It has been a story of central banks, as overnight Asian stocks reversed nearly two weeks of consecutive declines – the longest stretch since 2001 – and closed higher as the same catalysts that drove US equities higher buoyed the global tide: a combination of Chinese liquidity injection (for the paltry amount of just under $90 billion; “paltry” considering Chinese banks create over $1 trillion in inside money/loans every quarter) and Hilsenrath leaking that despite all the “recovery” rhetoric, the Fed will not be turning hawkish and there will be no change in the Fed language today (perhaps not on the redline but Yellen’s news conference at 2:30pm will certainly be interesting), pushed risk higher, if not benefiting US equities much which remains largely unchanged.
Overnight Goldman joined Hilsy in predicting “no change” to the language, when its strategists said the Fed won’t drop “considerable time” from statement today and the language will instead be watered down and dropped in months ahead. However, if past Yellen press conferences are any indication, watch for her to once again define just how many months “considerable time” implies, although if she says 6 months again, algos may be confused.
Other banks disagreed, with Deutsche Bank’s base case is that the phrase will be dropped this time round for two key reasons. First removing the language gives the Fed more flexibility to act sooner if the economy outperforms against expectations in the months ahead. Secondly, Committee participants on both the hawkish and dovish sides (as well as the center) have publicly expressed that it is time to remove the language. So it is likely that the Yellen will agree to make this language change but only if she feels this can be achieved without causing the market to bring forward significantly its expectations about the timing of the first rate hike. All eyes will therefore be on the press conference where Yellen will likely emphasise that the change is not intended to signal a significant advance in the timing of the first hike but rather the timing will be based on recent and prospective economic performance of which the key labour market and inflation indicators are still much below desired levels.
As DB’s Jim Reid notes, given that the removal of this key phrase has probably been increasingly priced in over recent days, it didn’t take much for the Dollar to slip yesterday after the WSJ’s Jon Hilsenrath said that he thinks the Fed may keep the words ‚considerable time? in its policy statement but qualify them instead. The WSJ correspondent thinks that given the economic backdrop, the Fed wouldn’t want to send a signal right now that rate hikes are imminent. He also thinks that the Fed will focus on its QE exit strategy in this meeting and that they may think that by focusing on both the exit strategy and guidance changes at the same time, it will be too much for the market to handle. So for him the “considerable time” language stays. The recent minutes suggested that the Fed was indeed close to agreeing on updating their exit strategy on asset purchases when they met in July.
All that said, one would have to be truly naive to assume that the Fed will do anything to rock the boat ahead of the Alibaba IPO – the biggest and most overhyped perhaps in history – which prices in just over 24 hours. As such, it is safe to say that if there is any Yellen surprise, it will be to the dovish side.
European equities benefited from the open as fears of a hawkish FOMC statement dissipated. As such, both equities and core fixed income markets are trading stronger, with softer US yields also weighing on the USD. Euro-area CPI +0.4% y/y in Aug. vs 0.3% est. U.K. unemployment drops to lowest in 6 years. European car sales rise for 12th month. 18 out of 19 Stoxx 600 sectors rise; basic resources, travel & leisure outperform, food & beverage, retail underperform. 81% of Stoxx 600 members gain, 16.5% decline. Eurostoxx 50 +0.6%, FTSE 100 +0.3%, CAC 40 +0.7%, DAX +0.5%, IBEX +0.8%, FTSEMIB +1%, SMI +0.1%
The Hang Seng (+1.0%) snapped its 8-day losing streak after reports that the PBoC is to inject an extra CNY 500bln (USD 81bln) in liquidity to China’s 5 largest banks. Goldman Sachs noted that this equates to a 50bps RRR cut. The move from the Chinese central bank comes in the wake of a string of poor macro data from China, and ahead of the week-long Golden Week holiday in early October, as central bankers anticipate a squeeze on cash in the near future. Asian stocks rise with the Hang Seng outperforming and the ASX underperforming. MSCI Asia Pacific up 0.2% to 144.5, Nikkei 225 down 0.1%, Hang Seng up 1%, Kospi up 1%, Shanghai Composite up 0.5%, ASX down 0.7%, Sensex up 0.5%. 7 out of 10 sectors rise with tech, energy outperforming and industrials, consumer underperforming
