A further slowing in growth
Markets overnight initially took the lead from a lower than expected print on US core CPI for November, missing the 0.2%/1.8% consensus by a tenth, at 0.1%/1.7%. Stocks rallied, the dollar faded as did Treasury yields.
The AUD pushed back above 0.76 and was trading just above the figure when the Fed announced its expected hike in Fed funds by ¼% to 1.25-1.50%. It’s higher still. The other big news overnight was the likely reconciliation between the US Senate and the House on tax reform. “Sources” suggest they’ve agreed on a 21% corporate tax rate, a start in 2018, and a cut in the top US personal income tax rate to 35% from 39.5%. With Republicans now to have one less Senator and the new Democrats senator to take his seat apparently from late December, there’s now an urgency to get the tax legislation passed.
The FOMC hiked rates as expected, lifting the target range of Fed funds by 0.25% to 1.25-1.50%. There were two dissenters – Kashkari and Evans. The Fed’s statement was re-crafted to reflect the latest economic developments, in part from a little more colour around the Hurricane effects, though still a positive reflection on the economy and low inflation.
There was no downgrading of the Fed’s median of the individual FOMC member’s Fed funds projections that continue to project three more rate rises next year and another two in 2019. Growth forecasts were actually revised up and the unemployment forecasts revised down. Yellen outlined in her press conference that the tax cuts were a factor supporting the FOMC’s growth forecasts (with all the timing and magnitude uncertainties). She also said she expected tax reform to lift aggregate demand (potentially inflationary) but could also lift aggregate supply, the capex expensing provisions lowering the cost of capital and lifting investment.
She was quizzed – as she has for some time – on the low inflation story. The Fed continues to expect that the factors holding down inflation this year will not be repeated next year, though they are “monitoring inflation developments closely” and have a symmetric view on policy. She said that the continuing low earnings story may well be evidence that there is still some slack in the labour market. This was Chair Yellen’s last press conference, she’ll be leaving her professional home for the past two decades.
Notwithstanding no deviation in the Fed’s own rate projections, the dollar and Treasury yields have continued to decay in the aftermath of the Statement and her presser. Two year Treasury yields have eased a further 4bps and the BBDXY is down another 0.4%. The data will continue to drive markets.
In late news on Brexit, UK MPs have voted against a Government bill now to give Parliament the guarantee of a vote on the final Brexit deal struck. This means that any deal struck across the table won’t likely be the final deal. Little Pound reaction so far on this further uncertainty.
The two big data points are the AU Labour Force at 11.30 and the China economic activity data at 13.00, both important for the Aussie and local rates markets.
NAB’s models point to employment in the order of 15K (market consensus is +19K). Leading indicators of employment (e.g. SEEK, NAB Business Survey employment index) point to further trend growth. Sample rotation effects do not suggest a particular risk to employment but they do suggest mild upside risk to the unemployment rate, to the risk of a 5.5% outcome, from 5.4% in October. NAB’s preferred point estimate of the unemployment rate is 5.4%.
While not important for markets, but very crucial to the growth story, the Statistician is also releasing its latest quarterly population estimates, this for the June quarter. Overseas arrivals and departures (including tourism traffic flows) for October is also out.
With the better-than-expected trade and lending data for November, the market would not be surprised if today’s China growth numbers print somewhat higher than expected. Then official China Manufacturing PMI rose marginally in November (as did the Non-manufacturing PMI), a hint in that positive direction.
Then it’s on to the ECB, BoE, and SNB meetings, the ECB under focus for their latest forecasts for growth and inflation and whether they’ve tweaked them higher, for growth at least. Draghi has a press conference too.
Remember too that the three day EC Summit is due to get underway tonight, offering the potential for pound-sensitive Brexit-related news stories. Now having had the benefit of UK inflation and average earnings data over the past two days, there’ll be more opportunity for reflection on the state of High Street with the UK Retail Sales report for November, a step up in growth from 0.1% to 0.4% expected.
There’s more event risk on the other side of the Atlantic with the US Retail Sales report for November, the core ex autos and gas series expected to increase to 0.3% growth, up from 0.2%. Further north, Bank of Canada Governor Stephen Poloz is speaking too.
On global stock markets, the S&P 500 was +0.13%. Bond markets saw US 10-years -4.64bp to 2.35%. In commodities, Brent crude oil -1.39% to $62.46, gold+1.1% to $1,253, iron ore +0.5% to $69.34, steam coal +1.0% to $99.65, met. coal +0.0% to $231.50. AUD is at 0.7632 and the range since yesterday 5pm Sydney time is 0.7558 to 0.764.
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