Markets On Hold Awaiting The Fed's Non-Announcement As Central Banks Ramp Up Currency Wars

We would say today's main event is the culmination of the Fed's two-day meeting and the announcement slated for 2 pm this afternoon, however with the 90 economists polled by Bloomberg all expecting no rate hike, today's Fed decision also happens to be the least anticipated in years (which may be just the time for the Fed to prove it is not driven by market considerations and shock everybody, alas that will not happen). And considering how bad the economic data has gone in recent months, not to mention the recent easing, hints of easing, and outright return to currency war by other banks, the Fed is once again trapped and may not be able to hike in December or perhaps ever, now that the USD is again surging not due to its actions but due to what other central banks are doing.

In fact, the biggest central bank announcement today may not be from the Fed at all, but what the Swedish Riksbank did a little over two hours ago, when it kept its interest rate at the already record low -0.35%, but boosted its QE by a further SEK65 billion, in the process slamming its currency and sending bond yields tumbling. This is what it said:

Overall, the Executive Board's assessment is that monetary policy needs to be more expansionary in order to underpin the positive development in the Swedish economy and safeguard the robustness of the upturn in inflation. The Executive Board has therefore decided to extend the government bond purchasing programme by an additional SEK 65 billion so that purchases will amount to SEK 200 billion in total by the end of June 2016. The repo rate is left unchanged at ?0.35 per cent but an initial raise in the rate will be deferred by approximately six months compared with the previous assessment.

The impact of this announcement on both the currency....


... and Sweden's bond yields, which tumbled to fresh 2 year lows, was immediate.


Why is the Riksbank doing this? Simple: to preempt the ECB just as we described two days ago in ""Giant Wave Of Money" Heads For Sweden, As Draghi Creates "Nightmare" For Riksbank."

For now Sweden's response, now that currency warns have official returned after a 6 month hiatus is to monetize even more debt, and sending bonds yields to fresh lows. Sure enough, this just happenede moments ago in Germany:


In fact, as the following chart shows, the short end across Europe is once again getting ridiculous:


And it is in this environment of resurgent deflationary signals, which are merely indicating expectations of more central bank frontrunning, that the Fed is expected to hike rates, and push the already strong dollar into the stratosphere, crushing US multinational exporters? Good luck.

Taking a quick look at overnight markets around the globe, Asian equities traded mostly lower following the subdued U.S. close as markets remain cautious ahead of the FOMC meeting today, while weakness in the energy complex also weighed on risk sentiment . ASX 200 (-0.2%) traded in mild negative territory with weakness in financials following a miss on earnings from big-4 bank NAB.

Shanghai Comp. (-1.7%) was weighed on by tech names as participants await the conclusion of the Chinese plenum and details of the next 5yr plan, where some have touted a 6.5% growth target. Nikkei 225 (+0.7%) outperformed as telecoms lifted the index amid gains in Softbank after Alibaba rose by 32% post earnings, in which the Co. holds over a 30% stake in. 10yr JGBs traded higher as the cautious tone in markets drove 10yr yields below 0.3% for the 1st time in 3 months, while the BoJ also bought JPY 380b1n of long to super long end bonds.

Remember: on Friday the BOJ may or may not join the latest round of currency warfare when it too eases, although with the JPY the carry currency of choice, for now other central banks have been doing its job for it.

European equities (Euro Stoxx: +0.8%) trade firmly in the green this morning, reversing the sentiment seen in the US and Asia amid positive stock specific news . TMT is the notable outperforming sector, benefitting from pre-market news that BT (+3.2%) merger with EE has been provisionally approved by the CMA, with stocks also benefitting from strength in both the energy complex and metals. Elsewhere, the most notable earnings report today came from Volkswagen (+4.5%), who cut 2015 profit target 'significantly' and missed on expectations, however shares reside in positive territory with the report not as bad as some had anticipated.

In FX, AUD has been the notable underperformer in FX markets overnight after Australian CPI figures saw the RBA preferred trimmed mean reading (2.10% vs. 2.40%) print at 3-yr low, with price action relatively muted elsewhere. Of note the USD-index resides in negative territory (-0.2%) ahead of the FOMC rate decision later today, with markets pricing in a 6% chance of a hike today.

Continuing the tradition of baffle with bullshit, ECB's Coeure said that the short term inflation forecast do not look good vs. the 2% level and that downside CPI risks could call for more monetary measures. He also stated that if the risk of inflation reaching 2% is slower than expected, it could result in adjustments to the deposit facility rate and that the central bank is having discussions about expanding asset purchases. This happened moments after another ECB governor, Hansson said he sees no convincing reason for further policy action at the next meeting, considering presently known information. Well of course not, the EURUSD is down 200 pips on Draghi's remarks.

WTI has come off yesterday's lows after API crude oil inventories showed a build that was less than the previous week (4100K, Prey. 7100K). WTI trades around its end of August lows, with participants looking ahead to today's DoE inventories which are expected to print at 3750k. Gold held on to yesterday's gains over but has seen strength in European trade to trade higher by over USD 6.00 on the day to trade in close proximity to the 200DMA at USD 1172.73

Key events today include the aforementioned FOMC rate decision, as well as the MBA mortgage applications, and the US advance goods trade balance. Highlights in terms of US earnings today include Amgen, Valero, Mondelez, Boston Scientific and Starwood hotels.

Market Wrap

  • S&P 500 futures up 0.2% at 2065.
  • Equities: Shanghai Composite (-1.7%), FTSEMIB (+0.7%)
  • Bonds: German 10Yr yield (+2.3%)
  • Commodities: LME 3m Nickel (-0.9%), LME 3m Copper (-0.8%)
  • FX: EUR/GBP (+0.1%), Euro (-0.1%)
  • VStoxx Index down 1.6% at 20.35
  • For a detailed market snapshot click here
  • U.S. mortgage applications, FOMC rate decision due later

Bulletin Headline Summary from Bloomberg and RanSquawk

  • European equities (Euro Stoxx: +0.8%) trade firmly in the green this morning, reversing the sentiment seen in the US and Asia amid positive stock specific news
  • AUD has been the notable underperformer in FX markets overnight after Australian CPI figures saw the RBA preferred trimmed mean reading (2.10% vs. 2.40%) print at 3-yr low
  • Looking ahead, as well as the aforementioned FOMC rate decision, today also sees the RBNZ rate decision and comments scheduled from ECB's Constancio
  • Nissan’s Ghosn says global auto demand is slowing
  • The ECB may need to take additional measures to help boost prices with inflation failing to rebound as fast as policy makers had expected, Executive Board member Benoit Coeure said
  • China’s steel industry, the world’s largest, is facing a crisis as demand collapses along with prices, banks tighten lending and losses stack up, the deputy head of the China Iron & Steel Association said on Wednesday
  • The PBOC will refrain from further benchmark interest-rate cuts and economic growth will hold steady in the fourth quarter, according to economists surveyed by Bloomberg News
  • Austria is planning to build a fence along its border with Slovenia, saying the “fixed constructions” on crossings will help to establish an “orderly” influx of refugees
  • Norway’s sovereign wealth fund, the world’s largest, posted its biggest loss in four years, just as the government prepares to make its first ever withdrawals to plug budget deficits.
  • The Riksbank expanded its bond-purchase plan for a fourth time since February as policy makers in Sweden struggle to keep pace with stimulus measures in the euro zone
  • Sovereign 10Y bond yields mostly lower. Asian stocks lower, European stocks rise, U.S. equity-index futures gain. Crude oil and gold higher, copper lower

US Event Calendar

  • 7:00am: MBA Mortgage Applications, Oct. 23 (prior 11.8%)
  • 8:30am: Advance Goods Trade Balance, Sept., est. -$64.3b (prior -$67.187b, revised -$66.6b)
  • 1:00pm: U.S. to sell $35b 5Y notes
  • 2:00pm: FOMC Rate Decision (upper and lower bounds), est. 0% to 0.25% (prior 0% to 0.25%)

DB's Jim Reid completes the overnight wrap

In another place and time today's FOMC meeting could actually be the most important event of the year. However with no economists out of 90 polled on Bloomberg expecting a change, today's meeting culmination - which has no planned press conference - should be a low key affair. However the statement could still contain some market moving discussion points. DB's Joe LaVorgna expects the Fed’s communiqué to be dovish. Given that growth is likely to be sub-2% in Q3 (with many forecasts around the low-to-mid 1% range and the Atlanta Fed now at 0.8% post yesterday’s soft durable goods numbers) he doesn't think the Fed can maintain the line “that economic activity is expanding at a moderate pace.”. He also thinks the description of the labor market will also have to change. September's “The labor market continued to improve, with solid job gains and declining unemployment.” would sound odd in light of the current three-month moving average on private employment growth of just +138k, the weakest since August 2012. Yesterday's weak durable goods report also challenges the description of moderate growth in “business fixed investment” from the last statement.

Finally Joe thinks if the Fed wanted to be really dovish they could tweak the following sentence: “The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced” to something that says the risks to both growth and inflation are to the downside. However he thinks that with some FOMC members still wanting the option of a December hike they are unlikely to go this far at this stage. So perhaps the key today is how much the Fed leaves the door ajar for a move in December.

The decision and statement will be released at 6pm London time which is slightly odd as European clocks have gone back but the US haven't as yet. In Europe going home time is now going to be firmly in the dark until March - a depressing thought. On the subject of the clocks I read a fascinating article yesterday that made the point that the only places in the world where there is no official time are the North and South Poles. All the longitude lines that determine global time zones meet at the poles. So if you happen to be standing at either end of the earth you can choose any time you want. Indeed if you move a few inches and straddle the international date line, your big toe could be a day ahead of your little toe.

Indeed yesterday felt like we'd just repeated the day before as there was a similar theme in markets to that of Monday. Further weakness in the energy complex weighed on energy stocks once again as WTI (-1.77%) and Brent (-1.54%) tumbled further. Natural Gas (+1.45%) did manage to close up but not before it had slid below $2 for the first time since April 2012. Earnings reports were generally pretty mixed yesterday with BP and Pfizer beating expectations, but Ford and UPS sliding after their latest quarterlies were seen as disappointing. Despite some resilience, US equities retreated with the S&P 500 closing -0.26% and Dow finishing -0.24%. There were bigger losses for European markets where the Stoxx 600 ended -1.07%. US Treasury yields nudged a couple of basis points lower helped by some soft durable and capital goods orders data. Some of the more interesting bond moves yesterday were in Europe where there was a decent rally across much of the region, with yields generally 4-6bps lower.

More on that shortly, but firstly to the latest in Asia this morning where bourses are generally taking the lead from the US yesterday and trading lower. In China the Shanghai Comp has fallen -1.40% as we go to print, not helped by the latest October consumer sentiment print which has dropped 8.5pts from September to 109.7 this month - the lowest reading on record with data going back 8 years. The data had previously risen for the last 4 months, however the latest reading showed fairly broad-based declines across all components including a notable drop in expectations for business conditions over the next 12 months (declining -14.4pts to 108.1). Elsewhere in markets this morning, the Hang Seng (-0.59%), Kospi (-0.17%) and ASX (-0.20%) are all down, although there’s better news in Japan where the Nikkei is currently +0.64% after some disappointing retail sales numbers which have seemingly raised hopes of more BoJ stimulus on Friday. Meanwhile, some softer than expected Australia CPI data (headline +0.5% qoq vs. +0.7% expected) has seen the Aussie Dollar tumble 1% and raised the market pricing of a 25bps RBA rate cut next week to 60% from closer to 30% prior to the data.

Moving on. After the US close yesterday we got the latest hotly anticipated Apple quarterly numbers. It was something of a mixed bag, reflected in the after-market trading where, having initially jumped 2%, shares eventually closed back down at where they started. The good news was that both earnings and revenue came in above analyst forecasts, while it was noted that revenues in particular would have been 7% higher in constant currency terms. Apple’s CEO Tim Cook talked up growth in China although it was highlighted that Q4 revenues out of Greater China actually declined 5% relative to Q3. Meanwhile, for the holiday period management guided towards another record quarter with forecasted sales of between $75.5bn and $77.5bn, although analyst expectations (of $77.1bn) had already been sitting at the upper end of this guidance.

All-in-all 43 S&P 500 companies reported yesterday in what was a strong day relative to what we’ve seen so far with 35 (81%) beating earnings expectations and 21 (49%) ahead of sales estimates. Accounting for yesterday’s reporters, this compares to the overall trend of 75% and 43% respectively so far with 228 companies now having reported.

As mentioned there was a decent rally in the European government bond market yesterday, although it’s difficult to pin a single reason for the moves. The Euro area credit and money aggregates were a tad more disappointing than expected, particularly in light of the recent ECB bank lending survey. Euro area M3 growth of 4.9% yoy in September was unchanged from August and down a tenth versus expectations. Meanwhile loans to non-financial corps rose just +0.1% yoy having previously stood at +0.4%. Elsewhere, a Reuters led survey of economists suggested that there was a greater than 60% chance that the ECB announces further monetary easing at the December meeting. Meanwhile comments from the ECB’s Nowotny supported the case for continued easy policy. The ECB official said that ‘monetary policy will remain unconventional’ for some time to come and that the ECB is to continue purchases until September 2016 and at least until inflation is close to target. There were even more dovish hints to follow this late last night from ECB board member Coeure who noted that an adjustment of the deposit facility rate was an ‘open discussion’ and a ‘discussion that has started’.

Yesterday also saw Italy manage to sell 2y debt at a negative yield (-0.203%) for the first time ever in yesterday’s BTP auction. It’s pretty amazing to see this given 2y BTP’s traded at nearly 8% towards the end of 2011. Also of note and not to be outdone in yesterday’s rally, Swiss 10y yields tumbled 4bps lower yesterday to settle at a new all-time low of -0.358%.

Speaking of negative yields, T-Bills due next month traded with a negative handle yesterday having previously traded as high as 13bps on Friday. The move lower yesterday came on the back of the news that US Congress is set to vote today on a bipartisan budget/debt ceiling deal which will extend the Treasury Department’s borrowing authority until March 2017.

With regards to the dataflow yesterday, as noted US durable goods orders in September were soft at -1.2% mom (vs. -1.5% expected) which followed a downwardly revised -3.0% mom drop in August. There was weakness in core capex orders also which declined -0.3% mom (vs. 0.0% expected), while the August data was revised down also by a steep 140bps to -1.6%. Meanwhile, the flash services PMI print declined 0.6pts from last month to 54.4 (vs. 55.5 expected) and to the lowest reading since January this year. There wasn’t much better news to come out of the latest consumer confidence data either with the October print falling 5pts to 97.6 (vs. 102.9 expected) and a three-month low, driven to a large degree by the present situation component which declined 8.4pts this month. Elsewhere, the Richmond Fed manufacturing activity index for October was a tad better than expected at -1 (vs. -3 expected), up 4pts from September. Finally the S&P/Case-Shiller house price index was up +0.1% mom in August as expected.

Wrapping up yesterday’s data, in the UK the Q3 GDP print was bit softer than expected at +0.5% qoq (vs. +0.6% expected). That saw the YoY reading nudge down a tenth to 2.3% with Sterling coming under a bit of a pressure as result, finishing down 0.3% versus the Dollar.

Looking at the day ahead, the only data of note in the European session this morning are various consumer confidence indicators out of Germany, France and Italy. This afternoon in the US sees the September advanced goods trade balance reading which is one of the last key data points before Thursday’s GDP report. This is then of course followed by the conclusion of the aforementioned two-day FOMC meeting. Earnings are set to remain front and centre also with 44 S&P 500 companies scheduled to release their latest quarterly numbers, the highlights including Walgreens Boots prior to the open and Paypal and Amgen after the closing bell. In Europe 23 Stoxx 600 companies will report also, with Volkswagen set to be a closely watched affair given the recent emissions scandal, while Fiat Chrysler and Heineken are also due.


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