Markets Today: Don’t dream it’s over

A rather measured night again in the lead up to the FOMC tomorrow morning and the BoJ meeting today where the Bank has been honing its thinking on policy to lift inflation.


A rather measured night again in the lead up to the FOMC tomorrow morning and the BoJ meeting today where the Bank has been honing its thinking on policy to lift inflation.  The NZD has had an up and down 24 hours, rallying yesterday ahead of last night’s Global Dairy Auction where prices rose 1.7%, under our expectations of a 5-8% uplift, the essence of which seems to have been priced into the Kiwi that overnight gave back yesterday’s gains.  It’s still trading this morning above 0.73 at 0.7316 ahead of the RBNZ announcement.  In the past hour, Fonterra has materially lifted its 2016/17 milk price to NZ$5.25 (close to BNZ’s $5.30) and up from their last forecast at $4.75, so a not inconsequential increase in dairy industry farm income.  The Kiwi remains steady.

The USD has been relatively subdued with US equities almost flat again and US Treasury yields off by ½-2 bps across the curve.  US housing starts fell a larger than expected 5.8% (misses and overshoots are usual) and the Atlanta Fed’s GDPNow for Q3 was shaved to 2.9% from 3.0% overnight, not from housing starts but the somewhat stronger CPI last week that saw consumption lowered a touch (higher prices, less “real” growth).

Elsewhere, Sterling has continued to drift lower, below 1.30, trading at 1.2985 this morning.  The AUD has continued to trade in the mid 0.75s amid a further lift in bulk export commodity prices, especially met coal that pushed up another 4.52% to $196.50!  Coking coal exports are 1.1% of GDP so a more than doubling in prices is at least for now supporting the terms of trade and nominal GDP.

Coming up

The main market interest in our time zone today is the outcome of the BoJ meeting.  Doing nothing risks a knee-jerk yen-positive response.  The market will also be interested in the outcome of an internal staff review of Japan’s growth and inflation under the Bank’s move to adopt and re-jig its Quantitative and Qualitative Easing (QQE) and “QQE with a Negative Interest Rate” monetary policies.  This review was commissioned at the Bank’s July 29 Monetary Policy Meeting.  At that meeting, the Bank decided to increase its purchases of Exchange Traded Funds (ETFs), roughly doubling from ¥3.3tr annually to ¥6tr, increases US$ funding for FIs, but not change the projected annual increase in the money base from ¥80tr nor the -0.1% policy rate; there were two dissenters to increasing ETF purchases on financial stability/moral hazard grounds.

There is market speculation whether the BoJ will push its policy rate into deeper negative territory to weaken the yen (forecasts range t0 -0.4%), and perhaps coupling this with measures to protect bank net interest margins through the likes of a negative bond market “twist” operation by purchasing shorter-to medium dated JGBs and selling the super long dated JGBs to increase the yield curve slope.

Governor Kuroda’s press conference starts at 4.30pm; there’s no pre-determined time for the outcome of the meeting to be made public.  It could be any time from around 1pm AEST.  Completing the diary for today we have Japanese trade figures for August this morning, while locally, the RBA’s Alex Heath is speaking at a CEDA labour market/education, skills and training conference at midday.  NZ also has credit card spending data this afternoon.

Then the FOMC beckons, followed by the RBNZ (at 7.00 AEST).  NAB expects no change from the RBNZ.  As for the FOMC, there’ll be the immediate interest in the Statement (look for the number of dissenters here too; up to three is likely with George very likely, Mester, likely, Rosengren, possible).  With the Statement comes the accompanying “Projection Materials” (updated forecasts).  Of specific interest will be the range of FOMC member Fed Funds end year forecasts (this years will likely be cut ¼%) and for the longer run (neutral) rate.  That was 3% when last published in June, having been downgraded over time from 4.25% back in January 2012 when these Fed funds forecasts were first released.  Then it’ll be deciphering the tone and outlook from Fed Chair Yellen’s press conference 30 mins later (4.30 am AEST).

The market is more priced to a “no change” and only gradual rate rise expectations outcome.  It’s going to take something toward hawkishness from the Fed Chair’s presser to have the market even thinking whether its pricing that the Fed will only increase rates by 1-2 times between now and the end of 2017 is too thin. It’s hard to see Fed Chair Yellen, the Statement and the forecasts pointing to a more dovish outcome than that.


On global stock markets, the S&P 500 was +0.03%. Bond markets saw US 10-years -2.26bp to 1.69%. In commodities, Brent crude oil +0.37% to $46.12, gold+0.0% to $1,318, iron ore +0.2% to $55.77. AUD is at 0.7555 and the range since yesterday 5pm Sydney time is 0.754 to 0.7564.

Good luck.

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