September 13, 2016

Markets Today: What a difference a day makes

Well there’s one conspiracy theory that has come to nought. That Fed Governor Brainard – a monetary policy dove to now – had become more policy hawkish and indicate that next week’s September 20-32 FOMC would be “live”.

Well there’s one conspiracy theory that has come to nought.  That Fed Governor Brainard – a monetary policy dove to now – had become more policy hawkish and indicate that next week’s September 20-32 FOMC would be “live”. Speaking on the economic outlook in Chicago, Brainard counselled continued prudence in the withdrawal of monetary policy.

“The case to tighten policy pre-emptively is less compelling” in an environment where declining unemployment has been slow to spur faster inflation, she remarked.  Asymmetry in risk management in today’s new normal argues for caution, in her view, saying that it’s much easier for the Fed to react to faster-than-expected demand than to a negative surprise that upsets the economy.  “I believe this approach has served us well in recent months”. She did note that the Fed has made progress on its employment and inflation mandates, but that inflation has not advanced as much as the Fed had hoped.

It was a market-moving address but the impact was the reverse of what the market had feared at the end of last week.  It was something of a reversal for the USD, the Bloomberg spot effective USD index down 0.26%, and most of the majors making up some ground.  After testing below 0.75 earlier in the session, the AUD/USD has recovered to now be trading at 0.7565 in early trade.  Likewise the NZD has recovered from below 0.73 to 0.7352, the AUD/NZD still below 1.03 at 1.0289.  Bonds rallied after opening heavier in the lead up to address, with US equities also clawing back ground after her address, the Dow closing up 1.32% and the S&P 500 +1.47%.  US 2y bonds eased a basis point net for the session, with 10s also lower, by half a point.  The VIX eased 2.34 points to 15.16.  Gold clawed back most of the session’s earlier losses.

Also speaking overnight were Fed Presidents Lockhart and Kashkari who are not voters on the FOMC this year, Lockhart arguing for a “serious discussion” on raising rates but refraining from calling for an actual hike now.  Kashkari said there was “no urgency to act”.

The Fed is now in media lock down mode into next week’s meeting, so that’s it on the potential volatility front from that source at least ahead of the meeting.  The market is pricing in a 22% chance of a hike next week and 70% by the December meeting.

Coming up

There is plenty of event risk coming up in the APAC session today.  First up at 830 we have a speech from the RBA’s Chris Kent who, while there is no specific title as yet on the RBA’s web site, we understand is apparently speaking on the evolving transition of the post-mining boom economy. New Zealand food prices for August are also being released this morning, at 8:45 AEST.

Then at 1130 comes the NAB Business Survey for August. Absolutely no comment on the today’s Survey’s key metrics, other than a reminder Business Conditions was at +8 in July while Business Confidence was at +4, the latter just below its long term average and Conditions a little above its long term average.

Then at midday comes the key monthly activity data for China, industrial production, retail sales, and fixed assets investment or August. Last week’s trade data would suggest today’s release should not disappoint.  They might even surprise a little on the high side. China’s monthly money supply, new yuan lending and aggregate financing data for August are also due any day now.

Tonight sees the release of several UK releases including August CPI, PPI, and house prices for July. Also in the European session, ECB President Draghi is receiving a public award in Italy, though it’s doubtful he would say anything to market moving at such then, especially given the ECB meeting in his press conference is only last week. The German and EC ZEW surveys for September are also being released; not usually a market mover of any significance.

In the US, with the Fed in media lockdown, more focus on the data flow – the Fed is data dependent after all – with the NFIB Small Business Optimism index for August out tonight.  There’ll be some focus points in this release on actual and planned compensation for employees, one of the watch points for wages and inflation observers.


On global stock markets, the S&P 500 was +1.47%. Bond markets saw US 10-years -1.20bp to 1.66%. In commodities, Brent crude oil +0.27% to $48.14, gold-0.3% to $1,331, iron ore +0.0% to $57.78. AUD is at 0.7565 and the range since yesterday 5pm Sydney time is 0.7495 to 0.7566.

Good luck.

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