The day has finally arrived: today the Fed will officially announce the start of its balance sheet shrinkage (full preview here) while keeping rates unchanged, perhaps hiking again in December (market odds at 56%), while revising its economic projections and "dots", most likely in a lower direction.
And while we wait for the announcement and press conference after 2pm, US index futures - as well as European and Asian equities - are little changed, signaling a pause for Wall Street’s three major benchmark indexes after they hit new all-time highs ahead of the Federal Reserve’s policy announcement due today. They probably will not be changed after 2:30 pm, however, especially if Yellen surprises on the hawkish side. Don't look at the dollar for clues though: The DXY fell less than 0.1% against a basket of major currencies and was down against the euro, the yen and sterling. The Bloomberg Dollar Spot Index fell a second day, with the U.S. currency confined to a narrow trading range, as Treasury yields edged lower; broad lack of directional catalyst seen over the session as traders awaited the FOMC decision.
“If we move closer to a U.S. rate hike, that should come along with a bit more dollar strength and euro weakness which would harden the ECB’s exit case and be a headwind for government bonds,” said Commerzbank strategist Rainer Guntermann.
Ahead of the Fed, Europe's Stoxx Europe 600 Index was mixed alongside S&P 500 futures and a fractionally higher session for Asian equities. The dollar slipped, the euro and yen gained and the British pound jumped as data showed U.K. retail sales rose more than forecast in August. Spanish assets showed resilience even as the government stepped up its crackdown on an illegal separatist referendum planned for the Catalonia region. The Mexican peso swung after a 7.2 magnitude earthquake struck. Benchmark crude rose but struggled to break $50 a barrel. US Treasuries halted a three-day decline awaiting the Fed's interest-rate projections. New Zealand’s dollar led gains versus the greenback after an election poll showed the ruling National Party ahead, while the pound advanced after U.K. retail-sales data beat forecasts.
Financial markets remain largely calm - even after President Donald Trump used a UN speech to threaten to annihilate North Korea - as all eyes turn to Wednesday’s Fed decision. Expectations are high that the central bank of the world’s biggest economy will unveil plans to start shrinking its $4.5 trillion balance sheet, while any clues on the chances of a rate increase this year could tip the balance - market expectations of another hike in 2017 are at about 50 percent.
Asian stocks swung between gains and losses as investors awaited the Fed. The MSCI Asia Pacific Index rose 0.2 percent to 164.44 even as most shares declined, after earlier falling by the same magnitude; the gauge closed Tuesday at its highest level since December 2007. The Topix index ended the session in Tokyo almost flat at the highest since August 2015. Australia’s S&P/ASX 200 and the Kospi index in Seoul closed slightly lower. The Hang Seng Index in Hong Kong swung between gains and losses with the Shanghai Composite Index, before both advanced. Telecommunications and energy stocks advanced, while utilities and consumer shares slipped. SoftBank Group Corp. was the biggest boost the gauge while Sony Corp. was among the biggest drags after Credit Suisse Group AG downgraded the stock, saying earnings may plateau in fiscal 2019. Japanese shares fluctuated in a narrow range throughout Wednesday’s session as investors awaited the outcome of the U.S. Federal Reserve’s policy meeting. The benchmark Topix index ended little changed, with about five shares declining for every four that rose. Nintendo Co. and telecommunications companies provided the most support, while chemicals and pharmaceutical shares were the biggest drags. The yen strengthened slightly against the dollar following a three-day. 1.2 percent drop
The Asia benchmark has risen about 22 percent this year, outstripping the S&P 500 Index’s 12 percent advance to a record, as investors looked past tensions between the U.S. and North Korea. Further gains may lie ahead because the Fed is expected to leave rates unchanged and may use “slightly dovish” language when announcing its decision later Wednesday in Washington, said James Soutter, a fund manager at K2 Asset Management in Melbourne. “Lower for longer rates probably means the U.S. dollar remains weak,” Soutter said in an email. That’s “a positive for Asian stocks."
Elsewhere, the New Zealand dollar surged after a poll put the ruling National Party back in the lead ahead of the main opposition Labour Party ahead of this weekend’s election. And the fixing of the yuan remained in focus as investors try to gauge where the People’s Bank of China wants the currency. In a notable move in Chinese rates, the local 5Year bond yield had its biggest move since March.
What has changed? China 5 yr makes biggest jump since March pic.twitter.com/RZKz4gOBUp— Sunchartist (@Sunchartist) September 20, 2017
Similarly, European equities are little changed for a second day, unwilling to make major moves ahead of any potential Fed surprises: the Stoxx Europe 600 Index was unchanged. Zara owner Inditex SA was among the worst performers after posting first-half earnings that missed analysts’ forecasts, while Kingfisher Plc was the best gainer after reporting France retail profit for the first half that beat the average analyst estimate.
In rates, the yield on 10-year Treasuries declined two basis points to 2.22 percent, the largest drop in almost two weeks. Germany’s 10-year yield fell two basis points to 0.44 percent, the biggest drop in almost two weeks. Britain’s 10-year yield declined less than one basis point to 1.327 percent.
In commodities, gold advanced 0.3 percent to $1,315.36 an ounce. Oil prices rose after Iraq’s oil minister said Organization of the Petroleum Exporting Countries producers and others were considering extending a supply cut and after data showed U.S. crude stocks were lower than expected.
Aside from the Fed, economic data include mortgage applications and existing home sales. General Mills is reporting earnings
Bulletin Headline Summary From RanSquawk
- GBP & NZD see initial bids following Retail Sales and Election Polls
- UK PM May intends to make a EUR 20bln Brexit payment offer to the EU, according to the FT
- Looking ahead, highlights include DoEs and the FOMC announcement & press conference
- S&P 500 futures little changed at 2,505.10
- STOXX Europe 600 up 0.03% to 382.25
- MSCI Asia up 0.2% to 164.48
- MSCI Asia ex Japan up 0.2% to 544.19
- Nikkei up 0.05% to 20,310.46
- Topix unchanged at 1,667.92
- Hang Seng Index up 0.3% to 28,127.80
- Shanghai Composite up 0.3% to 3,366.00
- Sensex up 0.03% to 32,413.08
- Australia S&P/ASX 200 down 0.08% to 5,709.09
- Kospi down 0.2% to 2,412.20
- Brent futures up 0.9% to $55.61/bbl
- German 10Y yield fell 1.0 bps to 0.442%
- Euro up 0.1% to $1.2011
- Italian 10Y yield fell 2.4 bps to 1.756%
- Spanish 10Y yield fell 1.0 bps to 1.546%
- Gold spot up 0.2% to $1,313.11
- U.S. Dollar Index down 0.1% to 91.68
Top Overnight News from BBG
- Investors looking to own exposure on the euro need to pay the stiffest premium since December 2016 when it comes to a Federal policy decision
- Even as the Fed will likely hold rates today, futures suggest another Fed hike could happen this year
- Oil rises on signs the pace of U.S. stockpile gains is slowing as refiners resume operations after Hurricane Harvey, boosting crude demand
- At least 248 people were confirmed dead after a 7.2 magnitude earthquake struck near Mexico City
- Bitcoin is looking increasingly likely to splinter off again in November, creating a third version of the world’s largest cryptocurrency
- Hurricane Maria was on course to hit Puerto Rico just two weeks after Irma caused as much as $1 billion in damages
- Impact of pound fall on goods inflation may have peaked, BOE says in quarterly agents’ summary of business conditions
- Capital Four, which is the largest European high-yield bond fund, is now cutting down on risk as higher interest rates loom on the horizon
- Merkel pact with SPD still looks most likely after Germany votes
- Abe said to delay fiscal 2020 primary balance target: Nikkei
- U.K. retail sales rise 1% m/m in Aug. vs est. +0.2%
- Japan Aug. exports rise 18.1% y/y; est. +14.3%
- Bain Is Said to Plan Toshiba Deal Close Despite Legal Threat
- Thyssenkrupp and Tata to Create Europe’s No. 2 Steelmaker
- Maersk Sells Tankers Unit for $1.17 Billion to Holding Company
- After Reaping 40% in Turkey, Traders Eye 2017’s Worst Stocks
- Noble Group CDS Ruling Puts Payouts in Doubt in Market Feud
- OPEC Has Success at Last, But Oil Revival May Be Short-Lived
Asia markets saw an indecisive trading day amid a cautious tone ahead of today’s FOMC announcement. The looming risk event initially sapped the momentum from another record close on Wall St. and kept bourses in Australia and Japan subdued, while Chinese markets also conformed to the tentativeness after a significantly weakened liquidity operation by the PBoC. However, sentiment then gradually improved throughout the session which helped Nikkei 225 (Unch), Hang Seng (+0.2%) and Shanghai Comp. (+0.2%) pare losses, although gains were only superficial as focus remained on the FOMC and ASX 200 (-0.1%) continued to lag amid weakness across its major industries. 10yr JGBs were flat with participants sidelined amid an enhanced liquidity auction in which the b/c fell from previous, while the BoJ also kick starts its latest 2-day policy meeting where it is widely anticipated to refrain from any policy tweaks. PBoC injected CNY 20bln via 7-day reverse repos and CNY 10bln via 28-day reverse repos. PBoC set CNY mid-point at 6.5670 (Prev. 6.5530) Japanese Trade Balance Total Yen (Aug) 113.6B vs. Exp. 104.4B (Prev. 418.8B).
Top Asian News
- China Is Said to Mull Relaxing Foreign EV Maker Restrictions
- Buffett-Backed BYD Looks Overcharged on China Electric Car Bets
- Philippine Tax Reform Bill Heads for Senate Plenary Debates
- Iron Ore Sinks as ‘Peak Steel’ Call, Supply Angst Rattle Market
- Yuan Fix Back in the Spotlight as Traders Track PBOC Signals
- Bitcoin’s Likely to Split Again in November as Debate Rages On
European equity markets trade close to flat levels, as much of the anticipation is on the Fed decision and press conference later in the session. Kingfisher is the notable out-performer following their better than expected trading update, while Thyssenkrupp also trade in the green, following agreeing a JV with Tata Steel. Bonos have been surprisingly calm ahead of the Catalonia independence referendum, where we saw earlier reports stating that the Spanish Police have arrested the Catalonian Jr Minister. 10y spreads to Bunds have been tighter by over 10bps to 111.3bps, from a wide of 123bps earlier this month. Much fixed income anticipation was on the new German 30y Bund auction, with a B/C of 1.8 and an average yield of 1.27%. Gilts saw some bearish pressure following the stela Retail Sales report from the UK, falling 30 ticks as a reaction and printing fresh recent lows
Top European News:
- Banks Are Said to Hire Lazard to Solve Turkey’s Biggest Default
- Zara Owner’s Profitability Drops to Eight-Year Low on Euro
- Volkswagen Comeback Pushes Europe Bond Sales Past Trillion Euros
- U.K. Retail Sales Rise More Than Forecast as Consumers Stir
- Kingfisher Gains Most Since 2011 in ‘Litmus Test’ for Sector
- NorteGas Energia May Sell EUR Benchmark 5Y, 10Y Bonds Tomorrow
- Major Lender Requests Bailout as Russian Banking Woes Spread
In currencies, GBP was the outperformer early in the EU session, evident of the aforementioned strong Retail Sales report from the UK, printing the largest increase since April. Cable was pushed towards the week’s high around the 1.3619 area, finding some resistance around these levels and retracing much of the move, trading back at pre-announced levels. EUR/GBP bears also took advantage of the strong figures, reversing the failed attempt to attack yesterday’s high. The latest New Zealand election poll sparked some early volatility on the futures open, with the seemingly market friendly, National Party regaining ground in the One News Poll (National Party 46% (+6%), vs. Labour 37% (-7%), vs. Green 8% (+1%)). AUD/NZD trades back inside the 2017 range and back below 1.1, a close below 0.9 could see the 1.1 – 1.03 2017 range once again become the trading pattern in the pair. The DXY remains range bound as much focus is on the Fed later in the session
In commodities, oil markets have seen slow trade, with WTI’s attempt of a successful break of yesterday’s high failing, and now consolidating back in the post API range. Elsewhere, Saudi Aramco will be able to release its financial accounts in early 2018 if the government decides where they plan to list the oil giant, according to sources.
Looking at the day ahead, Germany’s August PPI printed at 2.6%, vs 2.5% yoy expected; in the US, data wise there is MBA mortgage applications and existing home sales. Onto other events, the main story is the FOMC rate decision in the US, followed by Yellen’s press conference at 14:30 EDT. Elsewhere, EU’s Chief Brexit negotiator Michael Barnier will speak and the OPEC’s panel of technical representatives will meet to discuss production cuts.
US Event Calendar
- 7am: MBA Mortgage Applications, prior 9.9%
- 10am: Existing Home Sales, est. 5.45m, prior 5.44m
- 10am: Existing Home Sales MoM, est. 0.18%, prior -1.3%
- 2pm: FOMC Rate Decision (Upper Bound), est. 1.25%, prior 1.25%
- 2pm: FOMC Rate Decision (Lower Bound), est. 1.0%, prior 1.0%
DB's Jim Reid concludes the overnight wrap
I was casually watching CNBC yesterday afternoon, listening on my headphones while doing some work. So generally minding my own business. However I nearly spilt my coffee when the anchor suddenly asked one of the guests whether he thought Jim Reid was "crazy" for the conclusions of his latest report. I suppose they say all publicity is good publicity. One pastime I'm strangely addicted to is occasionally reading the comments section of the more 'far out there' financial market blogs whenever they quote one of my pieces. Yesterday was no exception with hundreds of comments from readers at the bottom of one questioning me (a polite way of putting it), my profession and then discussing numerous random conspiracy theories which in the past have included whether or not man walked on the moon. To be fair, my dearly departed father was absolutely convinced that man on the moon was a Hollywood stunt. I spent years trying to have a rational conversation with him about it. Alas I never got him to change his mind.
Hollywood are unlikely to make a movie about the last 6 days of trading as the S&P 500 (+0.11%) saw its 6th consecutive session where the intraday range was no larger than 0.35%. This is the first time that this has happened since Bloomberg started collating intra-day data back to April 1982. I suspect with the Fed concluding their FOMC today this run will come to an end.
For those who may have missed it, DB’s Peter Hooper and his team expects the reinvestment tapering to begin on October 1 and that the Committee will also signal, via its economic projections and in Yellen’s commentary during the press conference, that it still anticipates raising rates one more time this year so long as incoming data are supporting its projections for inflation and growth. In their view, the median Fed expectation of three rate hikes next year will likely also remain intact despite downward revisions to individual forecasts.
Staying in the US, Trump’s debut speech at the UN general assembly seemed to have lots of punchy rhetoric but little material policy implications. On North Korea, he said “if US is forced to defend itself or its allies, we will...totally destroy NK” and that “rocket man is on a suicide mission for himself and for his regime”. On Iran, he said its nuclear program is “an embarrassment to the US” that should be revisited. He also stressed the importance of sovereignty for individual nations, noting “as president of US, I’ll always put America first”. Finally, on the UN, he said the institution was often associated with “bureaucracy and process”, although later noted that he hopes disputes would be resolved via the UN. Notably, other world leaders including Germany’s Merkel, Russia’s Putin, UK’s May and China’s President Xi were absent from the meeting given their domestic commitments.
Turning to Europe, Reuters reported that the Euro’s strength is causing a rift among ECB policymakers on the timing and approach to the unwinding of QE. Sources told Reuters that Germany is ready to wind down the bond purchase program, while others prefer to reduce the monthly pace of buying, with earlier reports suggesting the scenarios discussed involved reducing the monthly buying to €20bln-€40bln (from €60bln). The split of opinions may mean no definitive end date for QE will be set when officials formally met in October. There was some talk of a delay on the decision until December.
Looking at how markets are kicking off on FOMC day over in Asia, we've pared back earlier losses following stronger than expected Japanese August import (15.2% yoy vs. 11.6% expected) and export (18.1% yoy vs. 14.3% expected) figures. As we type, markets are mixed but broadly unchanged, with the Kospi (-0.04%) and ASX 200 (-0.19%) down slightly, while the Nikkei is flattish and the Hang Seng is up 0.23%. Notably, Japan’s Abe is holding a press conference on 25 September, with speculation suggesting that a snap early election will be called. Returning to yesterday, US equities edged up slightly with all three bourses at fresh all-time highs. The S&P and Nasdaq were both up 0.1% and the Dow rose 0.18%. Within the S&P, gains were led by the telco sector (+2.25%), partly buoyed by merger talks between Sprint and T-Mobile. European markets were also higher, but little changed, with the Stoxx 600 (+0.04%) and DAX (+0.02%) broadly flat, while the FTSE 100 advanced (+0.30%) for the second consecutive day.
Core bond yields were also little changed, with Bunds and French OATs 10y yields down slightly (c0.5bp), while 10y Gilts continued to underperform (+2.7bp).
Elsewhere, peripherals have continued to outperform, with Italian and Spanish 10y yields down 2.5bp and 3bp respectively. Over in the US, yields were slightly higher (2Y: +0.5bp; 10Y: +1.6bp) yesterday, but are firmer (-0.7bp) this morning. Turning to currencies, Sterling was range bound intra-day on reports of whether Foreign Secretary Boris Johnson will resign or be sacked after his unauthorised Brexit manifesto but closed the day little changed (+0.06% vs. USD). Elsewhere, the US dollar index dipped 0.28% and the EURUSD gained 0.33%. In commodities, WTI oil rose 0.57% and Iron ore fell 4.06% as concerns build that Chinese steel production may be close to a peak. Precious metals have slightly recovered (Gold +0.28%; Silver +0.60%) after two consecutive days of weakness, while industrial metals broadly rose, with Copper (+0.04%), Zinc (+2.23%) and Aluminium (+1.38%) all up modestly.
Away from the markets and back to Brexit. Yesterday was an evolving day on the political front. Initially, the Telegraph reported that Foreign Secretary Boris Johnson may quit if PM Theresa May oppose his Brexit demands in her big speech later this week. Perhaps in response to this, Bloomberg reported that PM May has called a special cabinet meeting and avoided answering whether Johnson will resign or not. Then finally, later reports suggest the situation has been defused with Johnson planning to attend her keynote speech at Florence and that PM May plans to pay €20bln divorce payment to the EU to kick start the stalled Brexit talks. We can’t wait to hear what she has to say.
Elsewhere, the FT reported that France’s Emmanuel Macron will outline his proposal for EU reform in a speech on 26 September, potentially including themes such as a separate budget, a finance ministry and an EU monetary fund. This broadly echoes earlier comments made by EC President Juncker in his State of Union address where he called for a tighter EU integration.
Finally, the power of Amazon on traditional bricks and mortar stores has been shown again with Toys R US officially filing for Chapter 11 after c12 years under private equity ownership. Notably, its October 2018 bond now trades at 26c versus 97c at the start of this month. Elsewhere, S&P noted that 24 US retailers have filed for Chapter 11 this year, compared to 18 for all of 2016. So in a low default world the retail sector is certainly bucking the trend.
Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, August housing starts were soft, edging down 0.8% mom (vs. 1.7% expected), in part due to the impact of Hurricane Harvey. However, building permits were stronger than expected, rising 5.7% mom (vs. -0.8% expected) and leaves annual growth at 8.3% yoy. The level of permits has now returned to 1.3m, which is in line with this year’s high in January. Moving along, higher fuel prices have helped to drive a 0.6% mom increase in import prices in August (vs. 0.2% expected). Elsewhere, the 2Q current account deficit was -US $123.1bln (vs. -US$116bln expected), equivalent to c2.6% of GDP.
In Germany, the ZEW survey was above market expectations in the lead up to elections. For the current situations component, the reading came in 87.9 (vs. 86.2 expected) and on the expectations component, it was also higher at 17 (vs. 12 expected) – the highest in ten months. In the Eurozone, the ZEW survey on expectations rose to 31.7 (vs. 29.3 previous), while the July construction output came in at 0.2% mom (vs. 0.2% previous).
Looking at the day ahead, Germany’s August PPI will be out early in the morning (0.1% mom, 2.5% yoy expected). In the UK, there is retail sales for August (0.1% mom for core expected). Over in the US, data wise there is MBA mortgage applications and existing home sales. Onto other events, the main story is the FOMC rate decision in the US, followed by Yellen’s press conference at 14:30 EDT. Elsewhere, EU’s Chief Brexit negotiator Michael Barnier will speak and the OPEC’s panel of technical representatives will meet to discuss production cuts.