Ignoring the latest batch of bad news overnight from China (where we learned that home prices fell in half of the cities tracked on a MoM basis while home prices rose in the fewest cities in two years, corroborating reports that the housing market there is softening even as the housing bubble is now shifting to the UK) and of course the ongoing rehypothecation scandal which apparently nobody is allowed to talk about, all it took was a little USDJPY nudge to send the Nikkei nearly 1% higher while algos trading US equity futures are now focused solely on today’s 2pm FOMC announcement. The market expects few surprises in terms of policy with another $10bn taper and with rates staying on hold. Given this, eyes have turned towards the other data points the FOMC will provide us with – namely their Summary of Economic Projections (including the now famous dot plots) and the post-meeting Q&A session with Chair Yellen.
There has been growing debate in market’s about the possibility that this data-point heavy June meeting might mark the beginning of a more hawkish sounding Fed. This debate gained some additional firepower yesterday with the above-expectation CPI (2.1% YoY vs 2.0% expected) and core CPI (2.0% YoY vs 1.9% expected) readings. We should note that the dots were likely finalized before yesterday’s reading.
To be sure, it is suddenly not fun being a Fed president (or Chairmanwoman) these days: with yesterday’s 2.1% CPI print, the YoY rate has now increased for four consecutive months and is above the Fed’s target. Concurrently, the unemployment rate has also dipped well below the Fed’s previous 6.5% threshold guidance, in other words the Fed has now met both its mandates as set down previously. There have also been fairly unambiguous comments from the Fed’s Bullard suggesting that this is the closest the Fed has been to fulfilling its mandates in many years. Finally, adding to the “concerns” that the Fed may surprise everyone were BOE Carney’s comments last week that a hike “could happen sooner than the market currently expect.”
In short: continued QE here, without a taper acceleration, merely affirms that all the Fed is after is reflating the stock market, and such trivial considerations as employment and inflation are merely secondary to the Fed. Which, of course, we know – all is secondary to the wealth effect, i.e., making the rich, richer. But it is one thing for tinfoil hat sites to expose the truth, it is something else entirely when it is revealed to the entire world.
Elsewhere, a cautious tone is prevailing in Asian EM ahead of today’s events. Bourses in Indonesia (-0.2%), Korea (-0.4%) and China (-0.4%) are trading lower and a number of key EMFX crosses such as USDINR (+0.3%) and USDIDR (+0.8%) are indicating that there is some nervousness about today’s FOMC. The Chinese government released its latest home price data showing that prices fell in half of the cities tracked on a MoM basis. In addition to that, Chinese home prices rose in the fewest cities in two years, corroborating reports that the housing market there is softening. The stronger USD is helping USDJPY today (+0.15%) which is also giving Japanese equities a bid (Nikkei +0.6%).
Outside of Asia, all the recent conjecture about potentially a more hawkish Fed has taken its toll on the emerging markets complex in recent days. The CDX
EM index is down in price for the last 6 days, and the MSCI EM equity index is on a five day losing streak. Certainly the individual domestic themes in the likes of Poland, South Africa and Argentina haven’t helped while the broader Russia and Iraq concerns have only added to the poor sentiment. Overnight, Argentina’s economy minister Kicillof said that it would begin steps to swap restructured bonds into local law in an attempt to make it easier to continue making payments on restructured bonds but avoid the ruling of the US Supreme Court who effectively ruled that it can’t make bond payments until it compensates holdout investors. Kicillof said that the plan has been studied extensively “so that the reconstruction of Argentina isn’t jeopardised†but he also hinted that the country could come to a negotiated settlement with holdouts saying that “we’re not willing to make just any concessions and accept any termsâ€. Argentinian bonds closed weaker yesterday. Elsewhere in EM, fresh from Kenya’s debut issuance and the strong EM demand seen there, Ecuador has priced its first international bond since its $3.2bn default on foreign debt in 2008. Yesterday’s transaction raised US$2bn of 10yr funds at a yield of 7.95%, which was a fair bit tighter than initial price thoughts somewhere in the low 8% region.
