Schizomarket On Edge As FOMC Meeting Begins

There was non-Fed news in the overnight market.

Such as Nikkei reporting that Germany's Angela Merkel was the first G-8 member to be openly critical of Japan's credit-easing policy "that has led to the yen's weakening against major currencies" in what was the first shot across the bow between the two export-heavy countries. Not helping risk in Asia was also news that China May new home prices rose in 69 cities over the past year, compared to 68 the prior month, thus keeping the PBOC's hands tied even as the liquidity shortage in traditional liquidity conduits continues to cripple the banking system and forcing the Agricultural Development Bank of China to scale back the size of two bond offerings today by 31% "as the worst cash crunch in at least seven years curbs demand for the securities."

Rounding up Asia were the latest RBA meeting minutes which noted the possibility of further weakness in AUD over time, adding downside pressure on the currency and pressuring all AUD linked equity pairs lower. Still, the USDJPY caught a late bid pushing it above 95 on some comments by the economy minister Amari who said that the government would not be swayed by day-to-day market moves and the BOJ "should continue making efforts to convey its thinking to markets" adding the government was not making policy to pander to markets, confirming that Japan is making policy solely to pander to markets.

Then we moved to Europe where we found that European car sales hit a fresh 20 year low for May, which followed the return of Draghi jawboning after he said that Europe was ready to do "whatever it takes" to preserve the Euro, which is an odd statement to make considering all the promises by Van Rompuy saying the EUR existential crisis is well past. Draghi also said that he has an open mind on non-standard policies and that the ECB can stay accommodative as long as necessary. This quickly pushed the EUR to session lows, however, this move was rapidly reversed when the German ZEW Economic Sentiment survey printed at 38.5, up from 36.4 and beating expectations of 38.1, sending the EURUSD to a fresh three month high.

And while all this posturing was going on, Spain's economy cratered once again with the bad loan ratio rising from 10.47% in March to a record 10.87% in April, and since this is a coincident unemployment reading of unemployment look for the real, not manipulated and misreported, Spanish economy to continue deteriorating as rapidly as it has been to date.

But all of the above is meaningless with the market continuing to act like a teenage primadonna with the June FOMC meeting starting today. We can't help but wonder how much the market would plunge, or soar, if Amanda Bynes has a tweet commenting on what Bernanke may (or may not) do. Remember: it is a centrally planned world and we are all merely collateral whose every communication is intercepted and recorded by the authorities. And speaking of, it is quite likely that the next Fed Chairman is coming, following the release of Obama's Charlie Rose interview contents in which the president said that "he's already stayed a lot longer than he wanted or he was supposed to." Bring on the Geithner, Summers, Yellen, Krugman rumors.

All the news headlines in bulletin format courtesy of Bloomberg:

  • Treasuries steady as Fed’s two-day meeting begins, with rate decision and Bernanke press conference tomorrow; investors weighing whether economy strong enough for Fed to begin tapering asset purchases.
  • ECB’s Draghi said the central bank is considering further non- standard monetary policy tools and will deploy them if circumstances warrant
  • German investor confidence rose in June, with the ZEW index of investor and analyst expectations increasinf to 38.5 from 36.4 in May, est. 38.1
  • U.K. inflation accelerated 2.7% in May, more than economists forecast, as a record jump in air fares for the month helped extend its persistence above the Bank of England’s 2% target
  • European car sales fell to a 20-year low in May as rising joblessness caused by a recession in the euro region reduced demand at PSA Peugeot Citroen, Renault SA and General Motors Co.
  • Obama said Bernanke has stayed in his post “longer than he wanted,” one of the clearest signals the Fed chief will leave when his current term expires next year
  • Currency strategists from Barclays Plc to Deutsche Bank AG are advising investors to sell the yuan, this year’s best-performing emerging-market currency, as growth slows in the world’s second-largest economy and inflows wane
  • Sovereign yields mostly higher. Nikkei falls 0.2%, most Asian equity markets gain. European stocks mixed, U.S. equity index futures mixed. WTI crude and metals lower

SocGen recaps the main macro events of the day

The economic calendar is pretty busy today but whether that will matter for FX and bonds 24 hours before the Fed FOMC is debateable as markets continue to mulll over the Fed's tactics in the light of the recent back up in UST yields and mortgages. Price action was quiet in Asia with the USD a touch firmer following the FT article discussing Fed policy (see link above) where Robin Harding played up the likelihood of a signal on tapering.

Investors will probably be paying close attention in particular to the German ZEW index. Expected up for the second month in a row, it might indicate that the trough has been reached in terms of business in Germany. This would also confirm the lack of urgency signalled by the ECB at its June meeting. But will the EUR necessarily benefit? Theoretically, the answer would tend to be in the affirmative. The fact that the FOMC meeting takes place tomorrow makes us more cautious however.

In the UK, the slight increase forecast in CPI inflation should help fend off expectations of additional QE. This is marginally positive for the GBP, although the BoE minutes, to be published tomorrow, will probably be a more decisive factor. SG's call is for a rise in annual CPI from 2.4% to 2.7% vs consensus of 2.6%. A stronger number should help to underpin GBP's broad-based gains so far this month as markets assess the diminished policy leeway for incoming governor Carney.

A few US indicators should also be reported, but they are not expected to have a major impact on the outcome of the FOMC, the day before it occurs. They are also not expected to further prompt investors to take new directional positions: all of the players are now holding their breath until the major meeting is over. Will Ben Bernanke repeat that tapering is possible in a couple of meeting? The Fed's new forecasts and the press conference held by the chairman after the meeting might provide greater visibility. An up-tick in May CPI from 1.1% to 1.4% will leave it well below the 2.5% Fed reference.

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DB's Jim Reid with the complete overnight summary for those who missed the news yesterday

There has been no shortage of Fed-related headlines in the lead up to Wednesday’s FOMC. Yesterday, the FT published a commentary saying that Bernanke will likely use Wednesday’s post-FOMC press conference to signal that the Fed is close to tapering asset purchases. The article also wrote that Bernanke will balance his message by saying subsequent tapering moves will depend on the path of the economy and in no way brings forward the timing of a rate rise. The S&P500 fell almost 1%, and the USD index hit an intraday high of 80.9 (or +0.26%), in the hour after the article hit the newswires. But in an interesting turn of events, the FT reporter who wrote the article (US economy reporter Robin Harding) subsequently tweeted that “The Fed does not leak anything to any journalist to steer markets – especially during blackout” and that he has “been in the September taper camp for a while and I’d stick with that”. The S&P500 then went on to recover most of its losses to close with a 0.76% gain, while EURUSD bounced to a session high of 1.338. As we wrote yesterday, we suspect that this week Bernanke will continue to say tapering could happen this year but will be data dependant and that we are still a long way off from removing the very easy policy stance the Fed has in place.

In terms of other Fed headlines, the odds of having a new Fed Chairperson come February 2014 have seemingly shortened overnight after President Obama said that Bernanke has remained in his post “longer than (Bernanke) wanted”. Obama’s comment came in an interview with Charlie Rose, and was in response to whether he will renominate Bernanke for another term. Recall that in March’s post-FOMC press conference, Bernanke hinted that his current tenure as the Fed Chairman would be his last - and it’s likely he will be pressed again on this topic on Wednesday.

Moving on to the overnight session there’s plenty of focus on China. The Shanghai Composite (-0.05%) is slightly lower again for the second consecutive day this week. Chinese banks’ share prices aren’t much stronger overnight in Asia despite news that China’s state investment agency Huijin’s has raised it’s A-share stakes in China’s Big Four banks. There seems to be an increased focus on the sector not helped by the recent tightness in liquidity and spike in interbank funding rate.

Indeed Bloomberg news also reported that Agricultural Development Bank of China has scaled back the size of its two bond offerings today by nearly 31% due to “the recent large fluctuations in bond market liquidity”. DB’s Jun Ma thinks the latest data points on new loans and interbank rates suggest that monetary condition is a bit too tight and some relaxation will be needed. Staying in China, property prices remained buoyant in May with 69 out of 70 Chinese cities’ new home prices rising in May versus a year ago. Specifically, prices of new homes in Beijing and Shanghai rose 11.8% and 10.2% from a year ago. Data showing that China’s FDI grew at its slowest pace in four months in May is also not helping market sentiment.

Away from China, key Asia-Pacific bourses are mostly lower. The Hang Seng, Nikkei, and ASX 200 are down -0.7%, -0.3% and -1.0%, respectively as we type. Asian credit markets are mixed although we continue to see decent demand for cash credit ahead of the FOMC. The latest RBA meeting minutes noted that the possibility of further weakness in AUD over time, adding some downside pressure on the currency. The UST 10-year yield is steady at 2.176%.

Returning to yesterday, in the fixed income space DM credit held fairly firm with the CDX IG index closing 1bp tighter on the day tracking a similar move in the European iTraxx (-2bp). The resilience in credit was somewhat surprising coming off the back of rising UST yields (10yr USTs added 5bp to close at 2.18%). There were reports of fund managers taking advantage of the higher all-in yields offered by the recent sell off in rates and credit spreads. The stability in credit also allowed US primary markets activity to return following a fairly quiet week for new issuance last week. Indeed, Chevron managed to print a $6bn jumbo deal yesterday on the back on an order book in excess of $34bn, according to the IFR.

In the EM credit space, volatility continued to be high. Mexican and Brazilian 10yr government yields added around 18bp and 20bp respectively. Venezuelan 5yr CDS gapped out by 75bp to more than 1000bp after S&P cut the country’s rating to B from B+ citing the “political polarization and internal challenges within the government”.

Yesterday’s US dataflow was fairly mixed with stronger housing sentiment offset by deteriorating factory data. Our US economists expect this to be a template for the near-term economic outlook. Starting with housing, the NAHB homebuilder sentiment index printed at its highest level since March 2006 (52 vs 44 previous and 45 consensus). In the details, present sales (56 vs. 48), future sales (61 vs. 52) and buyer traffic (40 vs. 33) all touched a cyclical high. DB’s economists highlight that the current level of sentiment is consistent with housing starts of well over one million units. They forecast a starts rate closer to 1.3 million units by yearend. As a result, the direct contribution to real GDP growth from home construction is likely to be 50-100 bps in 2013 compared to 30 bps in 2012. On a less positive note, while the headline component of the NY Empire survey was markedly stronger than expectations (+7.8 vs. 0.0 expected), the details were roundly disappointing - new orders (-6.7 vs. -1.2 previous), shipments (-11.8 vs. unch.), employment (unch. vs. +5.7) and the average workweek (-11.3 vs. -1.1) all showed deterioration. The silver lining was that the six month outlook in nearly every category was above the current conditions reading.

Turning to the day ahead, the G8 summit will be wrapping up in Northern Ireland, while the first day of the two-day FOMC gets underway today. Germany’s ZEW survey is the main data release in the euroarea and consensus is looking for a small improvement in the economic sentiment index to 38.1 (vs 36.4 previous). In the UK, the focus will be on CPI and producer prices. Building permits, housing starts and CPI for May are the major data releases in the US.


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