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[PODCAST] European Open Rundown 23rd September 2021

  • The FOMC gave notice that a reduction in the pace of asset purchases may soon be warranted
  • Fed Median dot plot sees 1 hike in 2022 (prev. 0); 3 hikes in 2023 (prev. 2); 7 hikes through 2024; long run 9 (prev. 9)
  • Asian equity markets traded mostly positively as the region took its cue from the gains in the US
  • DXY has pulled back a touch from advances above 93.50 and EUR/USD has reclaimed 1.17 to the upside
  • Looking ahead, highlights include SNB, Norges Bank, BoE, CBRT & SARB rate decisions, Eurozone, UK & US flash PMIs, US IJC, Canadian Retail Sales, ECB's Elderson, ECB TLTRO allotment

FOMC

FOMC gave notice that if progress on its economic goals continues as expected, a reduction in the pace of asset purchases may soon be warranted. Additionally, the Fed now sees seven rate hikes over its forecast horizon (previously two), although the terminal rate view is unchanged at 2.50%. The 2022 dots now foresee at least one rate hike. Other forecasts saw the Fed raise near-term inflation forecasts for this year, and 2022 inflation view was raised, although the Fed continues to see core inflation falling back to just above 2% by the end of its projection horizon; the Fed continues to frame the inflation upside as ‘transitory’. Meanwhile, the Fed has broadly maintained its labour market view, and sees the jobless rate falling to 3.50% in 2023 (full employment area), and is expected to remain around that level by the end of 2024, before picking up to 4.0% in the long-term. Decisions were unanimous. Bottom line: this is broadly as the market was expecting (‘advance notice’, steeper rate trajectory, inflation still seen as transitory).

At his post-meeting press conference, Powell surprised by hinting at the possible parameters of the upcoming taper, and stated that if the economy remains on track, tapering of asset purchases could be concluded by the middle of next year – which would be on the hawkish-end of expectations. Powell also suggested that there was broad support on the Committee for the timing and pace of the taper. The Fed Chair also reiterated that the language in the statement was meant to flag that the bar for taper could be met at the next meeting; the key here is that Powell is talking up a November announcement, which will have disappointed some doves who expected the announcement in December/early 2022. Additionally, Powell seemed to suggest that the bar for tapering in November is low, given that he does not need to see a very strong jobs report to start, he’d only need to see a ‘decent’ jobs report. Powell was asked about some of the particulars about the taper – like what will happen to the balance sheet when the taper has been concluded – but the Fed chair dismissed the line of questioning, stating that he wants to get through the taper process before turning to other issues. Powell did however add that the Fed can speed or slow tapering as appropriate, but it will be a gradual taper. On the timing of the rate hike, Powell said that the Fed was still a way off from meeting the test on whether to lift rates; if inflation remained higher in 2022, the Fed may reach that bar, but he also noted that there was still lots of slack in the labour market; note that Fed officials have previously intimated that labour market progress was a more important input into the rate hike timing, and its latest forecasts today continue to see the economy reaching max employment at the end of 2023. Elsewhere, Powell dismissed Evergrande fears, noting that the direct impact on the US was low. The Fed chair was also asked many questions around ethics around Fed officials’ stock trading, but these didn’t have much influence on market trading dynamics.

CORONAVIRUS

US FDA authorised a booster dose of the Pfizer (PFE) / BioNTech (BNTX) for individuals aged 65 years and older, as well as for individuals 18-64 years old that are at high risk of severe COVID-19. (Newswires)

ASIA

Asian equity markets traded mostly positive as the region took its cue from the gains in US with the improved global sentiment spurred by some easing of Evergrande concerns and with stocks also unfazed by the marginally more hawkish than anticipated FOMC announcement (detailed above). ASX 200 (+1.0%) was underpinned by outperformance in the commodity-related sectors and strength in defensives, which have more than atoned for the losses in tech and financials, as well as helped markets overlook the record daily COVID-19 infections in Victoria state. Hang Seng (+0.7%) and Shanghai Comp. (+0.6%) were also positive after another respectable liquidity operation by the PBoC and with some relief in Evergrande shares which saw early gains of more than 30% after recent reports suggested a potential restructuring by China’s government and with the Co. Chairman noting that the top priority is to help wealth investors redeem their products, although the majority of the Evergrande gains were then pared and unit China Evergrande New Energy Vehicle fully retraced the initial double-digit advances. KOSPI (-0.5%) was the laggard as it played catch up to the recent losses on its first trading day of the week and amid concerns that COVID cases could surge following the holiday period, while Japanese markets were closed in observance of the Autumnal Equinox Day.

PBoC injected CNY 60bln via 7-day reverse repos and CNY 60bln via 14-day reverse repos with the 7-day reverse repo rate kept at 2.20% and 14-day reverse repo rate kept at 2.35%, for a net daily injection of CNY 110bln. (Newswires) PBoC set USD/CNY mid-point at 6.4749 vs exp. 6.4755 (prev. 6.4693)

China's Loan Prime Rates are more likely to decline in Q4, according to Chinese press reports. (China Securities Daily)

China Evergrande's (3333 HK) Chairman held a meeting yesterday where he said the firm will try its best to resume work and output, while executives were urged to ensure quality delivery of properties and the Chairman also noted that the top priority is to help wealth investors redeem their products. In other news, Chinese Estates reportedly sold 108.9mln Evergrande shares at a HKD 9.5bln loss.(Newswires)

UK/EU

UK ministers reportedly conceded that the lorry driver crisis will not be eased in time to avert Christmas chaos. (Telegraph)

France and US joint statement said that open talks between allies could have helped avoid problems over nuclear submarines, while it was also reported that France decided its Ambassador to US will return to Washington next week and noted that Biden and Macron are to meet in Europe next month. Furthermore, a senior official from the US State Department expects Secretary of State Blinken to meet with French Foreign Minister Le Drian today and noted that US welcomes France's deep engagement concerning the Indo-Pacific. (Newswires)

FX

In FX markets, the DXY is off this month's highs but remains ultimately firmer post-FOMC after having briefly breached the 93.50 level following the slightly more hawkish than expected meeting. EUR/USD declined in the aftermath of the FOMC but eventually recouped some of the losses overnight ahead of a large OpEx of more than EUR 3bln at 1.1700 for today’s New York cut. GBP/USD attempted to nurse some losses after losing ground to the dollar, but with price action contained ahead of the BoE policy announcement and with reports noting UK ministers concede that the haulage crisis will not be eased in time to avert Christmas chaos. USD/JPY approached closer towards 110.00 and led by the recent strength in the greenback but with further upside limited by the holiday closure in Japan, while antipodeans were subdued with AUD/USD uninspired after the recent failed approach and subsequent pullback from near the 0.73 handle and with the latest Australian PMI figures all improving from the prior month, albeit with Services and Composite figures remaining in contraction territory.

Brazil Central Bank hiked the Selic rate by 100bps to 6.25% as expected, with the decision unanimous and it sees a rate hike of the same magnitude at the next meeting. BCB stated in the current phase of rate hike cycle, this pace of adjustment is best to guarantee anchoring of inflation expectations and it sees a robust economic recovery in H2, while it added that heightened fiscal risks creates an upward asymmetry in balance of inflation risks. (Newswires)

RBNZ will proceed with its proposal to tighten loan-to-value ratio restrictions on lending to owner-occupiers to reduce risky mortgage lending in which it will restrict the amount of lending banks can do above the LVR of 80% from 20% to 10% effective November 1st. (Newswires)

  • Australian Manufacturing PMI (Sep P) 57.3 (Prev. 52.0)
  • Australian Services PMI (Sep P) 44.9 (Prev. 42.9)
  • Australian Composite PMI (Sep P) 46.0 (Prev. 43.3)

COMMODITIES

Commodities were mixed in which WTI crude futures marginally extended above the USD 72/bbl level with oil supported by the mostly constructive risk tone and after the larger than expected draw in EIA crude inventories, despite not being as bullish as the recent private sector inventory data. There were several recent pertinent comments including from Saudi King Salman who noted the Kingdom worked with OPEC+ and allies to stabilise the oil market, while the Iraq Oil Minister stated their exports will continue to increase but noted that international efforts are to keep crude prices at around USD 70/bbl. Furthermore, on the geopolitical front, US and Israel reportedly held secret talks on Iran to discuss a possible "Plan B" if nuclear talks do not resume. Gold was choppy but ultimately declined following the FOMC where the Fed left the door wide open for a taper announcement at the next meeting and copper prices were also pressured amid the firmer greenback but with downside stemmed by the mostly constructive mood across risk assets.

Saudi King told the UN General Assembly that Riyadh worked with OPEC+ and allies to stabilise oil market. Furthermore, he stated that Yemen's Houthis reject peaceful initiatives to end the war and that Saudi will defend itself against ballistic missiles and armed drones, while he added that the Middle East should be free of weapons of mass destruction. (Newswires)

Iraq Oil Minister stated that Iraqi exports will continue to increase monthly by an average of 400k bpd and international efforts are to keep crude prices at around USD 70/bbl, while Iraq hopes to maintain crude prices at more than USD 65/bbl. (Newswires)

US oil production is expected to increase again with forecasters projecting a 800k BPD increase next year led by privately-owned producers. (FT)

GEOPOLITICAL

US and Israel held secret talks on Iran to discuss a possible "Plan B" if nuclear talks do not resume, while an Israeli official noted the US is concerned about the stalemate and said it would impose additional sanctions on Iran if talks don't resume soon. (Axios)

UK Foreign Secretary Truss held a meeting with Iran's Foreign Minister to discuss bilateral, nuclear and regional issues, while Truss urged for Iran to quickly return to JCPOA negotiations with a view of all sides returning to compliance. (Newswires)

US

The TPLEX bear-flattened as the front and belly priced in a more hawkish-than-expected FOMC. 2s +2.4bps at 0.240%, 3s +3.7bps at 0.489%, 5s +3.0bps at 0.859%, 7s +0.9bps at 1.132%, 10s -0.8bps at 1.316%, 20s -2.6bps at 1.780%, 30s -2.3bps at 1.834%. Inflation breakevens narrowed with 5yr TIPS +6.0bps at -1.632%, 10yr TIPS +0.7bps at -0.967%, 30yr TIPS -1.6bps at -0.344%. Eurodollars sold off the hardest in Reds/Greens with EDZ2 -4bps at 99.535, Z3 -5.5bps at 98.915, Z4 -4.5bps at 98.525, Z5 -0.5bps at 98.35. SOFR and EFFR both unchanged as of Sept 21st at 5bps and 8bps, respectively. There was early love from Rome as BTPs surged on reports the Italian Treasury would not be holding debt syndication auctions this autumn, which saw spillover to the broader EGB space, and even saw USTs perk up out of their range in the otherwise light liquidity conditions ahead of FOMC. Despite the stock and commodity recovery, T-Notes gently rose back to their O/N highs of 133-09 into the FOMC announcement. While duration held up strong in the cash curve, with 20s leading post-Tuesday's strong auction, STIRS markets had seen decent bearish flow heading into the Dot Plot release, with ED Greens (3yr out) lower by 3bps. There was some two-way flow seen after the Fed statement and with the dot plots tilting hawkish as the median 2022 FFR dot saw a 25bps hike (prev. unchanged), and the median 2023-end forecast rose to 1% from 0.6%. However, it wasn't until the Fed presser/Q&A, with Powell talking up how he believes they are all but ready for tapering, and aiming for a mid-2022 completion, that the action in STIRs got moving, with EDs extending losses, and the belly of the Treasury curve getting hit as the tighter-than-expected Fed path got priced in, meanwhile, the long-end of the curve actually caught a bid, with flatteners prospering. T-Notes reversed all of their NY morning strength by futures settlement. T-note (Z1) futures settled 6+ ticks lower at 132-31+.

White House said progress was made in President Biden's meeting with Congressional Democrats, while President Biden and his team will have a follow up meeting from today. In other news, US President Biden tweeted that he is sick and tired of the super-wealthy and large corporations not paying their fair share in taxes and that it is time for it to change. (Newswires)

US Moderate Democrat Senator Manchin said he does not think a deal can be reached on reconciliation by next week. There were later reports from CNN's Raju that Senator Manchin said he thinks a deal on reconciliation can come together eventually but made it clear that Democrats are still not close to clinching an agreement and noted that he has "big problems" with the climate provisions. (Newswires/CNN/Twitter)

US Senate Minority Leader McConnell said they all agree America will never default and noted that Democrats have an obligation to raise the debt ceiling, while other reports noted that GOP House leadership is reportedly whipping against the infrastructure bill. (Newswires/Axios)

US House Budget Chair Representative Yarmuth that his staff have come to the conclusion that there is not enough time to alter the reconciliation bill or write a stand-alone bill to lift the debt ceiling which Punchbowl stated could complicate next month as we inch closer to the deadline. (Punchbowl)

US Treasury Secretary Yellen reportedly appealed to Wall Street CEOs for help with the debt ceiling and Yellen also met with Irish Finance Minister Donohoe in which she emphasised the goal of stabilising the international tax system and stopping a race to the bottom. (Newswires)

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