Trump On, Trump Off, Fed an Onlooker

Thursday February 2: Five things the markets are talking about

For anyone looking for significant clues to the future of Fed policy, yesterday’s FOMC statement was a real letdown. The announcement mostly reflects U.S policy makers’ caution in a time of political upheaval.

Nevertheless, the Fed indicated that they remain on track to gradually raise short-term interest rates this year, but gave no hint about when the next increase might come.

The official statement shows that U.S economic activity has continued to expand at a moderate pace, with jobs gains remaining solid and unemployment atop of its recent low. Will tomorrow’s non-farm payroll (NFP) report (08:30am EST) continue to support this? Officials reiterated that they expect only “gradual” increases in the fed-funds rate.

Fed fund futures now suggest a +69% probability of at least one rate increase by June – about the same level before the announcement – and a +71% chance of two increases by December.

1. Mixed responses from global stock indexes

For the time being, stronger U.S data continues to support ‘risk assets,’ however, investor uncertainty and concerns over Trump’s policies is putting global markets on edge.

Overnight in Asian, equities touched a four-month high as the dollar underperformed after the Fed stuck to its mildly upbeat economic view but gave no hint of accelerating rate hikes.

MSCI’s broadest index of Asia-Pacific shares, ex-Japan, was up +0.15% – touching its highest level since mid-October. However, gains were not broad-based in the region, with Hong Kong’s Hang Seng slipping -0.6% and Singapore down -0.8%. Even Japan’s Nikkei lost -1% on the back of a stronger yen (¥112.37).

In Europe, equity indices are trading mixed ahead of the BoE’s policy decision (07:00am EST) and a speech by ECB President Draghi scheduled at 07:15am EST. Financial are again leading the sector losses in the Eurostoxx while the FTSE 100 is being weighed by tech shares. Energy, commodity and mining stocks are providing some support in the index.

U.S equities are currently set to open a tad softer (-0.4%).

Indices: Stoxx50 -0.3% at 3,247, FTSE flat at 7,106, DAX -0.4% at 11,616, CAC-40 flat at 4,793, IBEX-35 +0.2% at 9,345, FTSE MIB +1.1% at 18,940, SMI -0.6% at 8,281, S&P 500 Futures -0.4%

2. Oil prices steady, gold still has support

Oil prices are steady ahead of the U.S open despite a sharp rise in U.S. crude and gasoline stockpiles yesterday. The market negatives continue to be mitigated by evidence that OPEC and other big exporters are cutting production.

Brent crude is up +5c cents at +$56.85 a barrel after settling up +$1.22 in the previous session. U.S. light crude (WTI) is down -5c at +$53.83 after climbing +$1.07 yesterday.

Weekly U.S. EIA inventories rose by more than double (+6.5m barrels to +494.8m) what was expected for the week ended Jan. 27, while gasoline stockpiles also increased sharply (+3.9m barrels to +257.1m).

Note: Oil stored at Cushing, Okla., the delivery point for U.S. stocks, decreased by -1.2m barrels to +64.1m.

Gold has edged up overnight (+0.4% to +$1,214.67 an ounce), resuming its gains after halting a three-day rally on Wednesday, on the back of a weaker dollar.

Platinum has printed a three-month highs this morning at +$1,004.60, its best since Nov. 10, 2016, while silver touched a 2-month high of +$17.63 in yesterday’s session.

3. U.S yields fall on Fed decision

It was natural to see the U.S bond market gets a boost as the latest Fed policy statement suggests the Fed is not in a rush for the next rate hike given the fiscal policy uncertainty.

The Fed called the near-term risks to the economic outlook ‘roughly balanced’ and indicated that they expect “only gradual increases” in rates. That suggests that the Fed may wait for a few more months and raise rates in the summer.

U.S 10’s are trading at +2.475% vs. +2.492% before yesterday’s Fed announcement. The policy sensitive two-year yield is +1.22% vs. 1.244%.

Given the lack of any new direction from the Fed, markets are likely to watch non-farm payrolls closely this week, and a stronger number could increase the probability of a March hike.

Elsewhere, Japanese 10-year yields rallied +2bps to +0.12%. That’s the highest print since the BoJ introduced negative interest rates over 12-months ago.

4. Dollar bulls continued to be squeezed

The FX volatility seen over recent days appears to have calmed, at least for the moment.

Currently, the ‘big’ dollar is maintaining its soft tone following yesterday’s FOMC statement and recent rhetoric from Trump officials. The Fed seems not to be in any hurry to adjust rates – market expectations are being slashed with dealers now pricing the possibility of a March hike at +18% odds, down from +28% prior the statement.

The pound (£1.2697) trades atop its two-month highs. No changes are expected from the BoE (see below) – officials are likely to reinforce their neutral policy stance and focus on Brexit risk and uncertainties. USD/JPY (¥112.35) continues to test key chart support ahead of the psychological ¥112 handle. Analysts believe a break of this and the market will be eyeing ¥111.00 rather quickly. Europe’s single unit (€1.0808) is holding up at the upper end of this week’s range.

One of the other big movers overnight has been the AUD (A$0.7670). It has found support after reporting a record trade surplus for the month of December (+A$3.5B vs. +A$2.0B e), supported mostly by the rise in prices of iron ore and coal to China.

5. Super Thursday – BoE to be all words no action

All eyes are on the Bank of England (BoE) interest rate decision and the presentation of its quarterly forecasts. Although rates are expected to be left “unchanged,” the BoE is likely to upgrade its growth and inflation forecasts.

The Inflation Report needs to reflect the more upbeat U.K activity data since November. Therefore, fixed income dealers expect above-target inflation to remain a feature of the updated forecasts, thus making it a tad difficult for Governor Carney to strike a “dovish” tone this morning.

Note: More inflation chatter will lead to more talk of interest rates increase if the U.K. economy continues to perform well, however, the neutrals should expect this argument to be somewhat counterbalanced by concerns about Brexit – perhaps an argument for sterling gains to be somewhat capped?

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