- We stick with our initial impression that the Fed was more hawkish than many expected
- The Bank of England meets but may be overshadowed by the Mansion House speeches tonight by Hammond and Carney
- Aussie is outperforming after stronger than expected jobs data
- EM monetary policy has decoupled from the Fed, at least for now; Bank Indonesia kept rates steady at 4.75%, as expected
- Central Bank of Turkey is expected to keep all rates steady; Chile central bank is expected to keep rates steady at 2.5%
The dollar is broadly firmer against the majors in the wake of the FOMC decision. The Aussie and yen are outperforming, while Nokkie and Kiwi are underperforming. EM currencies are broadly weaker. KRW and IDR are outperforming, while ZAR and MXN are underperforming. MSCI Asia Pacific was down 1%, with the Nikkei falling 0.3%. MSCI EM is down 0.9%, with the Shanghai Composite rising 0.1%. Euro Stoxx 600 is down 0.6% near midday, while S&P futures are pointing to a flat open. The 10-year US yield is up 2 bp at 2.14%. Commodity prices are mostly lower, with oil narrowly mixed, copper down 0.1%, and gold down 0.2%.
Reviewing the FOMC statement and Yellen’s comments, we stick with our initial impression that the Fed was more hawkish than many expected. The willingness of officials to look past the recent economic weakness and softness of prices is important. It also dropped a reference to the global economy and financial developments being monitored. Officials are simply more confident of the broad direction.
Indeed, as we have suggested before, the Fed is no longer worried about the recovery and expansion. It is accepted, and moreover, it seems to accept that trend growth has slowed, and that the US economy is growing near trend. Yellen was willing to dismiss the 3-4 month decline in core inflation to one-off factors.
Late in her press conference, Yellen suggested that the balance sheet adjustment could begin “relatively soon.” This is potentially an important tell. This is a strong hint that it will be initiated after the September FOMC meeting. This means that the third rate hike of the year, which the median dot plot still suggests will be appropriate, may come in December. Here the significant caveat is that the economy must evolve in line with the Fed expectations.
The US dollar has extended its gains today. The euro and the Swiss franc have recorded new lows for the month. Sterling’s attempt to recover from the election rout fizzled yesterday above $1.28 after the poor average weekly earnings data. News today that May UK retail sales were dismal compounds concerns that higher inflation and weaker earnings growth will undermine consumption, and through it, production.
UK retail sales, excluding auto fuel, fell 1.6%, the most this year. It follows a revised 2.2% rise in April (from 2.0%). The decline was widespread, in everything but fuel. Household goods sales fell 5.7%. Department store sales were off 0.8%, and sales at other stores fell 2.9%. The year-over-year pace fell to 0.9%, matching a four-year low.
The Bank of England meets. Although Forbes is likely to dissent again at this her last meeting, she has failed to persuade her colleagues, and a 7-1 vote is expected. The minutes will likely recognize the recent high frequency data and risks. Focusing on the signal, the strongest case will be made for a steady hand.
In some ways, a do-nothing MPC meeting may be overshadowed by the Mansion House speeches tonight by Hammond and Carney. Recall many expected Hammond to have lost his post if the Tories had been able to secure a majority in parliament. He is expected to make a case for a more pro-business Brexit, and while that sounds good, it is not clear what it means. Of course, the UK wants access to the single market, but the EU does not appear prepared to compromise on the four freedoms. The central trade-off of “control over national borders” and the single market remains as stark today as it was a year ago.
The only major currency that is gaining against the dollar today is the Australian dollar. It is trading at the upper end of yesterday’s range and trying to get a foothold above $0.7600. It began the month below $0.7400. A strong employment report is a key driver. The unemployment rate fell to 5.5% from 5.7%, and the participation rate ticked up to 64.9% from 64.8%. The country grew 42k jobs, four times more than expected even as the April jobs growth was revised to 46.1k from 37.4k. Those jobs Australia created were all full-time positions (52.1k).
There is an important caveat against taking the data at face value. It is the sixth month in the past seven that sample for the data was rotated. The data is not clean, and although the Australian dollar rose, Australian bonds rallied, with the 10-year yield easing almost five bp to 2.35%, and the equity market lost 1.2%, among the largest decline in the region.
Global equity markets are lower. The 0.9% drop in the MSCI Asia Pacific Index is the largest of the month. China and Taiwan were the exceptions. Their equity markets increased, but the Hong Kong market and the HK Enterprise Index fell 1.2% and 1.6%, respectively. In Europe, the Dow Jones Stoxx 600 is off 0.6%, for the third losing session this week after four last week. The 0.6% decline is being led by telecoms and materials, but no sector is gaining today.
The FOMC meeting may make today’s US economic data less potent. The Empire and Philly Fed surveys are for June and represent the new news, but May industrial output and manufacturing will draw attention. After 1.0% gains in both in April, the risk to the median guess (0.2% and 0.1% respectively) is to the downside. Treasury International Capital flows are reported at the close of the equity market. Import/Export prices and weekly initial jobless claims will draw little attention.
The euro’s low from late May is near $1.1110. A break of this area will likely be seeing the euro longs peel back. Below there is the 50% retracement of the euro rally since mid-May that is found near $1.1070. That said, the kind of topping pattern we are looking for suggests potential toward $1.10. The dollar is trading inside yesterday’s broad range against the yen. US yields are slightly firmer. We have found the direction of rates is often more important than level. Resistance is seen in the JPY110.00-JPY110.20 area, even though yesterday the dollar briefly traded a little higher.
The US dollar recovered smartly against the Canadian dollar yesterday after probing the lowest level since February. Some follow through US dollar buying has been seen despite a big adjustment to interest rate expectations for Canada. Looking at the derivative markets, it appears that more Bank of Canada rate hikes has been discounted than Fed hikes over the next year. Recall too that in the futures market, speculators had nearly a record short Canadian dollar position. A US dollar move above CAD1.3310 could spark a correcting the move that began at the end of last week’s CAD1.3340 area.
EM monetary policy has decoupled from the Fed, at least for now. Some EM central banks followed the Fed in lockstep with 25 bp hikes, but these were due to their currency pegs. These include Hong Kong, Bahrain, Saudi Arabia, and others. Countries that do not have a peg in place are finding that they do not need to match the Fed today.
Bank Indonesia kept rates steady at 4.75%, as expected. CPI rose 4.3% y/y in May, the highest since March 2016 and in the top half of the 3-5% target range. This should keep the central bank leaning hawkish, though a rate hike seems unlikely until late this year.
Central Bank of Turkey is expected to keep all rates steady. CPI inflation eased to 11.7% y/y in May, the first deceleration since November. With the lira remaining firm, this gives the central bank leeway to keep policy steady for now.
Chile central bank is expected to keep rates steady at 2.5%. May CPI rose 2.6% y/y, the lowest since November 2013 and within the 2-4% target range since August. The bank has signaled the end of the easing cycle after 100 bp of easing this year, but the data remain weak. If the recovery does not materialize, we would not rule out further easing.