July 26, 2017

Markets Today: Never make a move too soon

As expected, the FOMC left the funds rate unchanged overnight.

Nothing like a funky BB King tune to start the day… The FOMC meeting was the big event from the overnight session and as widely expected the Fed left the funds rate unchanged and made a small tweak to its balance sheet unwind guidance noting that a start should occur “relatively soon” rather than “this year”, as previously stated. Ahead of the meeting markets were essentially marking time, but reaction to the Statement has seen UST yields rally and a broad USD sell off while US equities are essentially unchanged after a small initial dip. The Fed left the market with the scent that a rate hike should still be expected this year, but the lack of specific timing on the it’s balance sheets plans and may be a small word change on inflation appear to have been the excuse for the move lower in UST yields and the dollar.

Fed officials voted unanimously to leave the funds rate unchanged and noted that the balance sheet normalisation is expected to begin “relatively soon” (which replaced “this year”). To us this change in wording confirms our view that a balance sheet announcement should be expected in September, data dependent of course. The characterisation on inflation was mildly dovish, noting inflation is “running below 2%”where as previously it said “running somewhat below 2%”. But with wording on the inflation outlook unchanged along with upgrades on the assessments of the labour market and the economy, our read of the Statement is that the Fed remains intent on hiking one more time this year (likely December), contingent on the economy evolving as expected with upcoming inflation and labour market data releases the key variables to watch.

Ahead of the FOMC the USD traded in fairly tight range, but reaction to the Statement triggered a broad selloff with DXY (USD index) dropping 0.8% in a short space of time. Over the past two weeks the USD has been under pressure and the lack of clear guidance by the Fed appears to have provided an additional excuse to sell the greenback. Against this backdrop, commodities have enjoyed a bit of a resurgence and as such it is not surprising that commodity linked currency sit at the top of the leader today.

The mighty AUD has finally cracked the 80c mark and after initially trading to 0.8014, it has now settled just above the figure at 0.8005. Yesterday the AUD traded with a soft tone after a lower than expected headline CPI (although the core readings now are not that far away from the lower end of the RBA’s 2-3% inflation band) and a speech from Governor Lowe confirming the RBA is going nowhere for a while yet. As it has been the case for recently, AUD strength is largely a function of USD weakness.

NZD is up 1.39% and is back trading above the 75c mark. Positive risk sentiment, higher commodity prices (including further gains in wholemilk powder futures), and a lack of jawboning for the RBNZ in yesterday’s speech from Assistant Governor McDermott already had the NZD in the ascendency. USD weakness was the cherry on the top and at 0.7517, the kiwi now trades at a new 23 month high.

10y UST yields traded to an overnight high of 2.336%, but reaction to the Statement triggered a 4bps rally and now they trade at 2.29% while pricing for a 25bp hike at the December meeting is now at 42%, down from around 50%.

Commodities have continued to perform, oil prices are up over 1%, copper is +1.6% and iron ore is 1.4%. Meanwhile the VIX index has closed below the 10 mark (9.60) for a 10th consecutive day

Coming Up

After what has been a busy 24 hours for markets with major data releases and events, today’s calendar has a lot of items but none of them are likely to be market moving.

This morning we get NAB’s Quarterly Australian Commercial Property survey along with import and export prices for Q2. For economists and FX strategists the Q2 prices will be of some interest as they are a good proxy for the Australia’s terms of and using the RBA commodity price index as a guide, we suspect the terms of trade declined in Q2. Today’s numbers should provide a good test to our theory. In addition, the RBA model on the AUD real TWI uses the goods terms of trade as an independent variable, so today’s numbers should also help assess to what extent the currency was overvalued in Q2.

Also this morning China publishes industrial profit figures for June and later in the day Germany gets its GfK Consumer Confidence reading for August. The ECB publishes money supply figures for June and if the Q2 bank lending survey is any guide the data should confirm credit conditions have continued to improve.

The US gets a lot of second tier data releases with durable goods orders, initial jobless claims and advance goods trade balance the highlights. As for Fed news, Fed nominee Quarles testifies to the Senate Banking Committee


On global stock markets, the S&P 500 was +0.03%. Bond markets saw US 10-years -1.61bp to 2.29%. In commodities, Brent crude oil +1.49% to $50.95, gold+0.7% to $1,260, iron ore +1.4% to $70.43, steam coal +0.5% to $87.25, met. coal -0.6% to $165.00. AUD is at 0.8007 and the range since yesterday 5pm Sydney time is 0.7893 to 0.797.

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