Futures Coiled As Traders Brace For Fed Rate Hike

Bulletin Headline Summary from RanSquawk

  • European bourses have put in a mixed performance thus far (Eurostoxx 50 +0.2%) ahead of the FOMC rate decision
  • In FX, DXY eyes 94.00 to the upside ahead, GBP the G10 laggard following UK CPI
  • Looking ahead, highlights include US PPI, DoEs, FOMC rate decision and press conference

After yesterday's surprisingly contained session, in which the priced-in Singapore summit made little impact on markets, so far today we have seen contained markets with little to note, as is usually the case in the pre-FOMC
session.

Commenting on the action so far this week, DB's Jim Reid writes that:

"it might be a packed week for big events but so far it’s hard to argue that anything has gone against the grain. The US-North Korea Summit passed without barely moving the dial. Yesterday’s US CPI report was bang in line with expectations and the Brexit vote seems to have provided enough to keep all sides happy for now. Will the Fed this afternoon buck the trend and bring a bit of volatility and fizz back to markets?"

European markets rose, as did S&P futures as investors await today's 2pm Federal Reserve 25bps rate hike, which the market sees as a 100% certainty.  Here is UBS' Paul Donovan on today's Fed action:

Today sees a new era dawning, with the US Federal Reserve expected to raise interest rates another quarter point. Rates of 2% are back to where we were almost 10 years ago. The Wall Street Journal reported that the Fed may hold a press conference every meeting. This would just bring the Fed into line with other central banks, and is probably not a policy signal.

The looming Fed rate hike came in tandem with a plethora of M&A newsflow overnight that began after a US judge ruled AT&T could proceed with its acquisition of Time Warner without any conditions imposed, which in turn underpinned several media and telecom names on the prospects of open M&A floodgates.

The dollar nudged rose to a 7 month high in advance of the higher US interest rate with Treasury yields, and emerging-market currencies extended a drop. The dollar strength was aided by a report that Trump said $80BN in agriculture purchase commitment from China was insufficient, rekindling the fear of potential trade wars. In related news, there were also comments from White House trade adviser Navarro that President Trump is planning to impose tariffs on a subset of China imports that were part of an initial list of around USD 50bln in goods, while reports also noted speculation this could be in place as soon as Friday.

Italian assets supported by further conciliatory comments from perceived eurosceptic Savona, while the Italian FTSE MIB rose +0.9%. Italian BTPs were supported from the open and also by solid long-end demand at today’s auction, conversely bunds pressured by surprisingly weak 10y auction; USTs hold in tight range, curve marginally flatter. Crude futures near yesterdays lows, still in reaction to yesterdays reports of Russian proposals for higher supply.

Earlier, Asian stocks traded subdued, with Japanese shares rose as the yen dipped, while equities fell in Hong Kong and Australia. Chinese shares also retreated, with ZTE Corp. plunging by its daily limit after it agreed to a $1 billion fine; Nikkei 225 (+0.4%) outperformed and was kept afloat by JPY weakness, while Shanghai Comp. (-0.9%) and Hang Seng (-1.2%) were lower amid expectations of a looming Fed hike and China to follow suit by raising rates on its repo and lending facilities.  Trade concerns also resurfaced as President Trump stated that $80BN agriculture purchase commitment from China and with trade adviser Navarro suggesting that Trump is to impose some tariffs on China.

The Bloomberg Dollar Spot Index rose to a seven-month high as investors speculated that the FOMC will hike the "dots" and signal that it will hike rates a total of four times this year. And as always when the DXY strengthens, emerging-market currencies came under pressure. In other global FX, EURUSD traded up 0.1% around 1.1760 amid light flows ahead of Thursday’s ECB decision where Draghi is expected to preview the end of QE.

  • USD/JPY holds near Asian session highs and above 200DMA; TRY much weaker after latest poll shows election risks possibly greater than expected.
  • Cable fell a fourth day to a session low and weakened against all major currencies amid political jitters even as U.K. CPI data matched estimates; the biggest increase in auto-fuel prices in more than seven years helped keep price growth from extending a three- month easing
  • The Aussie reversed losses after earlier edging lower following comments by RBA’s Lowe that a rate hike is still some way off
  • The Japanese yen fell 0.2% to 110.63 per dollar, a three-week low
  • Turkey’s lira fell as much as 2.2% to a three-week low as polls pointed to a close-run election

Euro-area bonds edged north and Treasuries steadied. Italian bonds gained amid an auction of new debt. The yield on 10-year TSYs declined one basis point to 2.95%; German 10-year bund yields dipped less than one basis point to 0.49% while Britain’s 10-year yield declined two basis points to 1.401%, the lowest in a week on the biggest fall in almost two weeks. Italy’s 10-year yield dropped 9bps to 2.769%, the lowest in more than a week.

Ahead of today's FOMC rate hike, a China PBoC adviser said there is no need for the PBoC to follow Fed rate hikes in the long term. He added that the PBOC could still carry out small open market operations rate hike and that it was not necessary for China to lift the benchmark deposit and lending rates.

In other geopolitical news, North Korea said US President Trump agreed in summit to lift sanctions against North Korea and offer North Korea security, while North Korea also stated that US President Trump agreed to step-by-step denuclearization by the North in return for US concessions.

Commodities were subdued overnight amid a slightly firmer USD with WTI crude futures also hampered by an unexpected build in API crude inventories (+0.800M vs. Exp. -2.700M), with the pressure exacerbated on a break below USD 66.00/bbl and the prior session’s lows. This also came in the context of source reports suggesting Russia are to seek a rollback on oil cuts for most OPEC+ nations and propose OPEC+ share out 1.8mln bpd quota increase, with the plan said to leave 1mln bpd of involuntary oil cuts intact. In the metals scope Gold and base metals are all lower with traders tentative ahead of the FOMC’s rate decision later in the day.

On today's calendar, in addition to the Federal Reserve rate decision, data points include the MBA mortgage applications and US PPI.

Market Snapshot

  • S&P 500 futures up 0.09% to 2,786.50
  • STOXX Europe 600 up 0.1% to 387.95
  • MXAP down 0.4% to 174.47
  • MXAPJ down 0.7% to 570.27
  • Nikkei up 0.4% to 22,966.38
  • Topix up 0.4% to 1,800.37
  • Hang Seng Index down 1.2% to 30,725.15
  • Shanghai Composite down 1% to 3,049.80
  • Sensex up 0.5% to 35,857.01
  • Australia S&P/ASX 200 down 0.5% to 6,023.53
  • Kospi down 0.05% to 2,468.83
  • German 10Y yield fell 2.0 bps to 0.471%
  • Euro down 0.03% to $1.1742
  • Brent Futures down 0.3% to $75.67/bbl
  • Italian 10Y yield rose 2.3 bps to 2.592%
  • Spanish 10Y yield fell 3.6 bps to 1.415%
  • Gold spot down 0.2% to $1,293.66
  • U.S. Dollar Index up 0.1% to 93.93

Top Overnight News from Bloomberg

  • President Trump’s summit with North Korea’s Kim Jong Un produced a historic handshake but all the work lies ahead, with no benchmarks for progress, follow-up meetings scheduled or agreement on what success would look like
  • Following his meeting with North Korean leader Kim Jong Un in Singapore on Tuesday, U.S. President Donald Trump says “there is no longer a nuclear threat” from the Asian country
  • Kim Jong Un said Trump offered to lift sanctions against his regime when they met, state media reported, a claim that contrasts with the U.S. president’s rhetoric that the economic strictures would remain
  • Trump returns to Washington to face what may be the biggest threat to his presidency. Special Counsel Robert Mueller is intent on quickly resolving a central issue with Trump’s legal team: whether the president will sit voluntarily for an interview in the probe of Russian election meddling, according to current and former U.S. officials
  • For a Fed meeting where a rate hike is seen as a given, the stakes are still huge. Investors have piled into front-end wagers and curve plays betting on the timing and pace of tightening in the second half of the year
  • Theresa May won a key vote on Brexit, staving off a revolt from the pro-European wing of her Conservatives after offering concessions that make it likely Parliament will get a greater say in the EU divorce process
  • Mario Draghi is holding what might be the most awkward ECB meeting in his tenure. The session in Riga will have a notable absentee. Latvian Governor Ilmars Rimsevics is fighting corruption allegations
  • Russia plans to propose that OPEC and its allies be allowed to return production to October 2016 levels, rolling back most but not all of their output cuts, according to a person familiar with Russian thinking
  • A slump in euro-area industrial production is adding to a spate of underwhelming economic data ahead of Thursday’s ECB meeting that may set the course for future stimulus
  • Italy sold a combined 5.6b euros worth of bonds amid a calmer market in the first major test of investor appetite this month. The auction saw strong demand across all tenors except the seven-year notes

Asian stocks traded subdued with participants tentative ahead of the looming FOMC decision later today. ASX 200 (-0.5%) was dragged by weakness in energy and financials, although upside was seen in APA Group which surged over 20% after Cheung Kong Infrastructure made an offer for the Co. valued at AUD 13bln. This was also in tandem with a plethora of M&A newsflow overnight that began stateside after a US judge ruled AT&T could proceed with its acquisition of Time Warner without any conditions imposed, which in turn underpinned several media and telecom names on the prospects of open M&A floodgates. Nikkei 225 (+0.4%) outperformed and was kept afloat by JPY weakness, while Shanghai Comp. (-0.9%) and Hang Seng (-1.2%) were lower amid expectations of a looming Fed hike and China to follow suit by raising rates on its repo and lending facilities. Today saw the resumption of trade for ZTE shares from a 2-month halt which hit limit down in Shenzhen and dropped around 40% in Hong Kong after agreeing to pay a USD 1.4bln penalty to the US, while trade concerns also resurfaced as President Trump stated that USD 80bln agriculture purchase commitment from China and with trade adviser Navarro suggesting that Trump is to impose some tariffs on China. Finally, 10yr JGBs were flat amid similar uneventful trade in T-notes and a tentative tone in riskier assets, while the BoJ Rinban announcement also failed to spur demand with the total amount at a reserved JPY 505bln.  PBoC injected CNY 60bln via 7-day reverse repos, CNY 40bln via 14-day reverse repos and CNY 30bln via 28-day reverse repos, for a net daily injection of CNY 70bln.

Top Asian News

  • Li’s CKI Attempts Biggest-Ever Deal With $9.8 Billion APA Bid
  • ZTE Dives After Agreeing to $1 Billion Fine and Major Revamp
  • Ezion Falls After Converting Bonds to Shares at Discounted Price
  • China Is Said to Ease Some Curbs on Coal Imports, CCTD Reports
  • Philippine Central Bank Moves Policy Meet a Day Early to June 20

European bourses have put in a mixed performance thus far (Eurostoxx 50 +0.2%) ahead of the FOMC rate decision. The outperforming index is currently the FTSE MIB (+0.9%), with the IBEX flat following disappointing earnings from index heavyweight Inditex. The approval of AT&T’s merger with Time Warner by a US judge, is an event in focus by traders, as this could lead to M&A follow through, with specific focus on Sky and Deutsche Telekom. Glencore (+2.6%) has seen the resolution of Gécamines’ litigation in DR Congo following the writing off of USD 5.6bln in their subsidiary Katanga Mining. Dixons Carphone (-4%) is the latest co. to be hit by a data breach, with 105k payment cards compromised, and 1.2m records containing non-financial personal data.

Top European News

  • Dixons Says Almost 6 Million Cards Targeted in Cyberattack
  • Former BNP Gilts Trader Sues Bank After Being Fired for Bullying
  • Draghi Set to Boost Euro, Weigh on Bonds as Political Risks Dim
  • Russia Is Said to Seek Oil-Cuts Rollback for Most OPEC+ Nations
  • Hedging the Euro Before ECB Meeting is Most Expensive Since 2016

In FX, the DXY is hovering just below 94.000 and looking for anything further to keep the momentum going from the FOMC beyond an already factored in 25 bp hike. GBP: The G10 laggard, and once again undermined by UK data to a degree as CPI remained unchanged in May (m/m and y/y) vs some expectations for an uptick. Cable was drifting down towards 1.3300 as a result, before trimming losses ahead of the 2nd day of Brexit bill debate and voting before attention turns to the Fed. JPY/CHF/CAD: All extending recent loss vs the Dollar as Usd/Jpy finally soaks up all offers around 110.50 to trade up at 110.70 and technically through another key resistance level (110.62 Fib), while Usd/Chf is back in the upper end of a broad 0.9850-0.9900 band after mixed Swiss data (y/y PPI firmer than previous, but industrial orders slowed markedly). The Loonie is back under pressure and sub-1.3000 again vs its US counterpart as the NA disharmony continues to impact, and 1.3050 is the next upside chart target in sight. EUR: Holding around 1.1750 vs the Usd amidst expectations that the ECB will live up to recent more hawkish impulses (via sources and GC officials) tomorrow, but also checked by very large option expiries ranging from 1.1700-1.1800 and just above.

Commodities were subdued overnight amid a slightly firmer USD with WTI crude futures also hampered by an unexpected build in API crude inventories (+0.800M vs. Exp. -2.700M), with the pressure exacerbated on a break below USD 66.00/bbl and the prior session’s lows. This also came in the context of source reports suggesting Russia are to seek a rollback on oil cuts for most OPEC+ nations and propose OPEC+ share out 1.8mln bpd quota increase, with the plan said to leave 1mln bpd of involuntary oil cuts intact. In European trade, oil broke back above the USD 66.00/bbl level in the wake of the IEA monthly report forecasting stable oil demand, as well as Iranian and Venezuelan oil output possibly falling by almost 30%. The fossil fuel is still negative for the day, however, at USD 66.20/bbl. Further news in the oil sector emanated from the Kremlin with Russian President Putin not planning to discuss an exit from the global oil output deal with Saudi Crown Prince at their World Cup meeting. In the metals scope Gold and base metals are all lower with traders tentative ahead of the FOMC’s rate decision later in the day.

Looking at the day ahead, all eyes will be on the Fed when we get the outcome of the FOMC meeting, followed closely by Fed Chair Powell's statement and presser. Prior to that we get the May PPI report in the US, while in Europe we'll get May CPI / PPI / RPI prints out of the UK (core CPI of 2.1% yoy expected) and the final reading of Spain’s CPI. April industrial production for the Euro area is also due. Elsewhere, the BOE’s Kashyap will speak in London.

US Event Calendar

  • 7am: MBA Mortgage Applications, prior 4.1%
  • 8:30am: PPI Final Demand MoM, est. 0.3%, prior 0.1%; PPI Ex Food and Energy MoM, est. 0.2%, prior 0.2%
    • PPI Final Demand YoY, est. 2.8%, prior 2.6%; PPI Ex Food and Energy YoY, est. 2.3%, prior 2.3%

DB's Jim Reid concludes the overnight wrap

It might be a packed week for big events but so far it’s hard to argue that anything has gone against the grain. The US-North Korea Summit passed without barely moving the dial. Yesterday’s US CPI report was bang in line with expectations and the Brexit vote seems to have provided enough to keep all sides happy for now. Even my birthday celebrations passed without a hiccup notwithstanding the impact of one glass of bubbly at home last night. Will the Fed this afternoon buck the trend and bring a bit of volatility and fizz back to markets?

Well a 25bp hike is as good as given so that won’t be the shock but what our US economists also expect is the FOMC to drop its forward guidance language, which will advance the Fed another half-step along the path of policy normalization. Our colleagues believe the time has come to phase out the commitment to hold rates low for longer given that rates are now significantly above the zero bound and the Fed’s dual mandate has essentially been achieved.

Away from that they also expect the post-meeting statement to convey a modestly more upbeat message on domestic activity. Indeed changes to the summary of economic projections will likely include further reductions in unemployment, rate projections and slightly higher inflation, but their best guess for the 2018 median fed funds dot is that it remains at three, at least for now. Market pricing is fairly split between 3 and 4 hikes this year so it probably doesn’t require a hawkish signal to correct a mispricing. It’s worth noting that our economists are still pegged at 4 hikes by the end of the year.

As for the press conference, the team expect Powell to take note of solid prospects for aggregate demand growth given significant fiscal stimulus, the tightening labour market with prospects for more to come, gradual increases in wage inflation (such as ECI) and PCE inflation nearing target. On the downside, Powell should note that some downside risks have arisen associated with Italy and trade policy. Any mention of policy outlook will likely include reference to further gradual rate increases being in order and a summary of the median SEPs and dots. As an aside, it’s worth noting that a CNBC article which came out on Sunday suggesting that the Fed could have a surprise in store for today’s meeting has turned a few heads. The crux of the story was that the Fed could announce that it is bringing forward the date at which it aims to stop reducing its balance sheet to as soon as next year depending on financial conditions.

Finally on the Fed there was a story last night that they are considering a press conference every meeting instead of quarterly. The story gathered a fair bit of interest without making much difference to markets. The perception is that it wouldn’t change the Fed’s path but might slightly change their exact route and create a bit more volatility around what were previously non-presser meetings.

As for markets, they go into the Fed meeting coming off the back of a fairly unexciting last 24 hours of price action which reflects all the big events going to plan so far. The S&P 500 eventually finished last night +0.17% higher with the Nasdaq (+0.57%) closing at a new record high, while in Europe the likes of the Stoxx 600 (-0.11%), DAX (unch.) and FTSE (-0.43%) weakened slightly, weigh down by energy and materials stocks. Treasuries were only modestly weaker with the 10y back up +0.9bps while Bunds were little changed (-0.2bp). 10 year BTPs finished +1.3bps which is the smallest one-day move for 13 days. It’s worth noting that the BTP 365-day bill sale passed without any hiccups however today is likely to be a bigger test with an auction of 3-year, 7-year and 30-year bonds due. Meanwhile the US dollar index firmed for the third straight day (+0.22%) while EM currencies outside of the Turkish Lira (-1.63%) were a lot calmer. Finally, wheat prices jumped 3.9% after the USDA trimmed its outlook for Russian wheat production while Australia also lowered its domestic output estimate.

Overnight sentiment in Asia is mixed with the Nikkei up +0.42% as the YEN dipped, while the Hang Seng (-0.62%), Shanghai Comp. (-0.75%) and ASX200 (-0.69%) are down modestly as we type. Elsewhere, the US District Court has cleared AT&T’s US$85bn takeover of Time Warner after rejecting the Justice Department’s request for an order blocking the proposed deal. Reuters noted the approval could lead to further M&A activity in the media sector. After the bell, Time Warner and Twenty-First Century Fox’s share price was up 4.5% and 7% respectively.

Back to yesterday where the afternoon’s US CPI report threw up no real surprises as mentioned at the top after core CPI printed at +0.2% mom for May and so helping to push the annual rate up to +2.2% yoy and the highest since February 2017. Both of these were in line with expectations. The 3 decimal place core print was +0.171% mom so if you were leaning one way or the other then it was a touch on the softer side but certainly not enough to move the dial. The 3-month annualized rate of core CPI was steady at 1.8% while the six-month rate nudged up to 2.5%. Overall, the data certainly fits the narrative that core inflation has risen back towards the Fed target but isn’t showing signs of running away at the moment.

Elsewhere the UK government won a crucial Brexit vote in the House of Commons, with the UK's lower house rejecting an amendment put forward by the upper house (House of Lords) that would require the government to accept the direction of Parliament in the event that no deal was reached with the EU27. To win the vote they offered Parliament a lot of influence/oversight over the negotiations. DB’s Oli Harvey believes that while there are risks certainly still out there this is further evidence of a shift towards a softer Brexit. There is clearly no parliamentary majority for a hard (either Canada or WTO-based) Brexit deal and this vote makes that difficult to sign off. This expected move from our FX guys is one factor behind our bullish sterling recommendation from earlier this year. Sterling rallied as much as 0.4% following the vote, but pared back gains throughout the day to close marginally lower (-0.05%).

As for the US-North Korea Summit, well in a nutshell it was big on optics but light on details which was enough to keep the market happy. A twopage document was signed in which both leaders committed to “complete denuclearization of the Korean Peninsula” albeit within an undefined timeframe and without a defined path. Perhaps the most significant part of the meeting was just after it ended when China announced support for revising economic sanctions against North Korea. President Trump also said that the US would suspend military exercises with South Korea although troops are set to remain in the peninsula. President Trump himself called the meeting “a very great moment in the history of the world” and was full of praise for North Korea Leader Kim Jong Un, saying that the two have formed “a very special bond”. He also said that Kim is a “talented man” and a “worthy negotiator”. Compare that to how Trump felt at the end of the G7 meeting at the weekend when he tweeted that Trudeau was “meek and mild” and “dishonest and weak”. Who would have thought the leader of the US could on paper have a better relationship with the leader of North Korea than the equivalent at their closest neighbour Canada.

Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the May NFIB small business optimism index was above market at 107.8 (vs. 105 expected) - marking a fresh record high since September 1983. Firms indicated that they were more optimistic about the economy, with a record 34% of firms believing it to be a good time to expand.

Meanwhile, the May monthly budget statement was slightly wider than expected at -$146.8bln (vs. -$144bln) - the largest deficit for the month of May since 2009. In the UK, the April unemployment rate was steady mom and in line at 4.2%, which remains the lowest print since 1975. The headline average weekly earnings growth was in line at 2.5% yoy, but the ex-bonus growth slowed to 2.8% yoy (vs. 2.9% expected). In Germany, the June ZEW survey current situations index was below consensus at 80.6 (vs. 85 expected) while the expectations index for Germany (-16.1 vs. -14 expected) and the Eurozone (-12.6 vs. 2.4 previous) were both below market, in part due to the recent Italian politics and trade uncertainties.

Looking at the day ahead, all eyes will be on the Fed when we get the outcome of the FOMC meeting, followed closely by Fed Chair Powell's statement and presser. Prior to that we get the May PPI report in the US, while in Europe we'll get May CPI / PPI / RPI prints out of the UK (core CPI of 2.1% yoy expected) and the final reading of Spain’s CPI. April industrial production for the Euro area is also due. Elsewhere, the BOE’s Kashyap will speak in London.

Comments

ravolla ll951983 Wed, 06/13/2018 - 09:56 Permalink

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In reply to by ll951983

Silver Savior Wed, 06/13/2018 - 09:18 Permalink

Keep raising rates. The bottom will fall out of the housing market and the market will come back to it's senses. Housing falling to sub 2009 prices, at the same time gold and silver skyrocket in value.

ejmoosa Wed, 06/13/2018 - 10:17 Permalink

What are they bracing for?  They know what this means.

 

Higher rates leads to lower corporate profits leads to higher prices leads to higher rates.

 

Businesses are going to have to do something to pay off the increasing interest.