January 28, 2016

Markets Today: I walk the line

The FOMC post meeting statement played a very straight bat, not locking themselves in to one course or the other as far as the March 17 meeting decision is concerned.

The FOMC post meeting statement played a very straight bat, not locking themselves in to one course or the other as far as the March 17 meeting decision is concerned, leaving that outcome to the course of the economy between now and then and prospects beyond as it will be assessed at that time.  Of course the Fed left rates unchanged at 0.25-0.5% as entirely expected.

The Statement laid out a pretty clinical and fair summary of economic market developments since December lift-off, modifying their description of the economy reflecting some slowing but with still strengthening labour market recognising generally higher levels of market volatility.

It aims to strike a balance.  On the one hand it says the Fed is “closely monitoring global economic and financial developments and is assessing their implications for the labour market and inflation and for the balance of risks”. It dropped its expectation of being “reasonably confident that inflation will rise to 2% over the medium term to 2%, opting for further risk evaluation.  On the other side it notes labour market conditions improved further and household spending and business fixed investment have been increasing, now describing that growth as moderate, a slight downshift from December’s “solid” description. They note that the housing sector has improved further, evidenced also by the overnight report of a stronger than expected rise in New Home Sales in December.

This Statement that looks to be a holding operation, describing the evolution of a still expanding but recently slowing US economy, telling markets they are not blind to the risks.  The Statement does not suggest that the Committee was close to another increase in rates, and March is looking doubtful too without renewed economic strength emerging and less market volatility.  The Statement reminded the market that it expects rate rises to be gradual.

US bonds rallied, 2s by 5-6bps since the Fed and a small net gain for the session; December Fed funds futures easing back from 0.65% to 0.62%.  Currency and equity markets have been whippy, before and after the Statement, commodity currencies overnight following the fortunes of oil that recovered mid-session, but US stocks on the heavy side into the last hour has seen the AUD pull back toward 0.70, also sold lower in the immediate aftermath of the just announced RBNZ decision.

Just announced at 7am this morning, the RBNZ has left the OCR unchanged, noting that further deprecation would be appropriate (Fonterra a little earlier reduced its 15/16 milk price forecast more than expected), and while core inflation is close to target, some monetary easing ahead may still be required; negative headlines for the flightless bird.  AUD/NZD has pushed up over 1.09 in response.

Coming up

With the FOMC now out of the way, will be some return to focusing on US economy’s fundamentals which starts as early as tonight. December goods orders report, business investment orders being adversely affected by the downturn in the oil and gas sector is a cuts back spending reduces new and ongoing fixed investment. Core durable goods orders are expected to dip a further 0.2% in December after a 0.3% decline in November. This release will also see the Atlanta Fed update its GDPNow estimate for Q4 GDP which currently sits at 0.7%, figure being released Thursday with the market consensus close to aligned, at 0.8%.

Also being released tonight are Eurozone January confidence surveys, German preliminary CPI for January, US jobless claims, pending home sales, and the January Kansas City Fed manufacturing survey. For Sterling watchers, the first estimate of UK GDP is expected to reveal almost unchanged quarterly growth of 0.5%, an outcome that would take annual growth down from 2.1% to 1.9%.


Whippy session; Fed not close to hiking again: Eurostoxx 600 +0.3%, Dax +0.6%, CAC +0.5%, FTSE +1.3%.  Dow -272 points to 15,895, -1.7%, S&P 500 -1.7%, Nasdaq -2.5%, VIX 24.07 +7.0%.  Shanghai -0.5%, Mumbai -0.5%, Nikkei 225 -2.5% and ASX 200 -1.2%; ASX SPI futures this morning -0.7%.  US bond yields: 2s at 0.84% (-1), 10s at 2.00% (+1).  WTI oil at $31.80 (+1.1%), Brent at $32.66 (+2.7%), Malaysian Tapis (yesterday) $31.56 (+5.7%).  Gold at $1127.60/oz (+0.6%). Base metals: LME copper +1.1%, nickel -0.2%, aluminium +2.1%. Iron ore $42.4/t +3.3% Chinese steel rebar futures -0.4%. Soft commodities spot futures: wheat -1.6%, sugar -3.1%, cotton -0.9%, coffee 1.3%.  Euro CO2 emissions price (Dec 16) -2.8%. The AUD/USD’s range overnight 0.7001-0.7081; indicative range today 0.6985-0.7065; the AUD/USD is 0.7006 now

The FOMC left rates steady at 0.25-0.5%; US New Home Sales (Dec) 544K (L: 490K/4.3%; E: 500K/2.0%); stronger

The RBNZ left rates on hold at 2.50%

Good luck.

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