The much anticipated announcement from the FOMC yesterday sent markets into a buying frenzy, as the Committee decided that they would need to see further improvement in the American economy before they slowed the pace of their monthly asset purchase program; presently running at $85bn per month. The press release from the Federal Reserve verified that policy makers on the board remained heavily data dependent, with members seeing downside risks inherent in the recent tightening of financial conditions over the last few months posing a risk to the labour market and economy, making it necessary in their view to keep the printing presses on overdrive.
At the margin, markets were expecting some sort of “token†tapering (taper-lite if you will) at the conclusion of the two-day meeting, so the declaration that asset purchases would continue at the same pace, along with the Committee downgrading their GDP growth forecasts in 2013 and 2014, reinvigorated the “risk-on†trade, and sent investors piling into anything high-yield – selling the USD in order to do so. The DXY fell off a cliff into the low 80s, having its third worst day of the year, while USDCAD was slammed into the low 1.02s and EURUSD rocketed above the 1.35 level. Commodities were one of the main benefactors of the broad USD weakness, as Gold futures spiked above $1,350/ounce and front-month WTI ramped into the mid $108/barrel level.
Critics of the Fed would argue that the central bank’s credibility is somewhat damaged after not following through with a slowdown in monthly asset purchases; however, the conundrum for the Fed lies in the fact that they had done such a good job at being transparent and warming investors up to the idea of a tapering, yields (in the Fed’s view) had gotten a little ahead of themselves, infringing on a level which the Fed feels could derail the fragile recovery. The reinforcement of low interest rates for an extended period of time (10 of the 17 Fed officials see short-term interest rates at or below 2% by the end of 2016) has markets re-pricing the high-yield carry trade, helping stocks hit all-time highs as the yield curve gets pressured lower.
The Asian overnight session saw a continuation of the “buy-everything-not-nailed-down†mentality, with equities rallying and credit spreads tightening. The Nikkei posted a 1.8% gain, while similar price action was seen from the Hang Seng as the index added 1.67% by the close of its session. Despite the rally in equity markets, the yen wasn’t able to sustain yesterday’s gains, with USDJPY essentially unchanged from where it was prior to the Fed’s announcement yesterday. After dipping its toes into the sub-98 waters, USDJPY is looking to make another run to try and regain the 99 handle, as reports overnight stated Japanese PM Abe has instructed his finance ministry to go ahead with a 2-stage lowering of corporate taxes, slated to kick in as an economic stimulus measure, should the planned consumption tax hike in April act as a drag on growth.
European bourses don’t want to be left out of the gains seen elsewhere in global equities, with the majors up convincingly midway through their session. Spain and France both has strong bond auctions this morning, both selling the top end of their targeted ranges, while Spain saw its borrowing costs drop on greater demand for its debt. After shooting up through the 1.61 mark against the USD yesterday, the pound is seeing some modest selling pressure after weaker than expected retail sales data pours cold water on the recent strong economic indicators flowing out of the UK. Retail Sales for the month of August fell by 0.9% compared to the previous month, weighed down by soft household goods sales and a big drop in foodstuff spending. Economists had forecasted retail sales would rise by 0.4% from July, so the miss has knocked Cable down a peg, slipping back below the 1.61 level.
Heading into the North American open, a smattering of economic data hits the wires, but nothing rivaling the magnitudes of yesterday’s Fed decision. Jobless claims for the American economy over the prior week were expected to come in at 330k, but the official print showed that only 309k of new claims were filed. Wholesale Sales for the month of July in the Canadian economy were also released, and while June’s print was revised lower to a drop of 3.1%, the July print clawed back some of those losses and increased by 1.5%, stronger than the 1.0% that has been estimated heading into the release. After continuing to strengthen during the Asian session, the Loonie is essentially unchanged against the USD as we get set for the opening bell in North America, little changed after the economic data releases. US equity futures are poised for stocks to add to their gains yesterday, although the pace of frantic equity buying has slowed down somewhat.
Later today we will get the reading on Existing Home Sales for the month of August, forecast to echo the softness we saw yesterday with permits and starts, expected to come in with an annualized reading of 5.25M, down from the 5.39M that was registered in July. Also on the docket is the Philly Fed Manufacturing Index, with the diffusion index of manufacturing activity in the Philadelphia region ticking up slightly to a reading of 10, slightly better than the 9.30 that we in August. For both readings, better than expected prints should help stem some of the bleeding in the USD, while disappointing numbers will most likely increase headwinds for the big dollar.
Further reading:
US economic indicators surprise to the upside – dollar still absorbing FOMC surprise
Jobless claims
