- Woooo what a night good US data prints and a Fed that seems more dovish than it was last night. It made for a wild night on GlobalFX markets with the Aussie (0.8988) getting smashed down through the range bottom to a low of 0.8936 after the Fed announcement. But it was the only major currency that lost ground with the USD generally a little weaker. Euro (1.3301) had a big night too moving through a 1.3213-1.3344 range. GBP (1.5207) was similarly buffetted but is roughly unchanged as is the Yen (97.92) which traded 98.52 down to 97.56.
- Looking first at the data in the US we saw ADP private sector employment (+200,000) beat expectations and print roughly what we saw last month which is a positive sign for Friday’s non-farm payrolls. Similarly the preliminary Q2 GDP came in at 1.7% (1.2% expected and 1.1% last) but the GDP price index undershot (+0.7% v 1% expected and 1.3% last) which is a sign that St Louis Fed President Bullard might be right about the threat of deflation.
- There are a billion different people out there poring over the Fed‘s words but I like to let Wordle tell me what the focus is when Central Bankers speak. In the context of the GDP deflator this fear of deflation was the thing that struck me as the key change in the Fed statement this morning via Wordle and it is clear that Inflation and the Fed’s concern for and of it (or its reciprocal deflation) dominates everything in the statement – you can see the picture here. Which is probably why the USD sold off a little post statement.
- Rates in the US reacted to both the economic and Fed news with the 10’s selling off to 2.70% after the ADP and GDP before rallying back to 2.59% after the Fed. The earlier selling dragged UK 10 year Gilts with it and rates rose to 2.36% in the UK, Bunds (1.68%) were up a smidge as well.
- Finally to Stocks and it seems they are less worried about the renewed focus on inflation, or lack there of, and what it means for the Taper and more worried about the data strength and what IT means for the Taper. The Dow (15,500 -0.13%) was 134 points off its high, the S&P500 (1686, no change) was 12 points off the high of 1698 and the Nasdaq was also off its high but managed to close up 0.26%. In Europe the FTSE (+0.76% @6621), DAX (+0.06%) and CAC (+0.16%) were all higher but Milan and Madrid fell 0.37% and 0.28% respectively.
- Australian stocks were stronger yesterday with futures trading up to 5056 but they have sold off since and are at 5009 on MT4 this morning – watch a break of 4997.
- On commodity markets the solid data in the US drove Nymex Crude up 2.01% to $105.05 Bbl, Copper was up 2.53% (3 bucks a pound held again) and gold recovered from early loses to be roughly unchanged at $1323 oz. Corn rose 0.71% and Soybeans were 1.78% higher.
On the Data front there is no let up today with the Australian performance of Manufacturing index, Chinese NBS manufacturing PMI and the HSBC version of same, Australian import and export indexes, Indonesian trade and inflation, and a raft of updated Markit PMI’s in Europe and the US as well as the BoE and ECB rate decisions. Of course initial jobless claims in the US is also important as is the ISM.
Lets have a look at the Aussie Dollar and then the Fed’s statement and my thoughts on the Taper in a little more detail.
Aussie Dollar pollaxed by US data
The Aussie dollar has been under pressure for 3 months now – ever since investors woke up to the fact that Australia was not immune to global or indeed Chinese economic weakness and the US economy started to look a lot healthier than it had and the Fed talked about the taper.
But for the last month and a half the Aussie has been in a big old 90-93.30/50 Darvasian box.
That was until last night when the release of the better than expected US GDP knocked the Aussie down through the bottom of this range to an eventual post FOMC low of 0.8936. Now of course this level is not far off my long held target of 0.8912 which was a 138.2% Fibonacci extension I identified some time ago and have communicated many times. So believe it or not I am not going to get too bearish once we get near my target.
Having said that though Darvas says once the box breaks and we move into the next box we don’t reverse unless the Aussie can trade an hold back above 90 cents. Lets say the Aussie is biased lower unless it can regain 0.9035.
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The Fed is a bit more Dovish than I expected
Strong data and a Dovish Fed make s for an ugly whippy night which is what we saw on stocks, FX and interest rate markets overnight. As I noted in the introduction the Wordle cloud really shows the concern for the outlook for inflation as you can see below.
I took out the word “committee” because it just confused things but inflation is clearly a focus.
On inflation the Fed said,
The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term.
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month.
The Fed also characterised growth as modest and reiterated that it remained flexible in its approach to policy,
The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes. In determining the size, pace, and composition of its asset purchases, the Committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives.
And building from this the Fed made it clear that rates are going to be very low for very long,
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.
So you may be asking as a believer in Septaper what do I think now?
I guess I have to say that I am less convinced that the Fed will taper in September now that they have explicitly focussed on inflation as James Bullard wanted and given the GDP deflator in the Q2 GDP release last night.
It is another big day and the situation remains fluid so tin hats and risk management is the order of the day