Fed’s Dudley yesterday opined that a sharp rise in the dollar would make it hard for the Fed to lift inflation. Bond market participants seem to be having such a view.
An FT article reports that the bond market cut their expectations for future inflation.
Expectations for inflation over the next five years, as measured by comparing yields on Treasury inflation protected securities and those of nominal Treasury bonds, have approached their double low of June 2013 and December 2011.
A drop in the so-called break-even rate for the next five years towards 1.62 per cent from 2.1 per cent earlier this summer, reflects the influence of a stronger dollar and lower commodity prices that have reduced inflationary pressure in recent months.
Crucially, falling inflation expectations could prompt the Fed to push back the first rate hike.
Source: FxWire Pro
Fed continued QE tapering and announced further reduction of $10 bn in asset purchase program.
Fed pledged to keep its interest rate unchanged at 0.25% for a “considerable time” after their bond purchase program ends.
U.S. economy is growing at moderate pace slack in the labor market shows the underutilization of labor resources.
Inflation remains below Fed target level of 2%.
Fed expects unemployment rate to be around 5.9-6% in late 2014 compared to 6-6.1% in June.
Fed fund rate Projection
The projection in 2016 was moved higher again. FOMC median projection at the end of 2016 up from 2.5% to 2.875%, it is higher than the current market pricing at 1.85%.
Source: FxWire Pro
The market was largely on hold waiting for the Fed’s statement to be released at 2:00pm ET. The statement was little changed, keeping in the “considerable period” phrase that many in the market had believed it would drop. The rest of the statement was little changed, which was much less than many market participants had expected the FOMC would do. However, the Summary of Economic Projections (SEP) showed a different picture. Although the commitee members’ outlooks for GDP and inflation were the same or lower, it raised its forecasts for interest rate projections in 2015, 2016, and 2017 – a curious development. This caused interest rates to rise and influenced a bear flattening in the Treasury yield curve.
Two FOMC members dissented at this meeting: Presidents Fisher and Plosser. Fisher argued that due to the recent increase in economic activity, labor market utilization, and financial market excess, the Fed will need to begin normalizing policy earlier. Plosser dissented for the same reason as the last meeting, believing that the FOMC’s forward guidance was not warranted now that the committee is closer to its economic goals.
Trading was predictably all over the map following the statement and Fed Chair Janet Yellen’s press conference. The biggest standout was the strength in the US dollar, which rallied 0.72% by the end of the equity session, a move in excess of three standard deviations. This caused gold and other commodities to fall. The yellow metal lost more than 1% for the day.
Equities traded around flat for much of the session. After the meeting, stocks briefly rose, the S&P 500 (SPX) gaining as much as 0.58% to breach its prior all-time highs, before settling back to just 0.13% for the session. Energy stocks were predictably weak thanks to the stronger USD and utilities lost in sympathy to higher interest rates. Materials and transportation stocks were strong this morning thanks to a strong earnings report from Fedex (FDX) and one of US Steel’s (X) Canadian units filing for creditor protection. Market breadth was neutral with exactly half of the issues in the SPX advancing.
August consumer prices fell 0.2% from the prior month, lowering the annual rate of change to 1.7% from 2.0% in July. Economists had expected the sequential change to be flat and the year-on-year rate to fall to 1.9%. The core rate was unchanged for the first time since 2010 (economists expected a 0.2% gain) and its year-on-year rate fell to 1.7% from 1.9% in the prior month. The NAHB survey of real-estate agent and realtor sentiment rose to its highest level since 2005.
If you didn’t get enough of the Fed today, not to worry, tomorrow morning at 8:45am Chair Janet Yellen will give a speech to the Corporation for Enterprise Development’s 2014 Assets Learning Conference. The prepared text will be released through a prerecorded video so there will be no Q&A session. Weekly initial jobless claims will be released in the morning in conjuction with August housing starts and permits. Jobless claims are expected to remain near the 300K level from the past six months. Last week’s claims rose to 315K and 304K are expected this week. New housing starts are expected to remain at a similar annual pace of 1.040 million after last month’s figure rose to 1.052 million.
Arguably the second most important event of the week – the Swiss National Bank (SNB) rate decision – is scheduled to be released at 7:30am GMT tomorrow. Because the ECB has chosen to set a deposit rate of -0.20% and the SNB must defend its EURCHF peg of 1.20, this will likely result in a second developed market central bank setting a negative interest rate. Previous comments from SNB policymakers have hinted this is a distinct possibility and the foreign exchange markets have reacted accordingly. This could end up being another headwind for the US dollars as the SNB may be forced to diversify into USD assets rather than Euro.
Another significant event is the Scottish referendum vote, which will determine whether or not it will break from the UK. The first exit polls will be released at 2:00am local Scottish time on Friday and continue until 6:00am.
Oracle (ORCL) is a major earnings report scheduled for tomorrow, the first for the tech sector. ConAgra (CAG), TIBCO Software (TIBX), RiteAid (RAD), and RedHat (RHT) will also report.
There is a lot of ink being wasted explaining what the Fed may do at today’s announcement and what that means for the future raising of rates. However, I pose to you a more interesting question…
Does the Fed Really Matter?
I know many of you will dismiss this notion out of hand. And certainly I appreciate that they do have a big role to play in our economy. However, please just slow down enough to consider this…as the QE taper has rolled out Treasury bond rates have gone lower…the exact opposite of what everyone predicted.
Therefore it is also possible that they could raise the Fed funds rate and yet Treasury rates don’t move higher. This is especially plausible if bond rates in other nations stay ultra-low and investors would rather swim to our shores for the safety of our government bonds keeping our rates down as well.
Note in time I certainly expect Treasury rates to rise back to their historical norms. Yet, I suspect it will take a lot longer to get there than many people imagine. Thus, what comes from the Fed announcement today should not change anyone’s investment outlook for stocks …it certainly won’t for me.
Steve Reitmeister ( aka Reity…pronounced “Righty” )
Executive Vice President
Wall Street ha chiuso in rialzo sostenuta anche dalle notizie boom sull’Ipo di Alibaba: Dow Jones +0,59%, Nasdaq +0,75%, S&P500 +0,75%.
Stasera alle 20:00 la Fed dovrebbe annunciare che la stagione degli stimoli è quasi terminata, il quantitativo di obbligazioni acquistate su base mensile dovrebbe essere ridotto di altri 10 miliardi di dollari a 15 miliardi di dollari. Le attese sono centrate sul possibile cambio di rotta in materia di tassi USA.
Asia. Secondo indiscrezioni, la Banca del Popolo della Cina potrebbe decidere un’iniezione straordinaria di liquidità da 500 miliardi di yuan, circa 81 miliardi di dollari, nelle prime cinque banche del Paese, per rilanciare la crescita e rispettare l’obiettivo di una crescita del Pil del 2014 del 7,2%.
L’indice di riferimento dell’area, il MSCI Asia Pacific, è in rialzo dopo 10 sedute consecutive di ribasso, la serie negativa più lunga dagli ultimi 12 anni. Hong Kong +1,1%, primo rialzo dopo nove giorni di flessione, Shanghai -0,2%, Mumbai +0,6%, Seul +0,5%. Tokyo è piatta.
I future sulle borse europee anticipano un avvio in rialzo dello 0,5%.
Scozia. I media dedicano ampio spazio al referendum, ma City (ieri -0,17%) e sterlina (invariata contro euro) continuano a snobbare l’evento. Chi dei due avrà ragione?
Ieri il premier Matteo Renzi, nel corso dei suoi due interventi in Parlamento e davanti all’organo direttivo del PD, ha rilanciato su tutti i fronti ed ha detto di essere pronto ad agire, anche con un decreto, sui rapporti tra lavoratori ed aziende.
Analisi tecnica borse. Sono ancora le borse europee a soffrire, senza eccessi particolari, pagando lo scotto dei dati macro deludenti. Per il resto il quadro di fondo rimane tonico con parecchi indici che si muovono a breve distanza dai massimi assoluti/di periodo. Altra bella reazione della borsa brasiliana ieri (+2%), l’S&P500 (1.998) si riporta vicino ai top assoluti posti poco sopra quota 2mila.
Brasile (Bovespa 59.114, +2%). Seconda bella reazione dopo lo scivolone di venerdì (-2,4%). Il rimbalzo è partito da area 57mila, obiettivo del pull back della recente figura di doppio minimo. Puntiamo al target verso 63/64mila. Stop loss sotto 55mila punti.
FtseMib (20.788, -0,3%). Ha reagito con determinazione dai minimi intraday a 20.600 punti. Segnali convincenti della ripresa dell’uptrend arriveranno però con il ritorno sopra 21.500 punti. Area 20.500 rafforza la sua valenza supportiva ed eventuali interessamenti rappresentano occasioni di acquisto. Restiamo ottimisti con obiettivo sui top dell’anno a 22.500. Allerta sotto 20.200 punti.
Petrolio. Il Wti è rimbalzato stanotte fino a 95 usd, massimi degli ultimi due mesi, dopo che l’OPEC ha ipotizzato un taglio degli obiettivi produttivi per il prossimo anno. Il Brent tratta a 99 dollari, 2,5 usd in più del minimo degli ultimi 2 anni toccato nel corso della settimana a 96,2 usd. Il quadro di fondo è negativo, ma (come abbiamo correttamente previsto ieri) ci sta una reazione tecnica. Supporti strategici rispettivamente a 90 e 80 usd.
Oro. Poco mosso a 1.237 usd. L’atteso rialzo dei tassi Usa continua a tenere lontani gli acquisti. Attendiamo l’eventuale approdo verso i supporti strategici a 1.200/1.180 usd per attivare acquisti di trading.
Forex. Euro/Dollaro (1,295). Pochissima volatilità nelle ultime sedute in attesa della Fed. Prosegue la fase di assestamento del dollaro in attesa di novità dalla Fed. Se stasera dovessero emergere novità “sgradite” e il dollaro dovesse indebolirsi stiamo pronti a comprare. Meglio se verso 1,32/1,33.
Bond periferici. Tutto fermo in vista delle grandi manovre della Bce previste a ottobre. Il rendimento del Btp 10 anni riparte dal 2,44%, il minimo storico è al 2,25%. Lo spread riparte da 139. Il differenziale contro la Spagna si è chiuso a 13 punti base da 20, ma non certo per merito nostro. Su questi livelli non vediamo grandi occasioni di acquisto, ma nemmeno pensiamo di chiudere gli investimenti sui bond periferici.
Quotes from Danske Bank:
-Key focus will be tonight’s FOMC meeting. It seems increasingly likely that the Fed will change its forward guidance away from the ‘considerable time’ language to something linked with the development towards its goals of full employment and inflation at 2%. It might put in some other soft language instead to avoid a too hawkish message.
-However, the economy is clearly moving in the right direction and the Fed will need more flexibility in its policy to raise rates earlier if necessary. Focus will also be on the new projections for the Fed funds rate, where we may see a move forward of the first rate hike as signalled by several Fed members.
-Finally, this meeting will have a press conference where Janet Yellen could adjust the tone if there is a strong market reaction after the statement and projections. The challenge for the Fed is that market pricing is still far below its current projections and it needs to try and adjust in a not too abrupt way. We continue to look for the first rate hike in April 2015 based on a continued robust recovery and strengthening labour market.
Source: FxWire Pro
Two pieces of relevant news was released near midday that propelled risk assets higher. Fed watcher Jon Hilsenrath of the WSJ said on a discussion panel that he thinks the central bank will keep its “considerable time” language in the FOMC’s statement, scheduled for release tomorrow, on when the central bank would begin normalizing monetary policy. This caused a sharp drop in the USD, steepening in the yield curve, and a rally in commodities.
Separately, it was revealed that the People’s Bank of China (PBoC) had lent 500 billion yuan to the five largest Chinese banks through a special lending facility. The move is the equivalent of a 50bps rate cut to the banks’ reserve requirements. Chinese H-shares indices – only tradeable by locals – had been down more than 1.8% last night following a report on foreign direct investment that showed a collapse in August. The 1.82% drop in the Shanghai Composite (SHCOMP) is the equivalent of two standard deviations or a 230 point drop in the Dow Jones Industrials (INDU).
Much of the rally in US stocks was attributed to generally heavy short positioning in preparation for tomorrow’s FOMC meeting and the Scottish independence vote in Thursday. With the risk of a hawkish meeting diminishing and further polls showing the gap between the “No” and “Yes” votes widening, this provided a tailwind for the S&P 500 (SPX). The benchmark index opened the day down a few points and reversed more than 1% during the session to finish up 0.75%. Healthcare, utilities, and energy stocks all led with every sector finishing positive. Trading activity on US exchanges was the most active it’s been in months.
The August producer prices report was completely inline with expectations. Prices were flat in the month and the rate of growth from a year ago rose to 1.8% from 1.7% in the month prior. Same-store sales showed a drop of 2.6% for the week ending September 13 following a spending spree around the turn of the month coinciding with the back-to-school shopping season. Demand for fall apparel has not picked up yet, according to ICSC.
Tomorrow will be the long awaited conclusion of the FOMC meeting. The Federal Reserve’s monetary policy committee will release its statement and economic projections at 2:00pm ET with a press conference scheduled to begin thirty minutes later. The statement will reveal the committee’s 2017 economic projections for the first time. Many market participants expect the release of the economic projections to show a higher rate of Fed funds in 2017 than is currently priced into the interest rate market. Additionally, they expect the FOMC to reconfigure its language surrounding the normalization of policy, which would leave the door open for a rate hike in the first quarter of next year. The market currently expects the Fed to hike at the June meeting or slightly after. Trading will likely be quiet up until the statement is released as positions have largely already been set.
The August consumer price index will be released tomorrow morning. Following 15 months of sequential gains, consumer inflation is expected to remain flat for August and at a 1.9% annual pace of growth. That is down from 2.0% in the month prior. The NAHB survey of homebuilder and real-estate sentiment is due to be reported in the late morning.
Overnight, the Bank of England (BoE) will release the minutes from its latest monetary policy meeting. At the last meeting, two members of the Monetary Policy Committee (MPC) dissented, having advocated the need for a rate hike at that meeting. In the release of the minutes, their dissent was marginalized as a “minority,” which was received positively by the market. Some of that dissent has been quelled by recent speeches from both BoE Governors Carney and Broadbent. However, if more MPC members dissent at this meeting, then it may become a problem and accelerate the central bank’s time table. Separately, Carney is scheduled to speak at 9:45am ET to the UK Parliament.
Lennar (LEN), Fedex (FDX), Pier 1 Imports (PIR), and General Mills (GIS) are scheduled to report earnings tomorrow. Fedex will be an important bellwether to help corroborate the recent acceleration in activity seen in various manufacturing surveys.