10yr implied inflation breakevens initially dipping before reversing to be up 2bps to 2.42%. Nevertheless, Powell didn’t think the Fed was behind the curve and would take stops “in a thoughtful manner”. The US 10yr yield is now up 3.6bps to 1.48% with similar moves being seen in 2yr yields (0.68%) with the 2/10s curve broadly flat. Fed Funds Futures are broadly in line with the dot plot for 2022 with 73bps of hikes priced with a hike by May 2022 now 90% priced. Risk sentiment remains positive with the S&P500 well in the green at +0.6% at the time of writing, while the USD is down post Fed with BBDXY -0.2%.

For your scribe the key takeaway point was the Fed’s Core PCE forecasts which point to the need of a further hawkish tilt in 2022. The Core PCE inflation forecast is now well above the 2% target at 2.7% in 2022 (2.3% previously) and at 2.3% in 2023 (2.2% previously). One gets the impression on that profile that the Fed could move as early as March 2022, though of course the Omicron variant is one key uncertainty as is the taper profile which plays to the view of the first rate hike being in May 2022 and which is 90% priced. As for details of the Fed dot plot, every Fed member now sees the case for rate hikes in 2022, an important distinction given they were split 9 v. 9 at the September. Importantly 10/18 seethe case for three hikes and 2/18 see the case for four hikes. As for 2023, the consensus is for another three hikes, while the longer-term ‘neutral’ dot was unchanged at 2.50% (see FOMC SEP for details and the Fed Statement).

FX moves are still evolving as markets react to the FOMC statements. The US Dollar is now down -0.2% on the BBDXY after having risen into the FOMC, with most currency pairs higher post FOMC. The EUR is +0.1% and GBP +0.2%. The AUD outperformed over the past 24 hours up some 0.8% to 0.7161 ahead of three key risks events – jobs, RBA Governor Lowe and MYEFO (see coming up for details).

As for other data pieces overnight, UK inflation surprised to the upside again. Annual headline CPI inflation rate broke the 5% mark at 5.1% y/y (consensus 4.8%), while there was a similar three-tenth surprise on core inflation at 4.0% y/y against 3.7% expected. With core inflation now double the BoE’s target, there is clearly more pressure on the BoE to get along with it and start to normalise policy after having bottled it at the last meeting. Markets are now back to pricing in almost a 50% chance of a 15bps rate hike at today’s BoE’s meeting, though the consensus is the BoE will hold fire and wait until the fallout from the Omicron variant becomes clear. Overnight, the UK reported 78,610 new COVID19 cases, the highest since January with the Chief Medical Officer warning a big rise in hospitalisations is “a nailed-on prospect”, asking people to  “de-prioritising” other social contact.

US retail sales were much weaker than expected in November, but the level of sales remains very elevated. Headline sales were 0.3% m/m vs. 0.8% expected and 1.8% previously. The core control group was even weaker at -0.1% m/m against 0.7% expected. There was though little reaction to the data coming before the Fed, and it is worth noting the miss comes after three very strong months in which core control sales rose by an average of 1.6% m/m. As for components, weakness was led by the electronic store sales which fell -4.6% m/m after lifting 3.1% in October, perhaps suggestive of people having brought forward their end of year shopping. Meanwhile north of the border Canadian inflation remained high, at 4.7% y/y for headline and 2.7% y/y for the average core figures in November, both in line with expectations.

Coming up today:

A busy day both domestically and offshore. There is a trifecta of Aussie events with RBA Governor Lowe speaking, jobs data, as well as the last budget update. Offshore NZ has Q3 GDP, while the big risk events are the ECB and BoE, along with the global PMIs. See details below:

• AU: RBA’s Lowe, Australian Jobs, MYEFO: A trifecta of market moving events. RBA Governor Lowe speaks at 10.30am on “The RBA and the Australian Economy ” which could be a scene setting speech as we break for the summary holidays. Of interest will be comments around QE and whether the RBA remains confident in their 2024/plausible 2023 rate hike view. As for the jobs figures we expect employment to increase 280k in the month, which is above the 200k consensus, and for the unemployment rate to fall to 4.9% from 5.2% (consensus 5.0%). Also expect MYEFO to be released during the day. We pencil in a 2021-22 deficit at around $75bn from the currently projected $106.6bn
• NZ: GDP – Q3: GDP is expected to show a sharp contraction of -4.1% q/q due to lockdowns, but it is worth noting this is a milder view than the RBNZ’s minus 7% pick, which pre-dated last week’s less [1]dire partial indicators.
• EZ: ECB, PMIs & Trade Balance: The ECB meets the consensus being they will announce the end of the Pandemic Emergency Purchase Program and the expansion of the Asset Purchase Program. The rise of the Omicron variant adds a little more uncertainty with the possibility such a decision is delayed until the fallout becomes clearer. As for the PMIs they are expected to fall back a little with manufacturing expected to be 57.8, down from 58.4.
• UK: BoE & PMIs: Markets are now back to pricing in almost a 50% chance of a 15bps rate hike at today’s BoE’s meeting, though the consensus is the BoE will hold fire and wait until the fallout from the Omicron variant becomes clear. Overnight, the UK reported 78,610 new COVID19 cases, the highest since January with the Chief Medical Officer warning a big rise in hospitalisations is “a nailed-on prospect ”, asking people to  “de-prioritising” other social contact.
• US: Jobless Claims, Industrial Production, Philly Fed, Housing Starts/Permits: A lot of second tier data is out. The consensus for industrial production is 0.6% m/m, jobless claims might get a closer look given how far it has fallen recently with consensus at 200k.

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