Futures Fade As Hawkish Fed Deemed Not So Bullish After All

Based on the overnight market prints which are an oddly reddish shade of green, it took algos about 12 hours to realize that the reason they soared for most of October, namely hopes of an easier Fed which were launched with the terrible September jobs report and continued with increasingly worse US economic report in the past month, can not be the same reason they also soared yesterday after the announcement of a more hawkish than expected Fed statement which envisioned a stronger US economy and a removal of foreign considerations, which even more curiously took place on even worse data than the Fed's far more dovish September statement.

As BNP put it "The Fed wants us to believe that it did not go in June and September, when the economy had a stronger pulse than it does now, but it is really seriously considering December. So much for data dependence." 

It gets worse: "To us, this seems to compound the Fed’s recent communication challenges and also threatens to combine this with a serious policy mistake. We don’t believe Chair Yellen will go along with this in the end, but the probability of a mis-step seems to have risen, to roughly a 50% chance in the market’s eyes." Which in the CCD "eyes"  of algos, is probably bullish too until it isn't.

Realized concerns about a stronger Dollar promptly pressured emerging markets, led by Indonesia whose main stock index fell more than 2.5 percent on Thursday, to its lowest in around two weeks.

Perhaps serving as a good indicator of what will happen now that the rate hike is back on the table, the overall Indonesian stock market saw outflows of foreign funds this week, in line with most peers in the region, as investors also awaited earning results for indications of the outlook on corporate health.

So is the EM debt crisis/capital outflow back on the table? Unless the Fed finds a way to somehow telegraph it will both ease and hike, we may soon have a repeat of the summer of 2015 when everything started falling apart simply because nothing has changed.

Something that did change overnight were job prospects for Deutsche Bank bankers after their employer announced plans to cut 35,000 jobs over the next two years as part of a sweeping overhaul under new co-Chief Executive John Cryan. The move, which came as Germany’s largest lender reported a steep third-quarter net loss, comes as Mr. Cryan attempts to reshape the bank by slashing costs, reducing risk and simplifying its business after taking over in the summer.

The overall head count reduction includes 9,000 full-time jobs, 6,000 external contractors and 20,000 additional roles through the disposal of assets. The bank’s total head count is around 100,000.

The news follows last night's announcement that DB is also halting its dividend until at least 2016. Surprisingly, DB stock - which usually loves mass layoff announcements - did not like the news.


Going back to the market, Asian stocks saw indecisive trade as they digested the Fed's decision to keep rates unchanged but kept prospects of a 2015 rate hike on the table. Shanghai Comp. (+0.4%) fluctuated amid mixed comments from PBoC assistant governor Yin, who dismissed the inclusion of QE as part of PBoC policy but also added that the central bank is to utilize further monetary policy tools and that there is plenty of space regarding rates . Nikkei 225 (+0.2%) declined from its highs as the JPY strengthened, while ASX 200 (-1.3%) underperformed weighed on by Woolworths (-9.70%) after it cut its forecast. Of note, Samsung Electronics operating profit rose 82% Y/Y but it missed on its net income. JGBs tracked UST yields higher following the less dovish FOMC meeting and better than expected industrial production data (M/M 1.00% vs. Exp. -0.60%) dampening calls of further BoJ easing.

Chinese Premier Li is said to say that China requires 6.53% - not 6.52%, not 6.54%, but 6.53% - GDP growth in the next 5yrs. There were also reports that Premier Li and German Chancellor Merkel agreed that a feasibility study regarding China-EU free trade discussions should be set up ASAP with Merkel adding that she hopes a trade deal is signed next year.

Risk averse sentiment also dominated the price action in early European trade as market participants reacted to somewhat hawkish Fed statement yesterday and re-priced expectations for a hike in December. Short-term rate curves continued to steepen, with Short-Sterling under particular pressure given the policy divergence between the ECB and the BoE. As a result, despite the initial selling pressure and the supply from Italy (equivalent to around 30k Bund futures), Bunds quickly found support amid the growing expectation of further policy easing by the ECB and also month-end related flows.

Disappointing earnings from the likes of Barclays (-5.4%), Sanofi (-4.4%) and Shell (-1.5%) also played its part in weighed on equity indices (Euro Stoxx: -0.6%). However the move lower was led by materials, which remain particularly susceptible to expectations of rate hikes by the Fed and also lingering concerns over China. In turn, this meant that the commodity heavy FTSE-100 index (-1.0%) underperformed its EU peers.

In commodities, the energy complex has continued its downward trend following the hawkish interpretation of yesterday's FOMC statement, with the metals complex also weighed upon by the recent USD strength amid relatively light commodity specific newsflow. In terms of looking ahead, today sees the EUR Natgas storage change, (Exp. 69, Prey. 81).

After the initial volatility following the announcement by the Fed, the price action by major FX pairs was largely locked to a range-bound pattern , in part due to a number of large expiring strikes on Friday. In particular, the focus is firmly on the upcoming BoJ rate decision.

Elsewhere, EUR/USD broke out of its tight overnight range midway through the European morning, supported by the upside in EUR/GBP amid touted month-end related flow as well as relatively upbeat data out of Germany, with regional CPIs coming in generally higher than expected . Of note, overnight saw the CNH experience gains as participants anticipate further intervention, with large Chinese banks selling USD in the offshore market according to trade sources as the PBoC continues to attempt to converge the two rates.

Going forward, market participants will get to digest the release of the advanced Q3 US GDP report, weekly jobs report, pending home sales report, as well as comments by Fed's Lockhart.

Market Wrap

  • S&P 500 futures down 0.6% to 2073
  • Stoxx 600 down 0.3% to 375
  • MSCI Asia Pacific down 0.9% to 134
  • US 10-yr yield down 2bps to 2.08%
  • Dollar Index down 0.4% to 97.39
  • WTI Crude futures down 0.9% to $45.54
  • Brent Futures down 0.9% to $48.61
  • Gold spot up 0.4% to $1,161
  • Silver spot up less than 0.1% to $15.96

Main News

  • Deutsche Bank to Shrink Workforce by About 26,000 in Revamp: Will cut 9,000 net, others to leave by 2018 as part of asset sales
  • Marco Rubio Lands Punches at Republican Debate in Colorado: Showed a knack for parrying attacks to his benefit
  • China Signs $17 Billion Deal to Buy 130 Airbus Planes: Intensifies competition with Boeing in what’s projected to become the world’s biggest aircraft market
  • Shell Has Biggest Loss in More Than a Decade on Price Slump: Took $7.89b charge on lower oil-price expectations
  • Barclays Third-Quarter Profit Misses Estimates, Cuts 2016 Target: Shares fall more than 6%
  • Samsung Deploys Cash With $10 Billion Buyback, Capex Boost: Tapping its $50b cash pile to buy back shares and invest in its components business
  • Nokia to Return $4.4 Billion to Investors Amid Deal Savings: Also moved forward a target for the savings it expects to reap from the takeover of Alcatel-Lucent

Select Corporate News

  • Baxter Names Jose Almeida Chairman, CEO
  • Ackman’s Pershing Square Loses 15.9% YTD as Valeant Drops
  • Newmont 3Q Adj. EPS, Rev. Beats; Cuts Yr Capex View
  • PayPal Reaffirms 2015 Forecasts; 3Q Oper. Profit Misses
  • Amgen Raises ‘15 View Above Ests. as 3Q Beats
  • IMAX 3Q Rev. Tops Ests.; Boosts 2015 Global Installation View
  • Buffalo Wild Wings Cuts Yr EPS View After 3Q Misses Est.
  • Yelp Raises Yr Net Rev. Range, 3Q Rev. Beats; Shrs Gain 7.4%
  • GoPro 3Q Adj. EPS, Rev. Trail Ests.; Shares Fall
  • McGraw Hill Financial Working w/ Adviser on J.D. Power: Reuters

DB's Jim Reid concludes the overnight wrap

If you've got a Christmas party on December 16th you might want to reschedule. However before we debate whether the Fed have cancelled Christmas, China is dominating the headlines this morning.

Premier Li Keqiang has said that the Chinese economy now needs growth of at least 6.53% over the next five years in order to achieve the government’s goal of a ‘moderately prosperous society’. We're not sure whether something was lost in translation that explains why the second decimal is so important but that is a direct quote. The comments came at the end of the 5th Plenary Session of the Central Committee of the Communist Party of China today although according to Bloomberg the comments were said to have been made at an October 23rd speech to Communist Party members. While this doesn’t appear to be the new official target of the Chinese government, the comments are a big signal that China’s government look set to lower their growth target when we eventually hear the outcome from the four-day meeting.

As we’d highlighted previously our China Chief Economist had expected that the likelihood of keeping the 7% growth target was slightly higher than cutting it to 6.5% so the news has come as a slight surprise although a Bloomberg survey suggested the majority of participants expected the Chinese government to move closer to a 6.5% target. Market reaction has been minimal. Chinese equity markets have traded in a relatively tight range all morning and the Shanghai Comp (+0.46%) is a touch higher post the news. Markets are mixed across the rest of the Asia region however with gains for the Nikkei (+0.30%) but falls for the Hang Seng (-0.17%), Kospi (-0.28%) and ASX (-1.28%). US equity futures are down nearly half a percent while EM currencies have declined across the board, although much of this weakness coming before the China news and more related to the FOMC last night.

Although we didn't think the Fed would take a December hike off the table, it was a surprise for them to warn the market so explicitly that a rate rise was a distinct possibility at their next meeting. A key line was the first part of the following sentence which was added this month - “In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation.” They also removed the following sentence that was in the September statement: “Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.” So the Fed think financial conditions have calmed enough for them to try to prepare markets for their long desired hike. Whether this eventually causes the same cycle of risk-off again is the big question. It didn't last night as the S&P closed +1.18%, having fallen -1% post statement before rallying all the way back at the close (more later).

Other parts of the statement didn't really acknowledge recent weaker data. The Fed continues to see growth "expanding at a moderate pace" in spite of Q3 GDP estimated by most economists to have a 1-handle. They also said “Household and business fixed investment have been increasing at solid rates.” even though the latest retail sales or durable goods data both missed. Retail sales ex auto and gas was 0.0% mom in September missing expectations by three-tenths (and the lowest monthly reading since April) while the latest durable goods ex transportation data printed at -0.4% mom, a miss versus expectations by four-tenths and the second consecutive negative monthly print. Meanwhile with regards to employment the Fed’s assessment was downgraded, with “solid job gains” replaced with “The pace of job gains slowed.” which is appropriate given the last payroll print. Reading between the lines the old 200k unofficial payroll target for a hike may have been lowered.

Overall the criteria for whether they hike in December continues to be data and financial market dependant but they have given the market warning of where their biases lie. All year we've been pretty convinced they won't hike in 2015 but last night's statement definitely puts us at risk of being wrong at the final hurdle. The probability of a December hike has now bumped up to 46% from around 35% 24 hours ago after having been as low as 26% earlier this month. Unsurprisingly it was a strong day for the USD with the Dollar index up +0.90% while US Treasury yields climbed higher. The 10y finished the day up +6.4bps at 2.102% while at the shorter end of the curve 2y yields were up +8.2bps (to 0.705%) for the biggest daily move higher since March 6th. Some of those moves were also supported by the September advance goods trade balance reading yesterday, with the deficit shrinking to $58.6bn from $66.6bn last month and to a seven-month low after exports rose +3.1% in the month and imports declined -2.5%.

That data came ahead of today’s Q3 GDP print where market expectations are for a fall to +1.6%, with our US colleagues slightly below this at +1.4%. As has been the trend in recent quarters the Atlanta Fed is more bearish and has Q3 growth pegged at +1.1% post yesterday’s trade data (which helped lift it from +0.8% on Tuesday). The data is due out around 12.30pm London time.
Meanwhile it was a roundabout session for US credit markets yesterday also. CDX IG initially spiked a couple of basis points wider immediately following the FOMC from the day’s tights, but much like US equity markets then rallied into the close to finish 1bp tighter on the day. Much of the rebound for risk assets was led by a strong surge in bank stocks in particular, the financials component of the S&P 500 leading gains after rallying 2.4%. Energy stocks also played a large part after Oil markets spiked higher following a combination of the latest inventory data (as supplies rose less than expected) and a more technical-led rebound following the recent downturn in prices over the last couple of weeks. WTI finished the session up +6.34% and just shy of $46/bbl, while Brent rebounded +4.79% to settle back above $49/bbl.

It was another bumper session for US earnings yesterday with 45 S&P 500 companies reporting. In its first earnings report since separating from EBay, Paypal’s Q3 numbers were a bit of a mixed bag after beating profit expectations, but missing at the top line while investors latched onto some disappointing aspects in the details to send the stock down as much as 8% in extended trading. There were better numbers to come out of Amgen however, where the company reported beats at both levels and raised full year guidance. 35 (78%) companies notched a beat in earnings relative to guidance yesterday, slightly better than what we’ve seen so far (76% with 273 companies now having reported). It was actually a decent day for results all round, with 28 (62%) of yesterday’s reporters also notching a beat in revenue expectations which is well ahead of 47% run rate so far.

Prior to the FOMC and subsequent sharp moves across the pond yesterday, it was a relatively decent day for European equity markets with the Stoxx 600, DAX, CAC and peripheral bourses finishing with gains of around 1%. It’s the European sovereign bond market which is generating much interest at the moment however with a number of fresh record low yields being struck. Yesterday it was comments from the ECB’s Constancio which added to the dovish tone of late. The ECB Vice-President was noted in particular as saying that the bank’s main policy rates will stay low for a prolonged period of time and that the asset purchase program will keep the ECB’s balance sheet expanding until we see a sustained adjustment in the path of inflation. Importantly, Constancio also highlighted that ‘downside risks to the global economy have increased’ and that ‘the ECB is closely monitoring these developments and stands ready to act with all available instruments’.

Helped also by more easing out of Sweden yesterday after the Riksbank expanded its bond purchase plan for the fourth time this year (but kept the repo rate on hold at -0.35%), 2y bond yields in France, Finland and Belgium all struck record lows yesterday at -0.291%, -0.327% and -0.295% respectively. In fact with yields in both Spain and Slovenia nudging back into negative territory again yesterday, there are now 14 European countries with 2y yields trading below 0%, while 10 countries are below zero at the 5y bucket. Yesterday’s 10y Bund auction also drew the lowest yield since April this year (0.44% compared to the 0.62% yield at a 10y auction earlier this month) although it still has some way to go to match April’s auction where 10y Bunds priced at just 13bps.

Turning over to today’s calendar now. In Europe Germany’s preliminary CPI report will be closely watched with the market expecting the YoY rate to nudge up a couple of tenths to +0.2%. German unemployment data is also due and in Spain we’ll also get the latest CPI data along with retail sales. Euro area consumer confidence is expected while the latest UK credit aggregates and mortgage approvals numbers for September are due. In the US this afternoon it’s all eyes on the Q3 GDP read, while we’ll also get the latest quarterly core PCE data, along with initial jobless claims and September pending home sales. The Fed’s Lockhart is expected to make some comments today around lunchtime while it’s another busy day for earnings with 49 S&P 500 companies due to report with the highlights including ConocoPhillips and Time Warner (both prior to the US open). In Europe 33 Stoxx 600 companies are expected to report earnings also, with Total, Royal Dutch Shell, Barclays Bank, Danske Bank and Banco Santander just some of the highlights