Today’s Podcast

https://soundcloud.com/user-291029717/no-move-on-yellens-swansong

Overview

• Fed keeps rates steady, as expected; gradual hikes still expected; limited market reaction
• Minimal market impact from State of the Union
• Aussie lower on net since CPI/China Mfg PMI slight misses
• Eurozone CPI higher than expected; lower German inflation offset by France
• Chicago PMI, ADP Employment both strong ahead of ISM tonight and payrolls tomorrow

Yesterday’s State of the Union address from the President came and went without any great fanfare as far as market impact was concern.  As well as its political messages – always the foundation of this annual address – he made mention of his intention to push for $1.5tr in infrastructure spending, though understood to be most funded from private sources with government incentives.

US Treasury yields pushed a little higher in the lead up to the FOMC announcement this morning, stocks had regained their composure (since headed back down), an OK-to-positive data set out of the US, and after the quarterly US Treasury refunding announcement.

ADP Employment came in on the strong side of expectations for January, printing at 234K (expected 185K) ahead of tomorrow night’s payrolls.  The ADP report has had a less than stellar job in heralding the headline payrolls print and in any case, it’s as much going to be about what the payrolls report says about earnings and what that portends for US inflation and the Fed.  The Q4 Employment Cost Index revealed only the very mildest acceleration in employment costs through last year, rising 2.6% y/y, up from 2.2% through 2016, buying time for the Fed with its gradual removal of monetary accommodation. The Chicago PMI came in at 65.7 (f/c 64.0) ahead of tonight’s national ISM.

As widely expected, in what was Fed Chair Yellen’s last attendance in that role, the FOMC has voted unanimously (9-0) to keep the Fed funds rate steady at a range of 1.25-1.50%. (As part of the changeover process, Jerome Powell was also formally elected as the new FOMC Chair.)  Changes to the statement released by the FOMC were more in the nature of a time/new year refresher, taking out the previous references to the expected impacts of the hurricanes and confirming the still expected further gradual removal of monetary accommodation.  The statement described “gains in employment, household spending, and business fixed investment” as “solid” with the unemployment remaining low.

They still expect that with this further gradual removal of accommodation (further hikes, reducing the size of their balance sheet), growth will be moderate with a labour market remaining strong.  They continue to expect inflation this year to rise and then stabilise at around the 2% objective.  There is no sense in this statement that they have made any material changes to the forecasts released in December when they last hiked rates.  The Fed continues to see near term risks as balanced and there was no push back from market expectations that has the March 21 Meeting as delivering the next lift in rates (still fully priced).  Move along, nothing to see here was this observer’s takeaway.

After taking a hit after yesterday’s lower than expected headline CPI, the AUD has had something of a choppier session overnight, but still trading this morning in the mid 0.80s.  The USD moved initially higher after the release of the FOMC statement, as did Treasury yields (1-2 bps), but both the dollar and yields have eased back.  While the Fed confirmed their expectation of further hikes and the expected pick-up in inflation, there was no increases in growth/inflation or rate/dot point “risks” from the FOMC that some were expecting, all explaining limited post-Statement market reaction from the dollar and bonds.  US equities have pulled back into negative territory in late afternoon trade.  .

Coming up

• APAC today: AU Building approvals (+11.7%; F: -7.6%).  Whippy series; any rise (or small fall) would suggest further extension of the housing cycle and should be $A-supportive
• AiG PMI Manufacturing; CoreLogic House Prices (~-0.5% m/m); Export & Import Prices, Q4
• China Caixin PMI Mfg (L: 51.5; F: 51.5)
• Tonight: US ISM Mfg (L: 59.7; F: 58.6)

Market Prices

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