Just one week after the Fed overwhelmingly voted to keep rates unchanged, in a move that was seen as a painfully dovish admission that neither the global nor the US economy are growing at anything close to a satisfactory pace, last night, in a very macabre speech which ended prematurely when a clearly unwell Yellen called it a day, the Fed Chair tried to once again lay out the case for a rate hike before year end.
The market, which clearly ignored the glaring contradictions in Yellen’s speech which said that overseas events should not affect the Fed’s policy path just a week after the Fed statement admitted it is “monitoring developments abroad”, and also ignored Yellen explicit hint that NIRP is coming (only the size is unclear), and focused on the one thing it wanted to hear: a call to buy the all-critical USDJPY carry pair – because more dollar strength apparently is what the revenue and earnings recessioning S&P500 needs – which after trading around 120 in the past few days, had a 100 pip breakout overnight, hitting 121 just around 5am, in the process pushing US equity futures some 25 points higher at last check.
So is that it? Has the confused market, after a 7-year liquidity addiction driven by an overly generous liquidity dealing Fed, decided to go cold turkey and accept that rate hikes are positive for risk? Hardly. But it will take the confused market the usual period of time before it realizes that Yellen’s deathwish on Emerging Market currencies is about to unleash havoc on global risk flows as we showed earlier this week.
And if rate hikes are bullish, then why flirt with 25 bps – why not just do 2.5% or better yet, 5%, and send the E-mini limit up.
Joking aside, another catalyst for the overnight surge in the S&P500 carry trade, the USDJPY, was Japan’s previously reported relapse into deflation for the first time since 2013, a clear indication that Abenomics is no longer working so, drumroll, more Abenomics is needed (i.e., more QE)!
The CPI announcement was followed by a meeting between Kuroda and Abe earlier this morning. Some, like the Nikkei, suggested the meeting was to discuss future monetary policy and further easing, something we have said is in the cards now that the ECB is off the table indefinitely and leaves the BOJ as the only source of incremental “outside money” flows into risk… Even if such a QE boost means the BOJ monetizes outstanding Treasurys that much faster and is forced to taper QE prematurely. That doesn’t matter: what matters is preserving the status quo in a regime in which central bank credibility is suddenly crashing every single day.
But back to markets, and where the aforementioned USDJPY did not take place until just before the European open, Asian equity markets traded mostly lower following Fed Chair Yellen’s less dovish than expected comments where she said she expects rate lift-off this year. Shanghai Comp. (-1.6%) led the declines on continuation of Chinese growth concerns, while the ASX 200 (-0.6%) conformed to the negative tone led lower by energy and large banking names.
Japan’s Nikkei 225 (+1.8%) fluctuated between gains and losses as strength in health care was offset by weakness in tech names, while Sharp (-8%) fell to record lows after it confirmed that it will miss its H1 profit forecast. JGBs initially tracked the losses in T notes post-Yellen comments but the better than prior enhanced liquidity auction added support.
But if Asia limped along, European equity markets positive blasted off (Euro Stoxx: +3.0%) heading into the North American crossover, bolstered not only by the global Yen carry but also by stock specific news as German automakers see a rebound from recent losses after German press reported that there has been no suggestion of BMW exhaust manipulation despite contradictory reports yesterday. However it is worth noting that Euro Stoxx remains lower by around 1.5% for the week on the back of the ongoing emissions scandal.
In FX, the final session of the week starts with USD dominating proceedings, with the greenback bolstered by comments last night from Fed’s Yellen (USD-index: +0.3%). Yellen’s comments yesterday were seen as less dovish than expected, whereby she said she expects rate lift-off this year – of course the Fed has been saying that for the past year. The real question is not if the Fed will hike rates in 2015 – it is when in 2016 Goldman will give the greenlight for a 2016 hike, if ever.
For now, however, USD has continued to strengthen throughout the morning to weigh on major pairs, with EUR/USD breaking below its 50 and 100 DMAs. USD strength also saw downside in fixed income markets, with T-notes heading into the North American crossover lower by round 11 ticks and Bunds Dec’15 futures trading below 155.50.
On today’s US event calendar we will get the third and final reading for Q2 GDP where the consensus expectation is for no change to the 3.7% print. We’ll also get the flash services and composite PMI readings along with the final September print for University of Michigan consumer sentiment. Fedspeak wise it’s the turn of Bullard and George today. Hopefully they will be better “hydrated” than Yellen.
Bulletin Headline Summary from Bloomberg and RanSquawk
- Less-dovish than expected comments from Fed’s Yellen have supported USD and weighed on fixed income products
- Equity markets have seen notable strength, bolstered by a rebound in automakers
- Today’s highlights include the tertiary reading of Q2 GDP and the final reading of University of Michigan sentiment, while comments are expected from Fed’s George and Bullard and ECB’s Weidmann
- Treasuries decline, headed for modest loss on the week, after Fed’s Yellen said in speech last night that she is ready to raise rates this year.
- Yellen also said she intends to let the labor market run hot for a time to heal the recession’s lingering scars; the Fed chair felt unwell due to dehydration toward the end of her speech and briefly sought medical attention
- After hovering near zero for months, the Bank of Japan’s main inflation gauge dropped into negative territory as weak domestic demand and plunging oil prices wiped out the impact of Governor Haruhiko Kuroda’s unprecedented monetary stimulus
- Prime Minister Abe’s reboot of his economic agenda has left analysts scratching their heads, after Japan’s leader unveiled three new policy pillars — strong economy, child care support, social security — without tying them to previous plan
- Money is leaving China faster than ever, according to a Bloomberg gauge tracking capital flows, as an estimated $141.66b left the country in August, exceeding the previous record of $124.62b in July
- Brazilian policy makers will ignore pressure from traders to increase borrowing costs and are confident that keeping interest rates on hold is sufficient to tame inflation, central bank President Alexandre Tombini said
- Four years after Obama’s August 2011 ultimatum that Syrian president Bashar al-Assad must go, world leaders descending on New York for the United Nations General Assembly are closer to agreeing that Assad can stay
- Volkswagen AG is set to appoint Porsche brand chief Matthias Mueller as its new CEO and announce the departure of top executives in a sweeping overhaul to begin repairing the carmaker’s image tarnished by rigged emissions tests
- Sovereign 10Y bond yields mostly higher. Asian stocks mostly higher; European stocks and U.S. equity-index futures gain. Crude oil and copper gain, gold falls
US Event Calendar
- 8:30am: GDP Annualized, 2Q T, est. 3.7% (prior 3.7%)
- Personal Consumption, 2Q T, est. 3.2% (prior 3.1%)
- GDP Price Index, 2Q T, est. 2.1% (prior 2.1%, revised 2.1%)
- Core PCE, 2Q T, est. 1.8% (prior 1.8%)
- 9:15am: Fed’s Bullard speaks on St. Louis
- 9:45am: Markit US Composite PMI, Sept. P (prior 55.7)
- Markit US Services PMI, Sept P, est. 55.6 (prior 56.1)
- 10:00am: UMich Sentiment, Sept F, est. 86.5 (prior 85.7)
- Current Conditions, Sept F (prior 100.3)
- Expectations, Sept F (prior 76.4)
- 1 Yr Inflation, Sept F (prior 2.9%)
- 5-10 Yr Inflation, Sept F (prior 2.8%)
- 1:25pm: Fed’s George speaks in Omaha, Neb.
DB concludes the key event wrap of the previous day
So after another volatile and ultimately weak day for risk assets once again yesterday, Fed Chair Yellen, speaking after markets closed, underlined her case that raising rates will be appropriate later this year but also sought to add some soothing words around the outlook for the US economy. Yellen said that ‘it will be likely appropriate to raise the target range of the federal funds rate sometime later this year and to continue boosting short term rates at a gradual pace thereafter as the labour market improves further and inflation moves back to our 2% objective’. Yellen suggested that this was the view of most FOMC participants and that the more prudent strategy would be to begin tightening in a timely fashion and at a gradual pace. Unsurprisingly, the Fed Chair highlighted the well versed transitory factors holding back inflation, namely lower energy prices and the stronger Dollar but made mention once again that these factors are expected to wane. The labour market was highlighted as ‘not being far away from full employment’, while her view on US economic prospects was that they ‘generally appear solid’.
While the overall tone felt certainly more upbeat relative to last week, warning signs were still signaled which should keep the market guessing. Yellen noted that ‘we cannot be certain about the pace at which the headwinds still restraining the domestic economy will continue to fade’ and that ‘recent global economic and financial developments highlight the risk that a slowdown in foreign growth might restrain US economic activity somewhat further’. While she was of the view that the Fed will be ready to move later this year, it was noted that ‘if the economy surprises us, our judgments about appropriate monetary policy will change’. December liftoff expectations have been given a boost following the speech with a move now priced at 49%, up from 43% this time yesterday. Markets are pricing in little chance of a rate rise next month however, still hovering around 18%.
Overnight in Asia the only major data point has been Japan’s August inflation print. Looking at the numbers and it was something of a mixed report with the CPI excluding fresh food figure slipping into negative territory for the first time since April 2013 at -0.1% YoY, although the number excluding food and energy rose to +0.8% YoY. The report and the potential implications of it for the BoJ’s purchase program has helped Japanese markets buck the trend in overnight action with the Nikkei up +0.7% whilst the Hang Seng fell -0.5%, the Shanghai composite fell -1.8% and the broad S&P Asia 50 was down -0.7%. Debate as to whether the BoJ will adjust their policy at their next meeting on October 7th will certainly continue after these latest reads.
Back to yesterday. Sentiment continues to be rocked in markets at the moment and yesterday’s news out of Caterpillar that the company is set to cut up to 10,000 jobs as well cutting its full year revenue forecast set a ripple effect through the industrials sector. Much like Wednesday, the S&P 500 did stage a +1% rebound off the intraday lows but it was too little too late once again as it finished the session down -0.34%. The index is in fact down 4.4% now from the highs shortly following the FOMC decision last week after the fifth daily decline in the last six days. The losses were steeper in the European session as the fallout from the emissions scandal spread to other carmakers with BMW now the latest to come under scrutiny. That saw the DAX (-1.92%) plummet to the lowest level this year while the Stoxx 600 sold-off -2.12% with YTD returns dipping into the negative territory for the first time this year. It’s amazing to think that the index at one stage in April had seen YTD gains as high as +21%. European credit markets were also weak yesterday with Crossover and Main widening 18bps and 5bps respectively. The commodity complex was actually relatively well behaved. WTI and Brent finished up just shy of a percent, while Aluminum (+0.13%) and Copper (-0.12%) were little moved. Gold was the outlier however after surging over 2% yesterday to the highest level in a month.
Meanwhile, it was a big day for Central Bank moves yesterday as we saw Norway, Taiwan and Ukraine all ease. The big surprise was in Norway where the Norges Bank cut the overnight deposit rate by 25bps to 0.75% and to an all-time low while at the same time hinted at further cuts ahead. The first cut by Taiwan since 2009 was also a surprise to the majority, while in the Ukraine borrowing costs were lowered for the second consecutive month. Refreshing our numbers and assuming the ECB as representing 19 CB’s, we make that 56 different Central Banks to have eased monetary policy this year, of which 13 by our count were a surprise relative to market expectations.
There was plenty of economic data for markets to absorb yesterday too. In the US August headline durable goods declined -2.0% mom, although slightly better than the -2.3% decline expected with the fall attributed to the volatile aircraft and defense components. Excluding transportation, the print was a smidgen behind consensus (0.0% mom vs. +0.1% expected). Core capex orders (-0.2% mom) fell as expected having risen 2.1% in July. Meanwhile, there was further weakness in the Kansas City Fed manufacturing activity index which printed at -8 (vs. -6 expected) for September. There was weakness also in the Chicago Fed national activity index (-0.41 vs. +0.24 expected) however better news was to be had in the housing sector. New home sales rose +5.7% mom in August (vs. +1.6% expected) with a decent upward revision to July also. That saw the annualized rate of new home sales rise 30k to 552k and the highest in seven years. Finally, initial jobless claims printed at 267k last week, nudging the four week average down to 272k and the lowest in more than a month.
Before this in Europe, headlines dominated by the emissions scandal overshadowed what was actually a relatively upbeat German IFO reading. The September business climate headline reading rose a modest 0.1pts to 108.5 (vs. 107.9 expected). This was given a lift by the expectations index which rose 1.1pts to 103.3 (vs. 101.4 expected) and the highest since April which offset a slight decline in the current assessment index to 114 (vs. 114.7 expected), a fall of 0.8pts. Our colleagues in Germany believe that the latest data supports their case of 0.5% quarterly growth in Q3, in line with what the composite PMI suggested.
Before we take a look at today’s calendar, one event which will be worth keeping an eye on this Sunday will be the election in Catalonia. Yesterday, DB’s Marco Stringa and Abhishek Singhania published a note updating the current situation and looking ahead to what the elections may mean further down the line. They note that the recent polls have suggested pro-independence Junts pel Si and CUP are set to win the majority of seats and are creeping close to the majority of votes as well. Junts pel Si has argued that an absolute majority would be sufficient to declare victory in the de-factor referendum for independence regardless of the share of votes in any case. It pledges to declare unilaterally the independence of Catalonia in about 18 months unless the central government allows a binding referendum on independence. Our colleagues are of the view that given there is little else keeping such a heterogeneous coalition together, the pair will continue on the pro-independence path. However, what makes this more difficult is that any changing in the Constitution to allow Catalonia’s independence appears to be an extremely demanding scenario from both a legal and political perspective. The team also think that from an economic and financial perspective, a unilateral declaration of independence by Catalonia would likely be a lose-lose outcome for both Catalonia and Spain. There is also the risk that the election will leave a deeply divided Catalonia and deep division between Catalonia and the central government, so a negative outcome can’t be ruled out. Marco and Abhishek ultimately believe that a compromise in 2016 seems the most reasonable scenario, but it won’t be easy.
Turning over to today’s calendar now then. It’s a fairly quiet end to the week in Europe this morning with just French consumer confidence and Euro area money supply data due. Over in the US this afternoon we will get the third and final reading for Q2 GDP where the consensus expectation is for no change to the 3.7% print. We’ll also get the flash services and composite PMI readings along with the final September print for University of Michigan consumer sentiment. Fedspeak wise it’s the turn of Bullard and George today.
