Yesterday's market reaction to Yellen's commentary was curious: there was none, because when all was said and done the S&P and DJIA traded precisely where they were just before the show began.
Which, of course, was unacceptable, because one way or another the hawkish for the USD - the USDJPY just traded at the highest since 2008 - statement and conference had to be promptly interpreted for the algos as dovish for stocks - Futures are again just why of record highs - if not so much for the Fed-hated bonds, and sure enough, European equities traded in the green from the get-go even as RanSquawk notes, "there has been no major fundamental catalyst behind the spike higher seen in the morning, although do note that the move comes in the backdrop of the positive close on Wall Street which saw the S&P 500 (+0.13%) touch record highs before paring a large portion of the gains." In other words, the upside volatility in the intraday move is now a bullish catalyst, closing print notwithstanding.
And what did US equity futures do? Why they followed Europe higher, with the ES now +8, on what is "explained" as a European move to intraday US futures previously.
That, ladies and gentlemen, means we may have finally achieved perpetual motion, because all that would take to send the market higher is... for the market to go higher, etc, ad inf.
Sadly for Asia, except Tokyo of course, where the local stock market is now a carbon copy of Argentina both of which are soaring higher on daily currency destruction, it did not get the memo and Asian equity markets traded mixed. The Nikkei 225 (+1.13%) opened above 16,000 for the first time since Jan., supported by substantial JPY weakness following the FOMC meeting. The Hang Seng (-0.85%) declined as Chinese home prices fell in the most cities in August since Jan’11. However, the Shanghai Comp (+0.35%) pared earlier losses with financials gaining after the PBoC lowered money market rates in a sign of further stimulus efforts.
And while actual newsflow clearly hasn't mattered in years with the Fed telling the market now openly how to interpret any and all data (spoiler allert: bullishly), today we get jobless claims, building permits/housing starts, and the Philly Fed survey are the key releases. Yellen will also speak via a pre-recorded video on consumer finance later today.
Overnight Bulletin Summary
- European equities trade in the green across the board following the positive close in Wall Street with outperformance in the DAX after being boosted by German heavyweight Bayer.
- Bunds trade relatively unchanged, after paring initial losses following the modest TLTRO uptake which has spurred speculation of a potential QE programme.
- Looking ahead, attention turns towards the US weekly jobs report, housing starts, building permits, Philadelphia Fed business outlook, EIA natural gas storage change, as well as comments from Fed’s Yellen (pre-recorded) and Fisher.
- Treasury 5/30 curve continues flattening seen yesterday after Fed policy makers signaled they won’t be raising rates anytime soon while suggesting they would tighten credit at a faster pace once liftoff begins.
- ECB allotted EU82.6b in its first targeted loan program, below EU150b median estimate in a Bloomberg survey
- China’s new-home prices fell in all but two cities monitored by the government last month as tight credit damped demand even as local home-purchase restrictions were eased
- Voters in Scotland are deciding whether to seek independence from the U.K. in a ballot that could spell the end of a three- century-old union that once dominated the world and trigger a new era of self-determination across Europe
- A final batch of opinion polls showed the “no” campaign remained in the lead by a slim margin, as both sides used their last day to make emotional pleas to voters
- U.S. Secretary of State John Kerry said more than 50 countries have joined the U.S. fight against Islamic State, and some coalition members are prepared to launch airstrikes in Syria against the extremist group
- While Obama yesterday drew a hard line on sending U.S. forces into “another ground war in Iraq,” pledge does not preclude small groups of commandos operating in the shadows of Iraqi army units
- Australian police thwarted an alleged Islamic State plot to abduct and behead a member of the public as officers detained 15 people in the nation’s largest-ever anti-
terrorism operation. - Russia has deployed about 5,000 soldiers in eastern Ukraine to back separatist fighters, a Defense Ministry official in Kiev said as fighting flared up today on the outskirts of Donetsk
- Russia called a new law providing a special status for war-torn eastern Ukraine “a step in the right direction” while the government in Kiev cautioned that a drop in Russian natural gas supplies could hobble the EU during the peak heating season
- The Swiss National Bank maintained its cap on the franc at 1.20 per euro and vowed to deploy unlimited currency purchases to defend it, noting an increased risk of deflation
- Sovereign yields mostly higher. Asian, European stocks gain, U.S. equity-index futures gain. WTI crude and gold little changed, copper higher
US Event Calendar
- 8:30am: Initial Jobless Claims, Sept. 13, est. 305k (prior 315k)
- Continuing Claims, Sept. 6, est. 2.466m (prior 2.487m)
- 8:30am: Housing Starts, Aug., est. 1.037m (prior 1.093m)
- Housing Starts m/m, Aug., est. -5.2% (prior 15.7%)
- Building Permits, Aug., est. 1.040m (prior 1.052m, revised 1.057m)
- Building Permits m/m, Aug., est. -1.6% (prior 8.1%, revised 8.6%)
- 9:45am: Bloomberg Consumer Comfort, Sept. 14 (prior 36.5)
- 9:45am: Bloomberg Economic Expectations, Sept. (prior 45)
- 10:00am: Philadelphia Fed Business Outlook, Sept., est. 23.0 (prior 28)
- 12:00pm: Household Change in Net Worth, 2Q (prior $1.490t) Central Banks
- 8:45am: Fed’s Yellen speaks in Washington
- 11:00am: Fed to purchase $250m-$350m notes in 2024-2031 sector
- 1:00pm: U.S. to sell $13b 10Y TIPS in reopening
ASIA
Asian equity markets traded mixed despite a higher close on Wall Street after the Fed retained its “considerable period of time” phrase in relation to accommodative monetary policy. Nikkei 225 (+1.13%) opened above 16,000 for the first time since Jan., supported by substantial JPY weakness following the FOMC meeting. The Hang Seng (-0.85%) declined as Chinese home prices fell in the most cities in August since Jan’11. However, the Shanghai Comp (+0.35%) pared earlier losses with financials gaining after the PBoC lowered money market rates in a sign of further stimulus efforts.
FIXED INCOME
In line with their US counterparts, Bunds opened the session lower as participants responded to the hawkish elements of the FOMC release with 14 members of the Fed now seeing the first hike appropriate in 2015 vs. 12 in June. However, this move saw a mild retracement during European trade as participants booked profits ahead of the widely-anticipated TLTRO. Upon the release which revealed a modest take-up of EUR 82.602bln, Bund futures initially dipped lower as participants reacted to the lower than anticipated figure, which subsequently indicated restrained liquidity in the market. However, the move lower was then pared as attention shifted towards the fact that a weak take-up today could lead the ECB to unleash a QE programme in the future. Of note, reports in L’Opinion suggest that Moody's are to downgrade French government rating to AA2 from AA1, however French bonds remained unreactive to the news as it is largely infitting with current expectations.
EQUITIES
European equities traded in the green from the get-go with the exception of the Swiss SMI. There has been no major fundamental catalyst behind the spike higher seen in the morning, although do note that the move comes in the backdrop of the positive close on Wall Street which saw the S&P 500 (+0.13%) touch record highs before paring a large portion of the gains. Furthermore, the DAX has been the notable outperformer for the session with support being provided by Bayer (+4.8%) following reports the Co. is to IPO their plastics unit. However to the downside, SMI is the underperformer with Syngenta shares seen lower (-2.8%) amid litigation concerns.
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We conclude, as usual, with the thoughts of DB's Jim Reid
So the Fed gave with one hand last night and took away with the other. I'm writing this before boarding a plane in the US so I'll give my brief thoughts on the FOMC and on Scotland and then hand over to Colin to put the substance into today's EMR. Keeping the 'considerable time' language appeared to be a bit of dovish red herring to the market given that the Fed raised their median dots. Indeed the median for 2015 is now 1.375% (up 25 bps), 2.875% for 2016 (up 37.5 bps) and 3.75% (unchanged) for 2017. Also Yellen's Q&A was fairly neutral relative to her normal dovish bias. However when assessing their dovishness we'd put a far greater weight on what they do as oppose to what they forecast they're going to do, especially in this unique cycle. US inflation was surprisingly low yesterday and Yellen did discuss how she hoped Europe would be successful in seeing the pace of growth and inflation pick up but that it was a risk to the US and Global economy. So all in all the Fed remain short-term dovish but longer-term more hawkish but at the end of the day their actions speak louder than their forecasts.
As for Scotland. Not much more to add. We expect the result to be clear by the time we go to print in the morning. As we stand the opinion polls (like Survation, Opinium) almost all point to a narrow NO victory. I think it will be slightly more in favour of the NOs than that as the fears of job losses and price rises as a result of independence (justified or not) may sway the weaker conviction voters. However this is just an educated hunch. Assuming it is vaguely close though, things might never be quite the same again and more and more power might be handed over to the Scots over the coming months/years and this vote may come again one day. Also other dissatisfied regions around the world are likely to have already been empowered by the successes so far in the YES campaign. However a NO in any form will make this a slow burning issue rather than an immediate problem that a YES vote would bring, especially in UK assets.
In terms of markets the S&P 500 was in a narrow range prior to the FOMC statement before reaching an intraday high of 2010.74 during Yellen’s press conference. Most of those gains were unwound into the closing bell to see theindex finish the day only +0.13% higher even though the Dow (+0.15%) did close at a record high at 17,157. The USD was one of yesterday’s key movers with the USDJPY closing at a new recent high at 108.37 while the EUR fell to its lowest in more than a year at 1.286. The US Treasury curve bear flattened on the day with the 5yr and 10yr up by 6bp and 3bp respectively to 1.83% and 2.62% whilst the 30yr was virtually unchanged at 3.37%. In credit markets the CDX IG 22 contract was 1.5bp tighter on the day but off the day’s tights moving somewhat in lockstep with equities.
The Dollar strength yesterday was certainly interesting especially against the backdrop of a softer inflation reading for August. The Headline and Core CPI came in 1.7% yoy versus expectations of 1.9% for the month. This also marks the first CPI decline in nearly one and a half years which drove US TIPS break-even yields to the lowest in a year. Housing data offered some relief though. The NAHB housing index surprised the market on the upside with the headline reading up four points to 59 to the highest level since November 2005. The details of the report were also quite robust with present conditions, expectations and buyers’, traffic all higher on the month.
Touching on some of the other details of the FOMC event yesterday there were only modest changes to the Committee’s economic projections. It’s worth noting that the Fed also provided us with an updated set of policy normalization (exit) principles and plans. As expected by DB’s Peter Hooper, it followed the outlines given in the minutes to the July meeting. That is, Exit will begin with an increase in the fed funds target range. IOER will be the primary lever, and O/N RRPs a secondary lever. On the balance sheet, depending on how the markets and the economy are adjusting to the rate hikes, the reinvestment program will be ended and the balance sheet will be allowed to run down in a gradual and predictable manner.
Back to markets the Dollar strength against the Yen is encouraging bullish flows in the local equity markets overnight. The Nikkei and the TOPIX are over 1% higher as we type even though Sony Corp shares are down as much as 13% on profit warning overnight. The company now expects a bigger than expected loss for the year following an impairment hit to its Smartphone business. Chinese equities are around half a percent higher (helped by a drop in local market rates) along with decent gains in most South Asian indices. Asian credit have started the day on the front foot with IG spreads generally 1-3bp tighter. Longer dated cash bonds are better supported following the flattening in USD rates whilst CDS spreads are also compressing as hedges were being reversed. Negative news for China home prices didn’t seem to cause much worries. Bloomberg news noted that 68 of the 70 cities surveyed saw prices drop in August relative to July (including Beijing and Shanghai). The Dollar strength is probably weighing on commodity prices again with Brent down 0.7% overnight to US$98.3/bbl.
In terms of today, the weekly jobless claims, building permits/housing starts, and the Philly Fed survey are the key releases. Yellen will also speak via a pre-recorded video on consumer finance later today. In Europe, SNB’s rate announcement and UK retail sales are some of the main events but the real focus will still be on Scotland’s vote today. The Final YouGov survey for The Sun showed that the No camp leading the poll by a four point lead at 52%. Polling booths will open at 7am and closes at 10pm local time.

