This morning the world awakes to a landscape in which markets are frantically rushing to catch up to a suddenly hawkish Fed which not only hiked for the second time in a decade but, as per yesterday’s Fed statement and Yellen press conference, realized it has been behind the curve all along, and the result has been a spike in the dollar across virtually all currency pairs with the USDJPY surging above 118.40, coupled with a jump in bond yields around the globe as bond (the US 10 Year is trading at 2.64%, the highest since September 2014) as traders dump any hint of duration.
The sentiment was notable in the analyst commentary this morning:
- “The Fed is becoming a leopard with new spots,” said Stephen Gallo, currency analyst at BMO Capital Markets in London. “The Fed has shifted its 2017 bias away from supporting growth with ultra-stimulative policies towards keeping a lid on inflation risk.”
- “Maybe Fed officials are more concerned about the prospects for a rise in inflation next year than they are letting on, given the potential boost a fiscal stimulus could bring, which was something they didn’t have to consider last year,” Michael Hewson, a market analyst at CMC Markets in London, wrote in a note.
- “You had the Fed come in and be a bit more hawkish that many people, including us, were expecting,” said TD Securities head of global strategy Richard Kelly. “It wasn’t just the move in the dots, it was the language that was used. There was an acknowledgement that if Trump gets his plans moving through congress you could see the economy pushing higher.”
DB’s Jim Reid had a different angle: it will be all about the volatility in rates in the coming year, as the Fed has officially unleashed the inflationary genie out of the bottle.
People in my profession have perhaps been guilty of over analysing the Fed in recent years when every small nuance was over examined when in reality they really haven’t done much over this period. However last night’s statement and press conference was full of interesting remarks and certainly landed on the hawkish side with the dots edging up with the median dot now showing 3 hikes for 2017 rather than 2 beforehand. Last night’s meeting broke a trend as prior to this, the last six FOMCs have seen treasury yields fall with the last seven seeing the dollar fall against the Euro. Not this time. The meeting fits in with our view that markets are vulnerable to a bond yield spike next year. Rates vol could be the main talking point of 2017.
In equities, after yesterday’s drop, the biggest since the election, Asian stocks fell but European equities rose driven by financials while S&P futures are already getting the BTFD treatment and trying to make up for Thursday’s drop .
It wasn’t just the Fed tightening monetary policy. Shortly after the Fed announcement, virtually all Gulf Arab states followed suit out of necessity to keep their dollar pegs. As Bloomberg notes, policy makers in Saudi Arabia, the United Arab Emirates, Kuwait, Bahrain and Qatar raised borrowing costs within hours after the Fed raised its benchmark rate for the first time this year. The prospect of further increases in U.S. rates next year will complicate efforts to bolster economic growth and ease a cash squeeze among Gulf banks as revenue from oil exports, the region’s main source of income, plummets.
However, while stocks are modestly higher, the big story this morning is all about the Dollar, which continues its relentless surge higher, in the process pushing the USDJPY, as the Yen tumbles over 1%, and sending the pair to 118.30, the highet level since the start of the year…
… but more notably the Euro, which moments ago also plunged by 1% to 1.043, dropping to the lowest level since January 2003.
The dollar also extended its advance against all major and emerging-market peers.
The bloodbath was not confined to FX, however, as global government bonds were left reeling this morning, with the 10Y Treasury spiking to 2.64%, the highest level in over two years, while European bonds likewise tumbled, sending 10Y yields surging as follows:
- Spain +6bps at 1.46%;
- Italy +6bps at 1.85%,
- Portugal +4bps at 3.82%,
- German +7bps at 0.37%;
- Dec. bund futures -95 ticks at 161.51
This all follows this morning record crash in Chinese bond futures, which sent local 10Y yields higher by 22 bps, the most on record, to 3.45%, as a plunging yuan and hawkish Fed comments damped expectations of monetary easing in China.
In early trading, stocks were ignoring the momentous moves in FX and rates, and for now stocks in Europe and US futures traded higher, with the Stoxx Europe 600 Index rising 0.3 percent, led by banks.Randgold Resources Ltd., Fresnillo Plc and Centamin Plc fell more than 7 percent with declines in precious metals, while Electricite de France SA sank the most on record after saying profit will drop next year. The VStoxx Index declined 9 percent to the lowest level since September 2014, signaling traders are pulling back from hedging against swings in euro area shares.
In the U.S., futures on the S&P 500 Index were up about 0.2% after the equity gauge posted its biggest loss in two months on Wednesday, however should the bond collapse continue we fear the green will quickly shift to red.
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Bulletin Headline Summary From RanSquawk
- European bourses enter the North American crossover higher with financials outperforming
- USD strength remains the key theme in FX markets with USD/JPY remaining north of 118.00
- Looking ahead, highlights include SNB, Norges Bank, BoE rate decisions, US CPI, Philadelphia Mfg Index, NY Empire and Weekly Jobs
Market Snapshot:
- S&P 500 futures up less than 0.2% to 2255.2
- Stoxx 600 up 0.2% to 356
- FTSE 100 down 0.2% to 6934
- DAX up 0.5% to 11302
- German 10Yr yield up 7bps to 0.37%
- Italian 10Yr yield up 5bps to 1.84%
- Spanish 10Yr yield up 5bps to 1.45%
- S&P GSCI Index up 0.1% to 391.5
- MSCI Asia Pacific down 1.7% to 136
- Nikkei 225 up 0.1% to 19274
- Hang Seng down 1.8% to 22059
- Shanghai Composite down 0.7% to 3118
- S&P/ASX 200 down 0.8% to 5539
- US 10-yr yield up 2bps to 2.59%
- Dollar Index up 0.67% to 102.44
- WTI Crude futures up 0.4% to $51.23
- Brent Futures up 0.8% to $54.33
- Gold spot down 0.4% to $1,138
- Silver spot down 1.7% to $16.56
Global Headlines
- Molina CEO Tells Aetna-Humana Judge Company Isn’t ‘Trivial’
- Exxon Names Darren Woods as New CEO to Replace Rex Tillerson
- Laureate Said to Raise Over $300 Million From Apollo, Abraaj
- Lonza Focuses on Health With $5.5 Billion Deal for Capsugel
- Dubai Said to Plan $36 Billion Spend on World’s Biggest Airport
Asian equity markets traded mostly negative as the region reacted to the FOMC rate decision and steeper projected rate path. This pressured US stocks and dampened bourses across Asia with ASX 200 (-0.8%) led lower by commodity names after around 4%-5% declines in oil and iron ore, while gold slumped around USD 20. Hang Seng (-1.8%) and Shanghai Comp. (-0.7%) were also weighed by the developments across the Pacific and as regulators continued to impact risk appetite, with the CIRC seeking to lower the total proportion of equity assets held by insurance funds to 30% from 40%. Nikkei 225 (+0.4%) outperformed as downside pressure was overshadowed by JPY weakness which resulted to firm gains in large auto names, while 10yr JGBs saw spill-over selling from T-notes and fell below 150.00 as yields rose across the curve in reaction to the prospects of a steeper Fed rate hike path. However, prices were off worst levels following a 20yr JGB auction in which the b/c increased from prior and tail in price narrowed. PBoC injected CNY 140bIn 7-day reverse repos, CNY 45bIn in 14-day reverse repos, CNY 60bIn in 28-day reverse repos.
Top Asian News
- Indonesia Keeps Benchmark Rate Unchanged as Rupiah Slumps on Fed: Decision was forecast by all but one of 21 economists surveyed
- China Deploying Weapons on Artificial Reefs, Think Tank Says: China appears to be deploying weapons systems on all seven of the reefs it has reclaimed in the South China Sea, according to Washington-based Asia Maritime Transparency Initiative
- Japan Said to Assess Risks Tied to Banks’ Treasury Holdings: FSA said to survey banks on their U.S. bond portfolios
- Top Nickel Shipper Drags Out Mining Audit as Lopez Holds On: Final results of checkup are now due in January, Philippines Environment Secretary Gina Lopez says
- Goldman’s Logistics Spat Fast-Tracked in Test for Indian Courts: Commercial court in Telangana to begin hearing case against an Indian logistics company on Dec. 29
European markets trade higher as analysts and traders digests the key points from last night’s FOMC rate decision. Financials are outperforming at the top of the leader boards with 3 rate hikes touted for next year. The materials sector is feeling the pinch after the stronger dollar and low gold prices take their toll. In equity specific news Lonza Group (LONN VX) have confirmed they are to buy Capsugel for USD 5.5bIn this sent shares tumbling to the bottom of the SMI down as much as 10%. Fixed income markets have seen prices fall dramatically at the start of the session, Bunds currently trade near session lows at around 161.58 but north of the contract low seen at 159.91. This was largely inline with the moves seen in the T-Notes after the FOMC statement. Gilts are also underperforming down 120 ticks but we could also see some more volatility with the BoE also today. Note a full preview is available on our headline feed.
Top European News
- EDF Sees Ebitda Falling to EU13.7b-EU14.3b in 2017
- Metro Group to Demerge, Split Into Two Separate Companies
- Lonza to Buy Capsugel for $5.5b
- H&M Sales Miss Estimates in November, 4Q
- SNB Joins Draghi in Warning of Dread for 2017 Political Calendar
- VW Posts First Europe Market-Share Gain Since Diesel Crisis
In currencies, the dollar gained 0.5 percent to $1.0486 per euro as of 10:38 a.m. London time. A move through $1.0458 would make the greenback the strongest since 2003. The U.S. currency climbed 1 percent against the yen, reaching the highest level since February. The Fed lifted its target for overnight borrowing costs by 25 basis points, or 0.25 percentage point, on Wednesday to a range of 0.5 percent to 0.75 percent. Policy makers expect three rate increases in 2017, up from the two seen in September.
In commodities, gold for immediate delivery was down 0.4 percent to $1,137.79 an ounce, sliding to its lowest price since February. The commodity has lost 14 percent since the end of September. West Texas Intermediate crude was up 0.5 percent at $51.28 a barrel, after Wednesday’s 3.7 percent slide. Libya is preparing this week to ship the first cargo from its largest export terminal in two years.
Looking at the day ahead, the main highlight data wise will likely be the November inflation report. The market is expecting headline CPI to increase +0.2% mom and the core to also increase +0.2% mom, a view also shared by our US economists. Meanwhile, the latest weekly initial jobless claims data will be out alongside Empire manufacturing and the Philly Fed manufacturing reports for December. Lastly the NAHB housing market index reading will be out too. Away from the data, Japan PM Abe and Russia President Putin are scheduled to hold a meeting aimed at proposing economic cooperation between the two countries. The ECB will also publish the net take-up for TLTRO II. Finally EU leaders are also due to gather to discuss migration and security issues, as well as debate the Brexit process in Brussels this morning.
US Event Calendar
- 8:30am: Current Account Balance, 3Q, est. -$111.6b (prior – $119.9b)
- 8:30am: Empire Manufacturing, Dec., est. 4 (prior 1.5)
- 8:30am: CPI m/m, Nov., est. 0.2% (prior 0.4%)
- 8:30am: Initial Jobless Claims, Dec. 10, est. 255k (prior 258k)
- 8:30am: Philadelphia Fed Business Outlook, Dec., est. 9.1 (prior 7.6)
- 9:45am: Bloomberg Consumer Comfort, Dec. 11 (prior 45.1)
- 9:45am: Markit U.S. Manufacturing PMI, Dec. P, est. 54.5 (prior 54.1)
- 10am: Freddie Mac mortgage rates
- 10:30am: Bank of Canada’s Poloz speaks in Ottawa
- 10:30am: EIA natural-gas storage change
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DB’s Jim reid concludes the overnight wrap
People in my profession have perhaps been guilty of over analysing the Fed in recent years when every small nuance was over examined when in reality they really haven’t done much over this period. However last night’s statement and press conference was full of interesting remarks and certainly landed on the hawkish side with the dots edging up with the median dot now showing 3 hikes for 2017 rather than 2 beforehand. Last night’s meeting broke a trend as prior to this, the last six FOMCs have seen treasury yields fall with the last seven seeing the dollar fall against the Euro. Not this time. The meeting fits in with our view that markets are vulnerable to a bond yield spike next year. Rates vol could be the main talking point of 2017.
The first takeaway was some of the subtle tweaks in the tone of the statement. The committee highlighted the “considerable” pickup in inflation compensation and also the “decline” in the unemployment rate. Risks were still referenced as being “roughly balanced” which is something DB’s Peter Hooper believes is the committee’s way of recognising the fact that risks may never be perfectly balanced. Meanwhile, there was a subtle shift in the way the committee recognises how accommodative policy is now, toning down the extent to which it is accommodative by adding “some” to the observation that it is enough to support some further strengthening in the labour market. The signalling of a gradual pace of rate hikes was left as is.
The dots caused the most excitement however. As highlighted at the top the median dot for 2017 rose to 3 hikes from 2. In fact the number of committee members now forecasting just 2 hikes or less next year is only 6 out of 17. It had been 10 committee members at the last forecast. In other words 4 committee members shifted to 3 or more hikes. So a fairly convincing move. The 2018 and 2019 median dots were left at 3 hikes apiece while the longer run dot moved back to 3% after having been split between 2.75% and 3.0% last time out. Economic projections were a bit more of a non-event with growth and inflation forecasts revised up slightly and unemployment revised down.
Fed Chair Yellen’s press conference offered the final few interesting snippets. She made special mention in particular to the change in the dots being “really very tiny” which was seen as her way of softening the hawkishness of them. She also added that she never said that she favoured “running a high pressure” economy and wanted to make it clear that she has “not recommended running a hot economy as some sort of experiment”. A reminder that back in October Yellen had said at a speech in Boston that there might be benefits to temporarily letting the economy run hot with robust aggregate demand and a tight labour market to reverse adverse supply side effects. Meanwhile, when asked about fiscal stimulus Yellen said that “fiscal policy is not obviously needed to provide stimulus to help us get back to full employment”. When asked about the Fed’s response to fiscal, DB’s Peter Hooper highlighted that she did not explicitly say they would raise rates faster, but rather left that implicit in her response.
In terms of the market the immediate reaction function came in rates where the Treasury curve bear flattened in response. 10y yields smashed through 2.50% to close up +9.9bps on the day at 2.572% which is the highest since September 2014. 5y Treasury yields went through 2% and closed +13.9bps higher on the day at 2.049% which is the highest since April 2011. 2y yields finished up +10.4bps at 1.269% and the highest since August 2009. Futures also moved to price in a bit more than 2 rate hikes by December 2017. Also noticeable was the 2y Bund/Treasury spread which has now blown out to 205bps and the widest since 2000 while the 10y Bund/Treasury spread hit 227bps and is, amazingly, the widest since 1989. Currency markets weren’t to be ruled out with the US Dollar index touching highs last seen in 2003. That came largely at the expense of emerging market currencies which plummeted anywhere from -1% to -2%. Risk assets suffered meanwhile. The S&P 500 (-0.81%) had its worst day since October 11th while credit spreads finished wider with CDX IG nearly 2bps wider by the end of play. In commodities Gold (-1.35%) tumbled below $1150/oz while WTI Oil, weighed down by the rally for the USD and also some bearish supply data in the US, plummeted -3.66% and back to $51/bbl.
This morning in Asia the bond sell-off has continued with benchmark 10y yields in the antipodeans 10-11bps higher and 10y JGB yields also back up +2.5bps to 0.073%. Equity markets have followed the Wall Street lead and retreated. The Nikkei (-0.15%), Hang Seng (-1.69%), Shanghai Comp (-0.29%), Kospi (-0.04%) and ASX (-0.62%) all down. In credit the iTraxx Asia is 4bps wider currently.
Moving on. Today brings another central bank into focus with the BoE MPC meeting outcome due around midday. Both the market and our economists expect no surprises with current policy settings to stay as is. Indeed our economists expect the BoE to maintain the broadly neutral stance that they adopted at the November MPC meeting. Firstly, they highlight that the economy appears to be holding up well and consensus expectations for 2017 GDP growth have risen to 1.3%, albeit no higher than the MPC’s own forecast (1.4%). Secondly, sterling’s recent appreciation may reduce peak inflation marginally, although there is still a net 15% depreciation relative to late 2015 and recent data shows increasing evidence of pass through into core goods prices. Ultimately our colleagues think that the MPC will not rush to judgement this week and the neutral bias will remain. Their baseline view is that UK monetary policy won’t change in 2017 and sovereign QE will be allowed to end in Q1. However, with the real income shock coming they see a higher probability of the next move being an easing rather than a tightening.
Staying in the UK, yesterday Brexit Secretary David Davis spoke and didn’t rule out the possibility of a transitional deal ‘if necessary’ as a kind of ‘bridge’ for the UK leaving the EU. Putting him more on side with Chancellor Hammond, Davis also indicated that ‘an implementation phase’ could be a possibility. He also noted that the Government will not reveal Brexit plans before February. In any case the overall rhetoric from Davis clearly favours the recent move towards a softer exit. Sterling had initially been as much as half a percent stronger before the post-FOMC Dollar rally saw the Pound finish weaker.
Before we look at the day ahead, it was also a fairly busy day for economic data yesterday. In the US the primary focus was on the November retail sales report. Headline sales were up less than expected during the month (+0.1% mom vs. +0.3% expected) while the ex auto and gas component was also softer than expected (+0.2% mom vs. +0.4% expected). The GDP-sensitive control group component also missed (+0.1% mom vs. +0.3% expected) which will likely create some downside risks to Q4 GDP although by now the focus may have already turned to 2017 growth. Meanwhile there was also some softness in last month’s industrial production print (-0.4% mom vs. -0.3% expected) with capacity utilization also declining four-tenths to 75.0%. Elsewhere, producer prices were reported as rising more than expected. Headline PPI rose to +0.4% mom (vs. +0.1% expected) helping to raise the YoY rate to +1.3% from +0.8%.
In the UK the ILO unemployment rate was reported as holding steady in October at 4.8% although employment did decline a modest 6k with the statistics office noting that the labour market ‘appears to have flattened off in recent months’. There was better news in the earnings data however with average weekly earnings rising one-tenth to +2.5% yoy. Ex-bonuses rose to +2.6% yoy which is the fastest pace since August last year. Finally in France there were no last minute surprises in the November CPI report with consumer prices reported as unchanged during the month. For completeness in markets yesterday, European equity markets were generally weaker across the board with the Stoxx 600 finishing -0.50% prior to the Fed. Sovereign bond markets were firmer, albeit also pre-Fed clearly.
Looking at the day ahead the early focus in Europe this morning is on the December flash PMI’s where we’ll get manufacturing, services and composite readings. In the UK we’ll also get more data in the form of the November retail sales numbers while around midday the focus then turns over to the BoE MPC meeting outcome. No change in policy is expected there. Later on in the US the main highlight data wise will likely be the November inflation report. The market is expecting headline CPI to increase +0.2% mom and the core to also increase +0.2% mom, a view also shared by our US economists. Meanwhile, the latest weekly initial jobless claims data will be out alongside Empire manufacturing and the Philly Fed manufacturing reports for December. Lastly the NAHB housing market index reading will be out too. Away from the data, Japan PM Abe and Russia President Putin are scheduled to hold a meeting aimed at proposing economic cooperation between the two countries. The ECB will also publish the net take-up for TLTRO II. Finally EU leaders are also due to gather to discuss migration and security issues, as well as debate the Brexit process in Brussels this morning.
Centinel2012 