Dollar Builds on Post-FOMC Gains

  • The dollar firmed after the Fed hiked rates 25 bp; it is building on those gains today
  • The Italian drama continues; despite the ongoing budget battle, today’s Italian bond auction was well-received
  • Most German states have reported September CPI data that show accelerating inflation
  • US-China relations have worsened further
  • Taiwan central bank kept rates steady, Indonesia hiked 25 bp, and Philippines hiked 50 bp, all as expected
  • Argentina reports Q2 current account data; IMF program will be expanded

The dollar is broadly firmer against the majors in the wake of the FOMC decision.  Yen and Nokkie are outperforming, while the dollar bloc is underperforming.  EM currencies are mixed.  TRY and TWD are outperforming, while MXN and CZK are underperforming.  MSCI Asia Pacific was down 0.4%, with the Nikkei falling 1%.  MSCI EM is up 0.2% so far today, with the Shanghai Composite falling 0.5%.  Euro Stoxx 600 is down 0.4% near midday, while US futures are pointing to a higher open.  The 10-year US yield is flat at 3.05%.  Commodity prices are mixed, with Brent oil up 0.8%, copper down 1.1%, and gold up 0.1%.

The dollar firmed after the Fed hiked rates 25 bp, as widely expected.  It is building on those gains today, as the Fed was quite clear that it intends to continue tightening.  The euro is testing the downside after being unable to make a clean break above $1.18.  A break below $1.1635 is needed to set up a test of the September low near $1.1525.  US Treasury yields are lower after the FOMC decision, with the 10-year near 3.04% and the 2-year near 2.81%.

The Fed is sticking with its preferred rate path of one more hike in 2018, three in 2019, and one in 2020.  The Fed has stronger conviction with regards to that last hike this year, however, with 12 officials now seeing it vs. 8 in June.  Bloomberg’s WIRP suggests a 72.3% chance of a hike then.

The Fed added 2021 projections for the first time to the Dot Plot and it shows no rate hikes are planned after the terminal rate of 3.375% is reached in 2020.  The only other twist in the Dot Plots was that the longer-term rate edged up to 3% from 2.875% in June.  It was 2.75% in December.  The Fed dropped the phrase “accommodative” in describing policy, suggesting it is moving closer to a neutral stance.  However, Powell later said during the press conference that policy remains accommodative, and that markets shouldn’t read too much into the Fed dropping it.

As far as the growth forecasts go, it was raised to 3.1% from 2.8% in June for 2018 and raised to 2.5% from 2.4% for 2019.  The growth forecast was kept at 2.0% for 2020 and is seen slowing to 1.8% in 2021.  As we noted before the meeting, the 2018 forecast becomes less important as the first 2021 forecast comes into view.  The core PCE inflation forecasts from were kept unchanged at 2.0% in 2018, 2.1% in 2019, and 2.1% in 2020.  The new 2021 forecast was 2.1%.

During the North American session, the US reports quite a bit of data.  Advance August trade, wholesale inventories, durable goods orders, pending home sales, weekly jobless claims, and revised Q2 GDP figures will all be reported.  None are typically market-moving, however.

The Italian drama continues.  Finance Minister Tria is supposed to release his 2019 budget statement by midnight tonight.  Press reports suggest he will incorporate many of the ruling coalition’s populist spending plans, including Citizens Income.  However, reports also suggest that the coalition is pushing for a deficit equal to -2.4% of GDP.  This is much higher than the -1.9% figure that had been reportedly discussed as a compromise.

Despite the ongoing budget battle, today’s Italian bond auction was well-received.  Bid to cover ratio for the 10-year was the highest since May, and the average yield was 2.9% vs. 3.25% at the previous auction in August.  Italy was able to raise EUR5.2 bln in total.

Elsewhere, most German states have reported September CPI data that show accelerating inflation from August.  The national figure due out at 8 AM ET, and the state readings suggest upside risks to the consensus forecast of 2.0% y/y.  The ECB has recently reiterated that it is maintaining its forward guidance, which sees no tightening until after next summer.

US-China relations have worsened further.  President Trump at the UN accused China of meddling in the upcoming US elections, claiming that there is evidence.  Trump even suggested that he and President Xi may no longer be friends.  Trade talks were canceled over the weekend, and this week’s turn of events suggest that real ill will is building up on both sides.  Markets should be prepared for a protracted trade war.

Taiwan central bank kept rates steady at 1.375%, as expected.  The bank gave its first forecasts for 2019.  Growth is seen slowing to 2.48% from 2.73% this year, while inflation is forecast at 1.05% in 2019.  This suggests the bank is in no hurry to hike rates.  Note inflation was 1.5% y/y in August.  While the central bank does not have an explicit inflation target, low price pressures should allow it to remain on hold well into 2019.

Bank Indonesia hiked rates 25 bp to 5.75%, as expected.  Some analysts were looking for a 50 bp hike to 6.0%.  CPI rose 3.2% y/y in August, still below the 3.5% target and within the 2.5-4.5% target range.  However, the rupiah has been under pressure and so BI would do well to get further ahead of the curve.  Next policy meeting is November 15 and another hike then is likely if the rupiah remains under pressure.

Bangko Sentral ng Pilipinas hiked rates 50 bp to 4.5%, as expected.  CPI rose 6.4% y/y in August, well above the 2-4% target range.  The bank forecast inflation will remain above the target range in both 2018 and 2019, averaging 5.2% and 4.3%, respectively.  BSP remains behind the curve and needs to continue hiking to get ahead of it. The economy remains robust enough to handle further tightening.  Next policy meeting is November 15 and another hike then is likely.

Argentina reports Q2 current account data.  The economy is headed into recession and so the external accounts are likely to improve.  However, inflation is likely to move significantly higher and we suspect the peso is likely to remain under pressure.  Short-term, markets were happy to hear that the IMF expanded its program to $57.1 bln, with more funds to be disbursed up front.  The IMF said that the central bank will only carry out “limited intervention” in FX markets in case of “extreme overshooting.”