April 30, 2015

Markets Today: US Fed keeping options open with deliberately vague guidance

The FOMC statement issued earlier this morning has made it clear that there is no pre-determined timeline for Fed rate lift-off.

The FOMC statement issued earlier this morning has made it clear that there is no pre-determined timeline for Fed rate lift-off.  The Fed is totally data dependent in considering when next to change policy, that data then playing into the Fed’s assessment of progress in their dual mandate of “fostering maximum employment and price stability”.

Our assessment is that September remains the next most likely time for the Fed to move.  There are two meetings (June 18 and July 30) before the September 18 meeting and it will take time for the Fed to the comfortable that the US economy has not been dislodged from its underlying growth track.  How much of the recent softer growth is transitory is yet to play out.

Hours before the FOMC statement, first quarter US GDP was released and it disappointed growth expectations.  Growth was a paltry 0.2% (consensus 1.0%) with real final sales (domestic demand) down 0.5%.  Business investment contracted and consumer spending slowed.  Net exports again detracted from growth. A soft report all around.

Memories of a soft first quarter last year though from the exceptionally cold weather still resonate and have played into the Fed’s consideration, but only “in part”, the FOMC statement saying that “economic growth slowed during the winter months, in part reflecting transitory factors”.  The rest of the “in part” would include the slowdown in US oil and gas activity and the impact of the high $US.  The bottom line is that the Fed is very much keeping their options open.

The short end of the US Treasury market has changed little, Fed funds futures having already priced for only a small/modest probability of a June or July move.  The US$ softened in the aftermath of the soft GDP report and since the FOMC it has only managed to regain some of that lost composure.  The AUD/USD was on the other side of that trade, rallying to above 0.8070 after US GDP but then pulling back to 0.8023 initially in early trade this morning before some follow-on modest selling after the RBNZ announcement.  Chinese iron ore spot and futures prices did an about fact yesterday, spot down $2.75 to $57.13 (-4.59%) and Dalian futures off 1.78%.

Just announced, the RBNZ has left the Official Cash Rate unchanged at 3.50% and the Kiwi dollar has jagged lower by 60 bps (AUD/NZD up toward 1.05) in knee jerk response, the RBNZ continuing to say that the NZ$ is overvalued and that they’d need more evidence before they could ease.  Even so, the easing bias is still there (as it was in RBNZ’s McDermott’s recent speech) and has been latched on by the flightless bird that’s softened.

Coming up today/ tonight

Lots on the data slate over the next 24 hours.  First up today we have Japan’s preliminary March industrial production, the market braced for another decline, by 2.3% m/m.  Then we have three Australian release, first RBA credit for March where the focus will be in investor housing (L: 0.7%/10.1%) with the market looking for overall credit to grow by 0.5%, though we expect it could be a tenth higher at 0.6%.  We also have merchandise export and import prices for Q1, a good look in to the Q1 goods and services terms of trade to be revealed in the Q1 balance of payments and national accounts in a month.  We also have the NAB SME Business Survey for Q1, the small-medium business counterpart to the main survey.  Not market sensitive but an important component of Australia’s growth journey.  Also today is the BoJ meeting, its policy statement and Kuroda press conference, also coming with an important forecast update in the Bank’s Semi-Annual economic Outlook.

Spanish Q1 GDP tonight along with EC CPI preliminary and tin the US the March month personal spending and income report, including the important PCE deflators.  There’s also the Chicago PMI ahead of the national ISM tomorrow night.


Fed keeping its options open: Eurostoxx 600 -2.2%, Dax -3.2%, CAC -2.6%, FTSE -1.2%.  Dow -75 points to 18,036, -0.4%, S&P 500 -0.4%, Nasdaq -0.4%, VIX 13.39 +7.9%.  Mumbai +0.0%, Nikkei 225 -0.6% and ASX 200 -0.6%; ASX SPI futures this morning -0.7%.  US bond yields: 2s at 0.56% (0), 10s at 2.04% (+4).  WTI oil at $58.64 (+2.8%), Brent at $65.63 (+1.5%), Malaysian Tapis (yesterday) $64.90 (-0.3%).  Gold at $1204.40/oz (-0.8%). Base metals: LME copper +0.4%, nickel -0.2%, aluminium +0.5%. Iron ore $57.1/t -4.6% Chinese steel rebar futures -0.4%. Soft commodities spot futures: wheat +1.5%, sugar -0.5%, cotton +1.1%, coffee 0.3%.  Euro Dec 14 CO2 emissions at €7.50/t (1.5%). The AUD/USD’s range overnight 0.7977-0.8076; indicative range today 0.7955-0.8030; the AUD/USD is 0.7999 now

US GDP (Q1) 0.1 (L: 2.2; E: 1.0%); Pending Home Sales (Mar) +1.1%/13.4% (L: 3.6%/12.5%; E: 1.0%/5.1%)

German CPI (Apr, prelim) -0.1%/0.4% (L: 0.5%/0.3%; E: -0.1%/0.4%); EC Business Climate Indicator (Apr) 0.32 (L: 0.23; E: 0.20)

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