Below trend growth to continue
“Were the FOMC to delay the start of policy normalization for too long, we would likely end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of our goals,” Fed Chair Yellen told the Economic Club of Washington overnight.
“Were the FOMC to delay the start of policy normalization for too long, we would likely end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of our goals,” Fed Chair Yellen told the Economic Club of Washington overnight. “Such an abrupt tightening would risk disrupting financial markets and perhaps even inadvertently push the economy into recession.” So there you have it. Unless payrolls or other events seriously question the current US trajectory, the Fed is on course for lift-off in a fortnight. She was at pains to point out – yet again – that this rate cycle could be quite different; there is no pre-determined path; and that, in the end, it will be data dependent. Nothing too controversial from those caveats.
While it’s on, it’s also priced. Fed funds futures are back to a 75% probability for December (where they were before last night’s ISM) and about three hikes priced for next year. Treasury yields firmed. The USD rallied into Yellen’s speech, but then receded somewhat. Among other majors, the CAD was supported after the BoC left rates on hold (and despite further oil weakness as OPEC member gathered for talks in Vienna). The AUD pulled back from overnight highs amid further softness in iron ore (down another $1.11/t to $41.1/t), most LME base metals and gold prices.
Atlanta Fed President Lockhart was also speaking, signing from a similar hymn book as Yell and his previous comments, noting: “it’s not good to surprise markets; wants to avoid the taper tantrum, economy doesn’t need emergency treatment any longer; rises in rates likely gradual; further rises in dollar a risk to my outlook”. The just-released Fed’s Beige Book again contained lots of references to moderate growth across Fed districts; not notably different from October’s.
Ahead of local data, Fed President John Williams speaks at 740. Then the AU data flow starts with two second tier releases – AIG PSI services for Nov (L 48.9) at 930 and HIA new home sales for Oct (L, -4%) at 11 AM – ahead of the trade figures for October at 11:30 AM. For trade, we look for a virtually unchanged deficit at $2.4 bn after last month’s 2.3 billion shortfall. Weakness in iron ore exports from Port Hedland is expected to be broadly offset by better coal loadings from Newcastle, continued strength in gold exports and higher LNG exports with Santos’ Gladstone LNG project commencing production in mid-October.
Looking beyond Australia there are services/composite PMIs for Japan, China’s Caixin private sector counterparts, and India’s. Then the market’s attention well to the ECB tonight, with some further services/composite PMIs, including for Euro-zone, for some of its member countries and the UK’s.
As far as the ECB is concerned, it’s all the pressure on Mr Draghi tonight and whether he will deliver as far as boosting QE, extending to a cutting that cutting the deposit rate further and or other measures. For the Euro, the hurdle is already high, market already priced for something approaching a material step up in the pace of monetary accommodation already priced into the Euro. Already there are unsourced wire reports this morning that the forecasts circulated to national central banks ahead of the meeting are not markedly different. US jobless claims will continue to be watched, and the Fed’s Mester speaking at a Washington DC Financial Stability Conference.
Also to be parsed will be a follow-up speaking engagement from Janet Yellen, this time before the Joint Economic Committee, Yellen scheduled to start speaking same time as the US ISM non-manufacturing report is released. It’ll be an opportunity to show resolve ahead of December rate rise if the questioning gets heated. Data-wise, there’s also factory orders and Fed vice-chair Stanley Fischer, though also speaking at that same DC Financial Stability Conference.
Commodities softer overnight: Eurostoxx 600 -0.0%, Dax -0.6%, CAC -0.2%, FTSE +0.4%. Dow -163 points to 17,726, -0.9%, S&P 500 -0.9%, Nasdaq -0.7%, VIX 16.41 +11.9%. Shanghai +2.3%, Mumbai +2.3%, Nikkei 225 -0.7% and ASX 200 -0.1%; ASX SPI futures this morning -1.1%. US bond yields: 2s at 0.93% (3), 10s at 2.17% (+3). WTI oil at $40.01 (-4.4%), Brent at $42.54 (-4.3%), Malaysian Tapis (yesterday) $43.98 (-1.7%). Gold at $1053.40/oz (-0.9%). Base metals: LME copper -1.5%, nickel +0.0%, aluminium +1.1%. Iron ore $41.1/t -2.6% Chinese steel rebar futures -0.5%. Soft commodities spot futures: wheat -1.0%, sugar -0.6%, cotton -0.1%, coffee 0.5%. Euro CO2 emissions price (Dec 15) -0.9%. The AUD/USD’s range overnight 0.7293-0.7336; indicative range today 0.7270-0.7325; the AUD/USD is 0.7308 now
EC CPI, headline/core, y/y (Nov) 0.1%/0.9% (L: 0.1%/1.1; F: 0.2%/1.1%); ADP Employment (Nov) 217K (L: 182K; F: 190K); US Non-farm productivity (Q3, final) 2.2% (L: 1.6%; E: 2.2%).
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