Another relatively calm and comfortable session heading into the FOMC meeting. I’d like to think the same could be said this time tomorrow, but am far less convinced about that. With markets and economists split on the outcome, something will move if the Fed does, or it doesn’t. So enjoy the quiet day today, ahead of tomorrow.

Market moves were not all that consistent. Equities are higher across the board, even Shanghai has a strong day. Suggestive of no change in the Fed. But yields were higher; albeit less convincingly so. Commodities were up and the USD was lower. So overall, most markets heading into the Fed possibly thinking there will be no change, this and given the pricing, the bigger surprise will be a hike.

The data wasn’t strongly suggestive of one way or the other. US NAHB housing was better than expected. But the more important CPI was slightly on the soft side. Services prices were up, but goods were down, dragged lower by gasoline.

The US TIC data for long term assets showed net buying of US assets, but on Treasuries, there was selling for the first time since January. This isn’t unheard of, but markets will be waiting to see if it is persistent. And yes, there was selling from Belgium, but also from China itself. That is likely to get some attention. But it is definitely worth noting that foreigners were still buying other US assets, even if the reserve managers were potentially selling. All is not lost.

Final European CPI was a little lower than expected at just 0.1%yoy (0.2E, P). things were a little stronger in the UK, with their employment and earnings data showing some strength. Amid all the anticipation tonight, the UK releases its retail sales, so we shall see if GBP can hold its gains.

JPY underperformed overnight after S&P cut Japan’s sovereign rating to A+ from AA- as it seems they are as unconvinced about the present policy accommodation as the growing economics consensus. Ratings don’t often move a currency, so the risk-on move might have had something to do with it too.

Coming Up

Here we are, FOMC day (well at 4am AEST). The market is pricing only a 28% chance of a 25bp hike today, but the behaviour in a multitude of markets expresses a little more nervousness about the potential for a move today. In the Bloomberg survey, 51 of 113 economists look for a hike. So it is a close call. On balance we see December as a more likely outcome, but again, acknowledge that it is close.

While if we follow the cues from the Fed, there won’t be a move today: the employment market meets the criteria but there are some structural issues, while more needs to be seen on inflation. They suggest we are almost there, but not quite. However, the rhetoric has persistently been that the move is near. And markets hate to operate in a vacuum, and they aren’t terribly patient. We have been waiting years now, since Bernanke raised the possibility that, at some time, policy might begin the slooooooooow move toward normalisation. And so the nervousness isn’t necessarily around 25bp today (or in the next few months) but about the cycle and how the rest of the world copes with a US cycle. If we are worried about 25bp only by the Fed, then there are far bigger worries in the global financial system and ones that monetary policy alone just cannot fix (or dare I say are the cause of…).

If there is no hike today, the information from the Fed becomes critical. The ‘dot points’ of where they see Fed Funds at the end of each year and the forecasts. There should be much assurance that the rate profile will be low and relatively flat over the forecast horizon. The forecasts may be lowered, which should ease some concerns about a strong hiking cycle.

Given market moves in recent days, no change would likely see yields lower and the USD off against the majors, but also perhaps a short risk rally in equities as well. This is most likely AUD positive in the short term. But then we come back to the fact that the Fed will hike at some point, and the underlying dynamics aren’t changing with a few months’ delay.

If there is a hike, we could equally see a higher USD, higher yields and possibly some equity market concerns. That could again be short lived as markets look ahead and are hopefully reassured by the promise of a very slow cycle. That reassurance is going to have to be in the dot points, forecasts and from Yellen’s speech, or risk markets will fret.

If there is no move, then we settle in for more of the same for another, interminable, month or two. If it’s a hike, then the US may get, somewhat unfairly, blamed for any volatility in EM in this interconnected world.

Overnight

On global stock markets, the S&P 500 was +0.80%. Bond markets saw US 10-years +0.37bp to 2.29%. On commodity markets, Brent crude oil +4.38% to $49.84, gold+1.5% to $1,119, iron ore -0.1% to $57.21. AUD is at 0.7198 and the range was 0.7123 to 0.72.

• UK av. Earnings +2.9%yA, 2.5E, 2.6P
• US CPI -0.1%mA, E, 0.1P
• US ex FE 0.1A, E, P
• US ex FE yoy 1.8%A, 1.9E, P
• US NAHB housing 62A, 61E, P
• US Long Term TIC flow +141.9bnA, -129.7P rev from -110.3

For full analysis, download report:

Markets Today: 17 September 2015 (PDF, 282 KB)

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