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The day has come when the boxed-in Fed has no choice: with the vast majority of the market expecting a rate hike, Yellen has to deliver or suffer a crushing confidence blow like no other. And deliver she will, with expectations that said hike will be “as dovish as possible”, which however as we explained yesterday, is not really possible. For now however, the market is desperate to convince itself that just as more easing and more QE were bullish for the market, so rate hikes are just as bullish. Recall from late 2013: “tapering is not tightening,” then the 2015 version of this refrain is “tightening is not tightening.”
It remains to be seen just what happens after the Fed’s announcement but in the last few hours before it, the surge higher in global stocks and equity futures continues as the last ounces of a “dovish rate hike” are fully priced in. Asian and European stocks, S&P futures all rise ahead of Federal Reserve’s rate decision. The Dollar is little changed vs euro. Oil, however, has held its losses after late news last night that the U.S. plans to lift the 40-year-old ban on crude oil exports, which in itself will have little impact on oil prices, but as Virendra Chauhan at Energy Aspects in Singapore says “The deal to lift the crude ban is a significant change in U.S. policy, but in terms of the near-term impact on prices, we expect that to be blotchy and sentiment driven. All that you’re doing is transferring the glut from the U.S., where most of the storage capacity is, to elsewhere in the world.“
So with less than 8 hours until the Fed’s historic announcement – and for the best indicator of how the market will respond to the Fed’s announcement at 2pm just keep an eye on the USDJPY as it will dictate every other class, this is where we stand.
Aside from the Fed countdown, here are some of main overnight news:
As noted above, overnight markets were in a euphoric state, starting in Asia where stocks traded higher tracking the positive close on Wall St., following the continued rebound seen in energy prices ahead of the FOMC meeting later on today. The energy sector outperformed across all bourses, particularly in China where the sector rose by more than 6% in the Hang Seng (+2.0%) index.
Nikkei 225 (+2.6%) was led higher by telecom stocks, which were supported after Japan’s communication ministry panel did not push for mobile carrier rate cuts.
“Markets had time to prepare for this day, with investors winding back risks ahead of the event,” Tim Schroeders, a portfolio manager who helps oversee about $1 billion in equities at Pengana Capital Ltd. in Melbourne, said by phone. “What happens after the Fed rate hike is difficult to tell, especially since we’re coming into a quiet period around Christmas and New Year.”
10yr JGBs traded lower as the firm risk sentiment in markets dampened demand for safer assets, while the BoJ entered the market to purchase JPY 1.1trl in government bonds.
Top Asian News
In Europe, despite opening in the green, European equities (Euro Stoxx: +0.6%) briefly slipped into the red before then moving higher again in what has been a choppy session so far. In terms of a sector specific breakdown, defensive sectors lead the way higher, namely healthcare, while the energy sector continues to outperform after WTI and Brent managed to avoid fresh multiyear lows in the wake of yesterday’s build in API crude oil inventories.
Despite the early lack of direction in equity markets, with sentiment on edge today Bunds have moved higher throughout the European morning and reside in positive territory with analysts at Informa noting that bund options have been attracting some mixed put interest, while the curve steepening has slowed ahead of the FOMC decision later today. This comes after heavy losses seen in the German benchmark yesterday, and amid light supply today.
Top European News
In FX markets, the USD dictated play this morning, with the greenback gaining against EUR, GBP and JPY, with levels being broken in the form of the 122.00 level to the upside in USD/JPY and 1.5000 to the downside in GBP/USD. This morning has seen a number of data points out of Europe (Manufacturing PMI 53.10 vs. Exp. 52.80) and the UK (Jobless Claims Change 3.9K vs. Exp. 0.8K), however with reactions relatively muted given the focus on the FOMC later.
Asia-Pacific hours saw the continued divergence between CNH and CNY, with analysts at Informa noting that according to Citi data, short positions in CNH fell marginally last week, while contrasting data from BofAML shows that real money names have resumed selling after a brief spell of being net buyers.
The energy complex heads into the North American crossover seeing softness across the board, with WTI and Brent both in the red on the day, with the former residing around the USD 37.00/bbl handle and the latter below the USD 38.00/bbl handle. This comes after API crude oil inventories showed a build of 2300k (Prey. -1900k) and ahead of DoE crude oil inventories later today (Exp. -1500k, Prey. -3568k).
Gold was stable overnight and trades in modest positive territory as participants remained tentative ahead of today’s much awaited, key-risk FOMC decision. Elsewhere, copper and iron prices were mildly supported amid short-covering and an improvement in global risk sentiment. Finally, steel rebar futures showed some signs on stabilising overnight after the May future rose 1 %, although analysts warn that gains could be short-lived due to a lack of demand in China.
As well as the aforementioned Fed rate decision, today sees US housing starts, building permits and manufacturing PMI.
Bulletin Headline Summary from Bloomberg and RanSquawk
US Event Calendar
DB’s Jim Reid concludes the rest of the overnight wrap
Despite Oil markets down around half a percent this morning, bourses in Asia are following much of the strength from yesterday’s showing in the US and Europe. There are broad-based gains across the bulk of the region with +2% gains for the Nikkei, Hang Seng, Kospi and ASX. Markets in China haven’t quite been as impressive although the Shanghai Comp and CSI 300 are still up +0.71% and +0.41% respectively. Credit markets across Asia, Australia and Japan are generally 2-3bps tighter also. US politics is also attracting a bit of attention with the news that US congressional leaders have agreed on a plan that will see the 40-year old ban on crude oil exports lifted. According to the FT the new spending plan would also avoid a looming possible government shutdown. The House is due to vote on the bill on Thursday.
On another day yesterday’s data would have probably garnered more attention than it perhaps got. That being said, yesterday’s inflation numbers in the US coming in more or less in line with expectations will have given FOMC policymakers one last sigh of relief. Headline CPI for November printed at 0.0% mom which was in-line with expectations, while the YoY rate nudged up to the highest this year at +0.5% (vs. +0.4% expected), a rise of three-tenths from October as some of the energy price reductions rolled out from last year. The monthly core reading also met expectations at +0.2% mom which has helped to push the YoY rate up one-tenth to +2.0%. Meanwhile, the December Empire manufacturing reading improved to -4.6 from -10.7 in November, with the new orders and inventories components also showing improvement. Elsewhere the NAHB housing market index was down 1pt this month to 61 (vs. 63 expected) and has dipped lower for two consecutive months now.
Over in Europe we saw the German ZEW survey for December rise 0.6pts to 55.0 (vs. 54.2) with the expectations survey also up, rising 5.7pts to 16.1. Over in the UK, headline CPI was a bit better than expected last month although still at a lowly 0.0% mom (vs. -0.1% expected). The YoY rate edged up two-tenths to +0.1% while the core was up one-tenth to +1.2% as expected. Sweden also generated a few headlines after the Riksbank made no change to its current policy rate of -0.35% and its current asset purchasing program, while also coming across a bit more hawkish than anticipated in its post-meeting statement.
Looking at the day ahead, the focus in the European session this morning is set to be on the flash December PMI’s where we’ll get the manufacturing, services and composite prints for the Euro area, Germany and France. The latest batch of UK employment indicators are also expected this morning, along with the November Euro area CPI reading. It goes without saying that the focus this afternoon will be on the conclusion of the two-day FOMC meeting where we’ll get the decision at 7pm GMT. The associated dot plots and any potential revisions will be closely scrutinized, while Fed Chair Yellen’s post meeting press-conference will also be in the spotlight. Prior to this, the economic data due out in the US today includes November housing starts and building permits, industrial and manufacturing production, capacity utilization and finally the flash December manufacturing PMI.
See you all on the other side.