September 23, 2016

Markets Today: Under my [central bank] umbrella

24 hours on, under my [central bank] umbrella is how the markets have interpreted Wednesday’s US FOMC meeting.

24 hours on, under my [central bank] umbrella is how the markets have interpreted Wednesday’s US FOMC meeting. Although there were three dissenters, the statement was seen on the dovish side with the dot points for the fed funds rate lowered across the board. That has continued a rally in risk assets and bonds in an otherwise quiet data night (datawise US Jobless Claims fell to 252k a week, remaining at low levels and suggestive of continued payrolls growth, while existing home sales came in a weaker).

Equities led the way in a sea of green with the Euro Stoxx up 2.3% and the FTSE also up 1.1%. The risk on sentiment continued in the US with the S&P 500 up 0.7%.

In the FX space, there was slight US dollar weakness given the dovish signals with most major currency pairs higher. The outperformer was the Norwegian Krone which appreciated 1.6% against the dollar! That comes after the Norges Bank Monetary Policy Meeting, where while a no change decision was expected, the Bank did say “the key policy rate will most likely remain at today’s level in the period ahead” which has stemmed expectations of further easing; a higher oil price also helped.

The Euro and the Aussie were 0.2% higher, while the Pound outperformed up 0.4%. A speech by noted Bank of England hawk Forbes played down the need for further stimulus and that the BoE may have been “overcounting [the] Brexit-uncertainty effect”. Despite that hawkish tone, that should be played against earlier statements by Carney and the BoE which suggested further easing would be required. Also out from the BoE was a speech by Governor Carney who called on governments to step up fiscal and structural policies. That mantel was also supported by RBA Governor Lowe at his first parliamentary testimony yesterday. Indeed it appears that there is a concerted effort amongst central bankers to get governments to step up to the plate.

The Kiwi was the polar opposite, down 0.6% following the RBNZ’s signal of further easing: “Our current projections and assumptions indicate that further policy easing will be required to ensure that future inflation settles near the middle of the target range” and that “A decline in the exchange rate is needed” to boost tradeables inflation. Our Kiwi brethren note the statement is consistent with their view of the RBNZ cutting rates in November.

Most government bond yields fell with US Treasuries down 3 basis points to 1.6%, while in catch up to the FOMC German Bunds fell 9.8 basis points to -0.10%. In the Asia-Pac time zone yesterday, that soft RBNZ policy statement coming after the FOMC saw Kiwi bond yields down 13 basis points to 2.5% and Aussie CGS were also down 9.4 basis points to 2.03%.

In the commodities space the oil market continues its recent bout of volatility, with WTI up 1.8% to US$46.17 a barrel. The moves were helped along by heightened speculation of an OPEC supply agreement next week after OPEC rivals Saudi Arabia and Iran met last night.

Coming up

After a week of key risk events, Friday brings a breather to markets with little in the way of significant dataflow. The most notable is a host of preliminary September PMIs around the world. First up is Japan, then the Euro Area and the US. The US PMI doesn’t get much market attention, though it might get a glance as an indicator to whether the fall in the August Manufacturing ISM was an anomaly or was a signal of some softening ahead (Chart 1).

With the September FOMC behind us, the Fed’s Jive Talkin’ starts again with a number of Regional Fed presidents speaking tonight. First up are Harker, Mester, and Lockhart, all at a Conference on the “Fed’s Role in Our Communities”. The only FOMC voter is Mester and given her dissent at Wednesday’s FOMC meeting it wouldn’t be surprising to see a few hawkish headlines hit the wires. For what it’s worth, it appears the Fed Board of Governors hold a different view to the rotating regional Fed Presidents and for policy it seems the Governors hold sway (3 out 4 rotating regional fed presidents dissented in September). Kapaln also speaks at a separate event tonight.

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