Quiet Tuesday as FOMC Gets Under Way

new europe

  • Politics seem to dominate the talking points today
  • The FOMC meeting gets underway today with the outcome announced tomorrow
  • BOE and BOC comments impacted markets yesterday
  • The pressure on EM FX continues; Hungary central bank is expected to keep rates steady at 0.90%

The dollar is mostly softer against the majors on a subdued Turnaround Tuesday.  The Antipodeans are outperforming, while the yen and Swiss franc are underperforming.  EM currencies are softer.  CZK and PHP are outperforming, while KRW and INR are underperforming.  MSCI Asia Pacific was up 0.6%, with Japan markets up 2% after reopening from holiday.  MSCI EM is down 0.3%, with the Shanghai Composite falling 0.2%.  Euro Stoxx 600 is down 0.1% near midday, while S&P futures are pointing to a higher open.  The 10-year US yield is down 1 bp at 2.22%.  Commodity prices are mostly higher, with WTI oil up 0.9%, copper flat, and gold up 0.1%.

Politics seems to dominate the talking points today.  Boris Johnson’s weekend op-ed has been rejected by May, and there is talk that Johnson may resign or fired. Sterling is consolidating after pulling back yesterday.

Japanese politics is front and center.  Abe says he will decide whether to call a snap election when he returns from the US, where is headed soon for the UN.  The yen’s weakness looks to be more a function of the rise in US yields.  The 10-year yield had reached almost 2% before rebounding and now is a little above 2.2%.  The Nikkei’s nearly 2% rally may have also been partly a little catch up after being on holiday on Monday.

The New Zealand dollar is recouping yesterday’s losses.  The election on September 23 is still seen as too close to call.  It could very well turn on the performance of smaller parties as a coalition government looks necessary.  New Zealand reports Q2 GDP figures.  Some are suggesting that it could be the key to the election.  The economy expanded 0.5% in Q1 and is expected to have grown a bit faster in Q2, though the year-over-year rate may not improve from the 2.5% year-over-year pace.

There are some notable option expiries today.  The euro has options struck at $1.1950 (648 mln) and $1.20 (500 mln).  There are options struck at 111.50 ($382 mln) and the New Zealand dollar at $0.7295 (378 mln).

The FOMC meeting gets underway today with the outcome announced tomorrow.  Ahead of that, today the US reports August housing starts, which should recover a bit from July’s unexpectedly large 4.8% decline.  The impact of the hurricanes will likely distort the time series starting in Q4.  The Fed’s challenge of setting the appropriate monetary policy for the economy is all the more difficult if the economic data becomes distorted.

Still, over the past week or so, the market has moved to recognize a somewhat greater chance of another Fed hike by the end of the year.  This effectively means the December meeting.  The CME’s calculation puts the odds at 55.8%, interpolating from the Fed funds futures strip.  This is up from around 37.5% a month ago and 41.3% a week ago.  Bloomberg’s calculation puts the odds at 49.1% up from 35.2% a week ago.

The increase perceived likelihood has not done the dollar much good against the euro, where the single currency traded above $1.20 today for the first time since September 11.  The euro recorded the recent high on September 8 near $1.2090. The next key retracement target is near $1.2165, which is 50% of the single currency’s drop from mid-2014.  The dollar’s gains against the yen were extended toward JPY111.85.  The next level of resistance is seen near JPY112.00-JPY112.20.

Carney said that if the UK does hike it will be gradual and limited.  The markets did respond dramatically to the BOE minutes and suggestions by even some of the doves that rates may need to be lifted, but there is still a good reason to be a little skeptical.  Carney has intimated the same thing several times during his tenure, and the base rate is lower now.  It is possible that buying a few more months can see price pressures peak.

The Bank of Canada is pushing back against recent Loonie gains.  Deputy Governor Lane said yesterday that the bank is paying close attention to the exchange rate, and that it will take it into account when setting policy.  Bloomberg consensus sees BOC hikes continuing into 2018, with three hikes priced in for next year.  This strikes us as a tad too hawkish.  The next policy meeting is October 25, and no change is likely then.

RBA minutes were released overnight.  It sees a solid and employment outlook, but is concerned about risks stemming from rising household debt.  For now, the bank seems comfortable keeping rates steady.  Bloomberg consensus sees the first RBA hike coming in Q4 2018, which for now seems appropriate.

Besides August housing starts and building permits, the US reports Q2 current account and August import price data.  The Fed speaking embargo remains in place until this Friday due to the FOMC meeting Wednesday.

The pressure on EM FX continues, thought it has eased somewhat from Monday.  The losses this week have been broad-based, but we can’t really call it “risk off” when global equity markets are still making new highs.  MSCI EM is at its highest level since August 2011 and is on track to test the April 2011 high near 1212.  The divergence between EM FX and EM equities is puzzling.

Hungary central bank is expected to keep rates steady at 0.90%.  However, we think the bank is likely to ease further by unconventional means.  It has reduced the cap on commercial bank access to 3-month deposits quarterly, and will likely do so again at this meeting.

Poland reports August industrial and construction output, PPI, and real retail sales.  Consensus y/y gains are 5.9%, 24.0%, 2.9%, and 6.7%, respectively.  While the economy remains robust, central bankers remain extraordinarily dovish.  Some officials are saying no hikes at all in 2018.  Next policy meeting is October 4, no change seen then.