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Yet Another "Most Important FOMC Meeting Ever" Begins

Tyler Durden's picture





 

Overnight trading started with Asian markets continuing where yesterday's S&P 500 fizzle ended, wishing Summers could withdraw from Fed running again, as both the Nikkei and SHCOMP were well lower by the close. Perhaps all the easy multiple-expanding, headline-driven money is made, or perhaps economic fundamentals will finally start having to justify a 17x multiple on the S&P (a good is good regime for those who may be too young, or old, to remember), but overnight US futures were dull, and no doubt anticipating today's start of the "Most important FOMC meeting ever", which concludes tomorrow with an announcement by the Fed of what and how much (if any) tapering it will commence with an eye toward halting QE next summer, although more realistically what will happen is an Untaper being announced before then. While the start of the FOMC meeting is the main event, today we get CPI, TIC flows and the NAHB housing market index. Today's POMO is another modest $1.25-$1.75 billion in the long-end sector.

Market recap from RanSquawk:

Heading into the North American open stocks in Europe are seen lower across the board, with oil & gas related stocks under performing amid lower energy prices, as well as touted profit taking related flows ahead of eagerly anticipated FOMC. On that note, the widely followed Fed watcher Hilsenrath said Fed officials are exploring how to justify low rates far into future. Separate reports citing sources indicated that Janet Yellen is now the frontrunner for Fed chair nomination. Combination of softer than expected inflation data from the UK, as well as an encouraging ZEW report ensured that EUR outperformed GBP, which in turn saw EUR/GBP edge back towards the 10DMA line seen at 0.8416.

In terms of equity specific news flow, the UK government has raised GBP 3.2bln from the sale of a 6% share in Lloyds Banking Group, with co. shares down 2% this morning. Elsewhere, car makers in Germany have underperformed after the latest EU-27 car registrations report revealed 5% Y/Y drop in August to 0.654mln units. Going forward, market participants will get to digest the release of the latest US CPI report, as well as the NAHB Housing Market index for the month of September.

Headline news bulletin from Ran and BBG:

  • Treasuries gain for a fifth day, long bonds lead, as Fed meeting begins in Washington; rate and possible tapering decision, updated economic projections and Bernanke press conference tomorrow.
  • Many strategists expect FOMC to announce taper of $10b-$15b, with possible change in forward guidance, lowering of unemployment threshold; click here for roundup of views
  • Yellen is Obama’s top candidate to lead the central bank even after her supporters helped force his initial favorite Lawrence Summers to withdraw, according to people familiar with the process
  • Germany’s Zew index rose to 49.6 in September, the highest since April 2010, from 42 in August
  • Article published by WSJ's Fed watcher Hilsenrath late US session yesterday garnered some attention in Europe. Hilsenrath wrote that said Fed officials are exploring how to justify low rates far into future. Separately, Janet Yellen is now the frontrunner for Fed chair nomination, according to sources.
  • European car sales fell in August, bringing deliveries this year to the lowest since records began in 1990, as record joblessness in the euro region hurt deliveries at Volkswagen AG, PSA Peugeot Citroen and Fiat SpA
  • U.K. consumer prices increased 2.7% in August, the least in three months, vs 2.8% in July; core inflation remains at 2%
  • China’s stocks fell the most in two months after foreign investment data trailed economists’ estimates and money- market rates rose before the start of holidays this week
  • Australia’s central bank repeated it retains the option of reducing interest rates and said a further drop in the currency would aid the economy as resource investment slows, minutes of the Sept. 3 meeting showed
  • Sovereign yields mostly higher. EU peripheral spreads tighten. Nikkei falls 0.65%, Shanghai Composite -2.05%. European stocks, U.S.  equity-index futures lower. WTI crude and copper fall, gold gains

Asian Headlines

China Mofcom's Shen Danyang said China has confidence to realize trade target this year and that trade growth is expected to stabilize further in the coming month. Shen added that China's outbound investment is to keep trend of rapid growth and that China trade is to rebound over the rest of the year.

EU & UK Headlines

German ZEW Survey (Economic Sentiment) (Sep) M/M 49.6 vs. Exp. 45.0 (Prev. 42.0) - ZEW says that German economy is still gaining momentum and that optimism increased due to improved economic outlook for Eurozone.

German ZEW Survey (Current Situation) (Sep) M/M 30.6 vs. Exp. 20.0 (Prev. 18.3)

UK CPI (Aug) Y/Y 2.7% vs. Exp. 2.7% (Prev. 2.8%) - ONS said that largest downward pressure on annual CPI came from transport inlc. fuels, clothing and footwear.

UK CPI Core (Aug) Y/Y 2.0% vs. Exp. 2.1% (Prev. 2.0%)
UK PPI Input NSA (Aug) Y/Y 2.8% vs. Exp. 3.0% (Prev. 5.0%, Rev. 5.1%)
UK RPI (Aug) Y/Y 3.3% vs. Exp. 3.2% (Prev. 3.1%)
UK PPI Output NSA (Aug) Y/Y 1.6% vs. Exp. 1.8% (Prev. 2.1%)
UK ONS House Price Index (Jul) Y/Y 3.3% vs. Exp. 2.8% (Prev. 2.9%)

Germany's Merkel says decision on Greek assistance to be made in 2014 and doesn't foresee Greek debt write-down.

Ahead of bond auctions on Thursday, the Spanish Treasury sold EUR 4.56bln vs. Exp. EUR 4.50bln in 6-, 12-Month T-Bills.
Separately, Belgian Debt Agency sold EUR 2.006bln vs. Exp. EUR 2.3bln in T-Bills.

US Headlines

WSJ's Fed watcher Hilsenrath said Fed officials are exploring how to justify low rates far into future. Said Fed forecasts could show economy at "full employment" by 2016 and Fed forecasts likely to show rates rising but still low by 2016. He added that Fed forecasts for 2016 complicate Fed rate projections.

Janet Yellen is now the frontrunner for Fed chair nomination, according to sources. White House officials said the search for its Fed chair nominee is not starting over after Summers' withdrawal and no new candidates are being considered. The officials added that there will be no Fed nominee announcement this week.

Equities

Heading into the North American open stocks in Europe are seen lower across the board, with oil & gas related stocks under performing amid lower energy prices, as well as touted profit taking related flows ahead of eagerly anticipated FOMC. On that note, the widely followed Fed watcher Hilsenrath said Fed officials are exploring how to justify low rates far into future. Of note, FTSE 100 2014 target raised to 8,000 and SXXP raised to 370 at Citi.

In terms of equity specific news flow, the UK government has raised GBP 3.2bln from the sale of a 6% share in Lloyds Banking Group, co. shares down around 2% this morning in London.

FX

Combination of softer than expected inflation data from the UK, as well as an encouraging ZEW report ensured that EUR outperformed GBP, which in turn saw EUR/GBP edge back towards the 10DMA line seen at 0.8416.

RBA's September minutes said the board agreed to keep open possibility of further rate cuts, adding that the board was not signalling an imminent intention to reduce rates. The RBA said historically low rates and lower AUD providing substantial degree of stimulus. The RBA added that AUD still high and that some further decline would help compensate for drop in mining investment.

Commodities

Goldman Sachs remained neutral relative to gold prices till year end and said that gold prices will resume to decline heading into 2014. Goldman Sachs also kept its end-2014 forecast unchanged at USD 1050/oz.

Separately, analysts at SocGen believe that commodities set to drop on China slowdown and that gold is particularly vulnerable to USD strength.

The White House said the UN report on Syria's chemical weapons bolsters US assessment that Syrian government was responsible. Elsewhere, there were comments from Syria that Turkey was 'hasty' in shooting down a military helicopter and accused the government of trying to escalate tensions.

Saudi Arabia has increased output to 10.2mbpd in August, the most in IEA records. The UAE and Kuwait have also both set records for output this summer, at about 2.8mbpd. In August the three large Gulf producers met 17.1% of global demand. In thirty years of IEA data, their share has not topped 18%.

According to Canada's natural resources minister Joe Oliver, US approval of the Keystone XL pipeline is unlikely to occur in 2013.

* * *

DB's Jim Reid completes the overnight even recap:

The negative momentum which began in the US session yesterday has carried through to Asian equities this morning. Losses are being seen on the KOSPI (-0.7%), Hang Seng (-0.3%), Shanghai Comp (-1.0%) and S&P 500 futures (- 0.1%). 10yr UST yields are unchanged this morning at 2.86% but 10yr Australian government bonds are 7bp higher in yield and Asian credit spreads in both cash and CDS are a little wider this morning. The USD dollar is a touch stronger this morning (USD index +0.05%) which is also weighing on Brent crude (-0.4%).

The reason for the early rally yesterday was very clear but the drivers of the risk reversal during the US session were varied. There were some who were  skeptical that Yellen is a shoo-in for the role of Fed chair. The White House repeated yesterday that a final decision on nominating the Fed chairperson had yet to be made, but there was some indication that a decision could come in a matter of weeks. The other leading Fed candidate, Don Kohn, was on the newswires early with a couple of more hawkish-sounding quotes which mitigated some of yesterday’s dovish market reaction. In addition to warning about potential imbalances of very easy monetary policy, Kohn said that “problems can arise when one policy [monetary or financial regulation] is leaning so hard in one direction, the other can’t compensate, can’t achieve its objectives. And in these extreme kinds of circumstances, each policy may need to pay more attention to the objectives of the other’s”. The WSJ’s Hilsenrath questioned the conflicting nature of the Fed’s 2016 growth estimates versus its current forward guidance – something that we may hear more about at Wednesday’s FOMC statement/Bernanke press conference. Adding further weight on markets, Obama repeated his call that he will not be negotiating with lawmakers about raising the debt ceiling, reminding markets of potentially acrimonious budget negotiations that may come over the next few weeks.

Perhaps the most telling of the market moves yesterday was in the UST treasury market where the dovish market reaction saw 10yr yields bottom at 2.77% (-11bp) shortly after the NY open. From there it was largely one-way traffic as treasuries spent the rest of the day unwinding the move to close just 2bp lower on the day at 2.864%. One of the sharpest shifts in momentum came in the EM FX space where the Brazilian real opened +1.4% firmer against the USD but then ended the day 0.2% weaker. Brazil’s IBOVESPA equity index finished virtually unchanged after giving up gains of +1.3%. The outperformer was DM credit where the major indices including the European iTraxx (-4bp) and CDX IG (-2bp) closed just a basis point or two off the day’s tights.

The tone was a bit more positive in the European session yesterday especially in Germany where the DAX (+1.2%) hit an all-time high. News that Merkel’s conservative allies had won convincingly in the weekend’s Bavarian state elections probably added to the Summers-inspired rally. In an interesting move the UK government launched a small 6% selldown in its stake in partnationalised Lloyds Banking Group. The Lloyds sale will be an interesting test case as to how successful governments might be in winding down their stakes in UK/European banks. The sale comes at an opportune time with the bank’s share price enjoying a 61% increase in the year to date. Indeed, the strong performance has seemingly helped the UK government record a small gain on its investment. The selling price was reportedly around 75 pence and the average price at which the government bought shares was 73.6 pence according to Reuters.

The US data was a bit of a mixed bag yesterday with both IP and the Empire Fed manufacturing disappointing on the headline but showing strength in the details. August industrial production rose 0.4% (vs 0.5% expected) but DB’s economists noted that manufacturing, which is the core of the report, was up 0.7% (vs 0.5% expected). The rise in manufacturing activity is somewhat consistent with a much stronger set of readings from the ISM survey according to DB’s economists, which showed production above 6% over July and August. The increase in overall industrial production pushed the capacity utilization rate up 0.2% to 77.8%, which is well below its long-term average of 80.5%, leaving our economists to conclude that there is no evidence of any inflation pressure at this point in the production cycle. The NY Empire survey fell roughly 2 points to 6.3 on the headline (vs 9.1 expected) but the underlying details of the report, which are calculated separately from the headline, were not as soft. Both new orders (2.4 vs. 0.3) and shipments (16.4 vs. 1.5) improved in the month and employment (7.5 vs. 10.8) remained firmly in growth territory. Most importantly, the 6-month outlook (40.6 vs. 37.4) rose to the highest level since April 2012 (41.3).

Looking at today’s calendar, the latest Germany ZEW survey will be released this morning where consensus is looking for an improvement across both the current situation and expectations components. In the UK, the latest UK’s CPI and PPI reports are due. In the US, the main economic release is August consumer inflation data and we will be interested to see whether the recent mortgage rate rises have had a material impact on September’s NAHB homebuilder index. The first-day of the FOMC meeting starts today.

 


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