Futures Unchanged Hours Ahead Of Janet Yellen, As Chinese Liquidity Lifts All Global Boats

It has been a story of central banks, as overnight Asian stocks reversed nearly two weeks of consecutive declines - the longest stretch since 2001 - and closed higher as the same catalysts that drove US equities higher buoyed the global tide: a combination of Chinese liquidity injection (for the paltry amount of just under $90 billion; "paltry" considering Chinese banks create over $1 trillion in inside money/loans every quarter) and Hilsenrath leaking that despite all the "recovery" rhetoric, the Fed will not be turning hawkish and there will be no change in the Fed language today (perhaps not on the redline but Yellen's news conference at 2:30pm will certainly be interesting), pushed risk higher, if not benefiting US equities much which remains largely unchanged.

Overnight Goldman joined Hilsy in predicting "no change" to the language, when its strategists said the Fed won't drop "considerable time" from statement today and the language will instead be watered down and dropped in months ahead. However, if past Yellen press conferences are any indication, watch for her to once again define just how many months "considerable time" implies, although if she says 6 months again, algos may be confused.

Other banks disagreed, with Deutsche Bank's base case is that the phrase will be dropped this time round for two key reasons. First removing the language gives the Fed more flexibility to act sooner if the economy outperforms against expectations in the months ahead. Secondly, Committee participants on both the hawkish and dovish sides (as well as the center) have publically expressed that it is time to remove the language. So it is likely that the Yellen will agree to make this language change but only if she feels this can be achieved without causing the market to bring forward significantly its expectations about the timing of the first rate hike. All eyes will therefore be on the press conference where Yellen will likely emphasise that the change is not intended to signal a significant advance in the timing of the first hike but rather the timing will be based on recent and prospective economic performance of which the key labour market and inflation indicators are still much below desired levels.

As DB's Jim Reid notes, given that the removal of this key phrase has probably been increasingly priced in over recent days, it didn’t take much for the Dollar to slip yesterday after the WSJ’s Jon Hilsenrath said that he thinks the Fed may keep the words ‚considerable time? in its policy statement but qualify them instead. The WSJ correspondent thinks that given the economic backdrop, the Fed wouldn’t want to send a signal right now that rate hikes are imminent. He also thinks that the Fed will focus on its QE exit strategy in this meeting and that they may think that by focusing on both the exit strategy and guidance changes at the same time, it will be too much for the market to handle. So for him the "considerable time" language stays. The recent minutes suggested that the Fed was indeed close to agreeing on updating their exit strategy on asset purchases when they met in July.

All that said, one would have to be truly naive to assume that the Fed will do anything to rock the boat ahead of the Alibaba IPO - the biggest and most overhyped perhaps in history - which prices in just over 24 hours. As such, it is safe to say that if there is any Yellen surprise, it will be to the dovish side.

European equities benefited from the open as fears of a hawkish FOMC statement dissipated. As such, both equities and core fixed income markets are trading stronger, with softer US yields also weighing on the USD. Euro-area CPI +0.4% y/y in Aug. vs 0.3% est. U.K. unemployment drops to lowest in 6 years. European car sales rise for 12th month. 18 out of 19 Stoxx 600 sectors rise; basic resources, travel & leisure outperform, food & beverage, retail underperform. 81% of Stoxx 600 members gain, 16.5% decline. Eurostoxx 50 +0.6%, FTSE 100 +0.3%, CAC 40 +0.7%, DAX +0.5%, IBEX +0.8%, FTSEMIB +1%, SMI +0.1%

The Hang Seng (+1.0%) snapped its 8-day losing streak after reports that the PBoC is to inject an extra CNY 500bln (USD 81bln) in liquidity to China’s 5 largest banks. Goldman Sachs noted that this equates to a 50bps RRR cut. The move from the Chinese central bank comes in the wake of a string of poor macro data from China, and ahead of the week-long Golden Week holiday in early October, as central bankers anticipate a squeeze on cash in the near future. Asian stocks rise with the Hang Seng outperforming and the ASX underperforming. MSCI Asia Pacific up 0.2% to 144.5, Nikkei 225 down 0.1%, Hang Seng up 1%, Kospi up 1%, Shanghai Composite up 0.5%, ASX down 0.7%, Sensex up 0.5%. 7 out of 10 sectors rise with tech, energy outperforming and industrials, consumer underperforming

Looking at the key data highlights of today, we have the US CPI for the month of August and the NAHB Housing Market Index (Sept) in the US. In Europe, we expect the release of BoE’s previous meeting minutes, UK’s labour force data and trade balance updates from both Spain and Italy. But as mentioned upfront, the Fed and Yellen will take centre stage today when the FOMC statement is released at 2pm EST / 7pm UKT followed by the press conference 30mins later.

Market Wrap

Japanese 10yr bond yields fall; Irish yields decline. Commodities gain, with natural gas, corn underperforming and copper outperforming. U.S. mortgage applications, CPI, NAHB housing market index, Fed QE3 pace, FOMC rate decision, current account balance due later.

S&P 500 futures up 0% to 1992.1
Stoxx 600 up 0.6% to 344.8, for 1st session in 9
US 10Yr yield down 2bps to 2.57%
German 10Yr yield down 1bps to 1.05%
MSCI Asia Pacific up 0.2% to 144.5
Gold spot up 0.2% to $1238/oz

Bulletin Headline Summary

FOMC expected to trim QE3 by another USD 10bln today – however, fears of a hawkish turn have dissipated after Fed watcher Hilsenrath suggested the Fed will keep the phrase “rates to remain low for a considerable period of time”
Favourable central bank backdrop from both China and the US assists European bonds and equities higher
Markets expected to look beyond today’s US CPI release at 1330BST/0730CDT as central bank risk events loom on the horizon
Treasuries gain, 5/30 curve flattens before Fed issues decision on interest rates and QE at 2pm ET, followed by Yellen press conference. Scotland votes on independence tomorrow.
Goldman says FOMC won’t drop “considerable time” from statement today; language will instead be watered down and dropped in months ahead
The battle over Scotland’s future in the U.K. entered the final day of campaigning with the pro-independence side saying it had the momentum to win the ballot and the “no” camp urging voters not to use it as a protest
China’s central bank injected 500b yuan into the nation’s largest banks, joining the ECB in boosting liquidity to address weakening growth and underscoring a divergence in direction among the world’s biggest economies as the U.S. reduces stimulus
Euro area inflation was higher than initially forecast in August, easing pressure on the ECB after it took action to shield the region from the threat of a downward spiral in prices
Germany sold 2Y notes at a record-low yield of -0.07%; compares to 0.0% at August 20 auction
U.K. unemployment fell to the lowest in six years, indicating continued strength in the labor market that Bank of England Governor Mark Carney says will eventually boost earnings
BOE policy makers split for a second month, with the majority citing increased risks from Europe and muted inflation pressures supporting the case for keeping the key rate at a record low, minutes of the Sept. 3-4 meeting show
Business leaders in Western Japan warned central bank chief Haruhiko Kuroda that the yen’s slide to a six-year low is boosting costs of imported raw materials and fuel and may spell trouble for the economy
The cease-fire in Ukraine showed more signs of strain as rebels questioned further peace talks with the government, even after lawmakers in Kiev approved a special status for the country’s two easternmost regions
Students returned to schools in parts of northern Iraq ruled by Islamic State militants to find lessons including history, geography and literature are off the timetable as the group bans most subjects except religious studies
Obama urged aid groups and other nations to dramatically escalate their response to the Ebola outbreak in western Africa, warning that the epidemic is spiraling out of control
Sovereign yields mostly lower. Asian, European stocks gain, U.S. equity-index futures mixed. WTI crude lower, copper little changed, gold higher

US Event Calendar

7:00am: MBA Mortgage Applications, Sept. 12 (prior -7.2%)
8:30am: CPI m/m, Aug., est. 0.0% (prior 0.1%)
- CPI Ex Food and Energy m/m, Aug., est. 0.2% (prior 0.1%)
- CPI y/y, Aug., est. 1.9% (prior 2%)
- CPI Ex Food and Energy y/y, Aug., est. 1.9% (prior 1.9%)
- CPI Core Index SA, Aug., est. 238.597 (prior 238.311)
- CPI Index NSA, Aug., est. 238.262 (prior 238.250)
8:30am: Current Account Balance, 2Q, est. -$113.4b (prior - $111.2b)
10:00am: NAHB Housing Market Index, Sept., est. 56 (prior 55)
2:00pm: Fed seen maintaining overnight bank lending rate target between 0% and 0.25%, reducing QE purchases by $10b
2:30pm: Fed’s Yellen holds news conference on FOMC

ASIA

FIXED INCOME

Bund futures opened flat and overcame early selling pressure (the result of a positive equity open) as traders eyed Hilsenrath’s article positing that the Fed will retain their “rates to remain low for a considerable period of time” phrase, easing fears that the FOMC were coming closer to lifting rates. The appetite for debt a negative yield showed up strongly at today’s German Schatz auction, as Germany sold 2yr debt at a record low yield of -0.07% to strong demand, with the Bundesbank only retaining 16.5% for secondary market operations.

EQUITIES

European equities benefited from the open as fears of a hawkish FOMC statement this evening dissipated after Fed watcher Hilsenrath suggested the Fed could retain their pledge to keep rates low for a "considerable period of time". As such, both equities and core fixed income markets are trading stronger, with softer US yields also weighing on the USD. Chinese stocks traded strongly overnight (Hang Seng up 1.0%) after the PBoC injected CNY 500bln into the banking sector - as announced yesterday.

The Eurozone’s outperformer today is Adidas, who trade strongly on speculation that a hedge fund could take a large stake in the company and drive a turnaround in the business that has been hurt by Russian sanctions and a poor showing from their golf unit. Furthermore, late yesterday, Microsoft CEO Nadella unveiled a fresh board shake-up which analysts have already deemed as “positive” as well as lifting their dividend by 11% to USD 0.31/share vs. Exp. USD 0.30.

GBP/USD traded at one-week highs, as yesterday's polls showed unanimously that unionists hold a slim majority over the Yes camp in the Scottish Independence vote. GBP/USD was unshaken by the BoE minutes (inline with Exp. at 7-2 split) and stronger jobs data (6.2% jobless rate vs. Exp. 6.3%), however GBP slipped slightly on profit taking post-release, resulting in GBP/USD trading at 1.63 ahead of the US crossover.

COMMODITIES

Heading into the FOMC statement, gold trades flat and well above the Monday lows of USD 1,225.67, as the slightly softer USD keeps the price buoyant ahead of the COMEX open. Despite this, recent underperformance in gold has prompted Barclays to lower their Q4 gold forecast to USD 1,220/oz. The WTI-Brent spread trades slightly wider, as Libya’s Zawiya refinery remains knocked offline and the El Sharara Oilfield production has been fluctuating, threatening Libya’s targeted return to 1mln bpd output by the start of October. Looking ahead, the DoE crude inventories take focus, with the headline expected to show a draw of 1.5mln bbls. As a reminder, today sees the Oct’14 options expiring at the pit close.

* * *

DB's Jim Reid concludes the event recap of the overnight news

The much anticipated FOMC meeting will dominate proceedings today followed by the Scotland vote tomorrow. We briefly summarised DB Peter Hooper’s overall expectations on the Fed in yesterday’s EMR but the central focus today will likely be on what happens to the calendar-based guidance (ie how the Fed deals with the ‘considerable time’ language in the statement) so we’ll take a closer look at this today. Given Yellen’s 6-month interpretation previously, the phrase could remain intact this time round (and even in October), if the initial lift-off is not expected until June. That said, Peter Hooper’s base case is that the phrase will be dropped this time round for two key reasons. First removing the language gives the Fed more flexibility to act sooner if the economy outperforms against expectations in the months ahead. Secondly, Committee participants on both the hawkish and dovish sides (as well as the center) have publically expressed that it is time to remove the language. So it is likely that the Yellen will agree to make this language change but only if she feels this can be achieved without causing the market to bring forward significantly its expectations about the timing of the first rate hike. All eyes will therefore be on the press conference where Yellen will likely emphasise that the change is not intended to signal a significant advance in the timing of the first hike but rather the timing will be based on recent and prospective economic performance of which the key labour market and inflation indicators are still much below desired levels.

Given that the removal of this key phrase has probably been increasingly priced in over recent days, it didn’t take much for the Dollar to slip yesterday after the WSJ’s Jon Hilsenrath said that he thinks the Fed may keep the words ‚considerable time? in its policy statement but qualify them instead. The WSJ correspondent thinks that given the economic backdrop, the Fed wouldn’t want to send a signal right now that rate hikes are imminent. He also thinks that the Fed will focus on its QE exit strategy in this meeting and that they may think that by focusing on both the exit strategy and guidance changes at the same time, it will be too much for the market to handle. So for him the "considerable time" language stays. The recent minutes suggested that the Fed was indeed close to agreeing on updating their exit strategy on asset purchases when they met in July. Peter expects these guidelines to be released today but in his eyes are likely to be very much in line with the structure described in the July minutes (ie to continue reinvesting maturing Treasury and MBS securities through the initial rate hiking process with the intention of controlling long-term rates so that financial market conditions do not adversely tighten when fed fund rate is increased). For what its worth I think whatever the outcome of the statement, Yellen will likely be more dovish than the statement in the Q&A so this is where the true message will likely come today.

Hilsenrath’s comments and stimulus talks from China seemed to help reverse some of the tightening fears that have driven risk assets lower in the past few days. On the China story, local media reported that the PBOC on Tuesday injected Rmb500bn to 5 biggest banks (Rmb100bn each) through Standing Lending Facilities (SLF) with a tenor of 3 months. Our Asia FX strategists have compared the scale of this 3month SLF to an equivalent of a 50bps RRR cut although the difference is the SLF is rather selective in providing access and can be rolled back in 3 months. Still the day proved to be a rather positive one for US equities with the S&P 500 and the NASDAQ both up three quarters of a percent. The S&P 500 rally was rather broad based but Health Care (+1.35%), Utilities (+1.23%) and Energy (+1.19%) did enjoy the best of the day’s gains. Some of the Energy gains were perhaps driven by a stronger day for Oil (perhaps on the back of weaker Dollar) after Brent (+1.2%) posted its best daily bounce in 9 days. Treasuries were little changed on the day but the July Fed Funds rate fell 1bps to 0.365%.

Taking a quick look at the other key hurdle for markets this week, three updated Scottish referendum polls yesterday showed that the ‘No’ campaign is still ahead although with a narrowing lead as we head into the official vote. The latest ICM poll for the Scotsman with a sample size of over 1000 showed that the ‘Yes’ and ‘No’ votes stood at 48% and 52% respectively although the ‘Yes’ votes had gained a 3pt lead since the same poll was conducted in August. Both the Opinium poll for the Daily Telegraph and the Survation Poll for the Scottish Daily Mail also showed similar results (ie ‘Yes’ and ‘No’ votes at 48% and 52% respectively) with the ‘Yes’ percentages up by 1 percentage point since their last survey. The polls showed that a range of 8-14% of voters were still undecided before polls open at 6am GMT (7am BST) tomorrow. So the 'Nos' are edging ahead but its fair to say that there is much uncertainty still at to how people will vote once they get to the ballot box. My reading of the situation is that the No campaign has been enhanced in the last week by increasing noises from big business that jobs and prices might be negatively impacted by a 'Yes'. This harder hitting message might persuade some to vote with their wallet rather than with their heart. Anyway we'll see over the next 48 hours was the result shows.

Away from China, bourses in Hong Kong and Korea are +1.0% and +0.7% higher on the day though. The 10-year Treasuries are holding steady at around 2.58%. Asia iTraxx is 2bps tighter with cash markets increasingly focused on a steady build up in new issues.