OPEN: Equities have opened rather flat, however RUT is lagging and opened in the red. Yield price action is choppy, we were a touch steeper at the open but it has been gradually paring with 10-year yield going flat, while the dollar is also flat, but off earlier lows. If the buck and yields were to start rising, it may hinder equity gains. The FOMC minutes and further Fed speak will be eyed later in the session, with particularly focus on any chatter relating to a tapering of asset purchases and some further clarity from some of the more hawkish Fed dot plots. Sectors have opened mixed, the majority are firmer with Utilities and Communication Services outperforming, while Energy is also a touch firmer. Materials, Industrials and Health Care are the laggards with Materials hit by a fall in gold and silver. The relatively mundane open has seen both Value and Growth ETF’s open flat to slightly firmer. Elsewhere, the dollar is flat but off the lows, crude is choppy but a touch lower, precious metals are lower and the treasury curve is a touch steeper.
- SPX: 4120, 4114, 4104/08, 4100, 4086, 4057, 4034, 4021/20, 4011, 3993
- NDX: 14000/10, 13880, 13805, 13700/15, 13660, 13550, 13420, 13330/275, 13165, 13090/80
- RUT: 2329, 2312/18, 2294/98, 2276/81, 2268, 2254, 2244, 2223/21, 2210/06, 2200/2197
- Levels via Credit Suisse
- FED: Fed commentary remains rather cautious even after the strong March jobs report, Fed’s Kaplan (2022 dot, 2023 voter) said it is not the time for the central bank to pull back on its support for the economy, but paring stimulus when the economy meet’s the Fed’s goals will be important to keep the recovery on track. Kaplan expects 6.5% growth this year, in fitting with the Fed’s median view. Evans (voter) affirmed the dovish tone, noting achieving their goals might prove to be more difficult and there is still a way to go before its dual mandate is achieved. Focus now lies on the FOMC Minutes at 19:00BST/14:00EDT, a full preview can be found here. Meanwhile, Kaplan is set to speak again at 16:00BST/11:00EDT, Barkin (2021, 2024 voter) at 17:00BST/12:00EDT, Daly (2021, 2024 voter) at 18:00BST/13:00EDT.
- CRUISES (CCL, NCLH, RCL): US CDC says cruises could restart with restrictions by the middle of Summer.
- SPORTS BETTING (DKNG, PENN, MGM): New York Governor Cuomo confirmed the state will legalise mobile sports betting.
- Carnival Corp. (CCL) provided a Q1 business update; cash burn rate was better than expected, ended Q1 with USD 11.5bln of cash and short-term investments. Booking volumes for all future cruises during Q1 were roughly 90% higher Q/Q, Adj. Net loss of USD 2.0bln.
- Google’s (GOOG) Android advertising tool is the target of a complaint by Max Schrems, a French privacy activist, which accuses GOOG of breaching EU rules by failing to get consent from users.
- Samsung (SSNLF) provided a Q1 view; (KRW): operating profit 9.30trln (exp. 8.88trln), revenue view 65trln (exp. 61.53trln)
- Tesla (TSLA) announced cameras in Tesla (TSLA) vehicles are not activated outside of North America as it looks to calm China security concerns after the use of Tesla (TSLA) vehicles in military compounds was banned.
- Pfizer Inc. (PFE) arthritis drug is facing a probe from the Canadian health regulator after a trial identified an increased risk of serious heart-related issues and cancer in patients.
- Beyond Meat (BYND) is to open a new manufacturing facility in China, its first outside the US
- BlackBerry (BB) announced the BlackBerry QNX has been selected by Volvo (VLVLY) for its main domain controller in over 300k heavy vehicles.
- Snap (SNAP) will reportedly acquire ScreenShop application to fuel its shopping push, according to The Information.
- Xpeng (XPEV) is reportedly developing its own chip and is expected to tape out as early as year-end, according to CNEVpost.
The FOMC held the FFR target between 0.00-0.25%. It also enhanced its statement language to state a specific level for its asset purchases (USD 80bln Treasuries, USD 40bln MBS – unchanged levels) and removed references to buying at "the current pace", while also linking purchases to further progress being made towards reaching maximum employment and price stability goals. Notably, the Fed did not extend the weighted average maturities of its purchases (analysts judged the chances as 50/50 going into the meeting), with some suggesting that a January decision may be more appropriate, allowing the Fed to see how the pandemic's resurgence and fiscal stimulus plays out. Meanwhile, its forecasts saw near-term GDP upgraded, but 2023 onwards (including the long-term) was lowered; the unemployment rate projections were lowered across the forecast horizon, and the long-term dot was unchanged. The core inflation profile was lowered in 2020, but upped for 2021 and 2022, although interestingly, the longer-term inflation dots remained unchanged. To download the full report, please click here
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NOTE: This preview was initially posted on Tuesday 5th January
The Fed will keep rates unchanged at between 0.00-0.25%; its new policy framework is dovish, but unlikely to result in changes this week. The Fed will likely avoid announcing enhanced forward guidance as it waits to see how the recovery plays out. Dovish signalling will stem from the Fed’s updated projections; while growth and unemployment forecasts will likely be nudged up and down respectively, the central bank’s forecasts on inflation will be eyed to see if it still sees inflation running below target over its forecast horizon; if it does, the new policy framework implies it will be longer before the Fed begins thinking about lifting rates. Some changes to QE maturities are a possibility, although not the base case for the September meeting. Expect Powell to allude to yield curve targeting policies still remaining in its toolkit, following similar remarks from Vice Chair Clarida recently. If asked, Powell will likely again lean back on negative rates, though retain the optionality for the Fed to use them in the future if the situation demands. The FOMC will publish its rate decision and staff economic projections at 14:00 EDT/19:00 BST on September 16th; post-meeting press conference with Chair Powell will commence at 14:30 EDT/19:30 BST.
AVERAGE INFLATION TARGETING: The Fed's new average inflation targeting framework is generally considered to be a dovish development for future policy, although it is unlikely to result in any major policy changes this month. Nevertheless, the Fed might reflect its new inflation regime within its statement. Specifically, the line which refers to the "symmetric 2 percent inflation objective" could be tweaked; Goldman Sachs thinks it will be changed to "inflation that averages 2% over time," while others think ‘over time’ might instead be ‘on a sustained basis’.
ENHANCED FORWARD GUIDANCE: Officials seek more clarity on how the recovery is playing out before implementing specific forward guidance, which implies a September unveiling is unlikely. For now, statement tweaks may do much of the heavy lifting for the Fed. Chair Powell will likely still face questions on the theme, particularly since ‘a number’ of officials want rate guidance to be tightened. The general expectation is that the Fed will make these sorts of changes before the end of the year, perhaps in November. Officials appear to be leaning towards an outcome-based version, rather than a calendar-based version.
STAFF ECONOMIC PROJECTIONS: In the absence of other policy changes, the Fed’s dovish signal – that it will keep rates at current levels and keep policy accommodative – will come from the projections. These projections will need to walk a line of reflecting the US economy’s resilience, as well as telegraph the challenges that the economy still faces, and the level of support that is still needed. The Fed will still be keen to impress that the recovery will continue to be protracted, and risks to both growth and inflation are to the downside. Some officials have sounded more upbeat on the labour market than June’s 9.3% end-2020 forecast implies; Robert Kaplan, for instance, said he sees the unemployment rate ending the year around 8%. And on growth, Chair Powell recently said that three-months ago, there was a possibility of a much slower recovery, and of the recovery not going very well at all, but that has not happened; that puts the Fed’s current -6.5% GDP projection in line for an upward revision. The Fed’s June forecasts do not see inflation rising to 2% during its forecast horizon that runs through the end of 2022 (we will start getting 2023 forecasts at the upcoming meeting); if the Fed continues to see sub-2% inflation, the market will take that as another signal that rates will remain at present low levels for an extended period, given its new inflation framework. Finally, with regards to the notorious ‘dots’, the Fed sees no movement in rates through its forecasts, and that is unlikely to change this week. That would be in line with money market pricing (which, incidentally, prices a non-zero probability that rates could be cut into negative territory before 2023; if Powell is asked about negative rates, expect him to be cool on them, while retaining the optionality to keep them in the toolbox for the future).
QE MATURITIES: The Fed’s current QE programme is heavily weighted towards shorter-dated maturities, with over half of its current Treasury buying focussed on the maturities up to 5-years. Some analysts therefore have made the case that the Fed might extend its maturity horizon. While the general expectation is that the Fed will hold off any major changes, UBS argues that there are costs to waiting, as large amounts of front-end buying intensify future leverage ratio constraints for some banks. UBS says that USD 50bln of purchases in the 5-year+ sector would stimulate more than USD 80bln across the curve. And it argues that the Fed could extract more duration even with a smaller headline purchase amount. Finally, on asset purchases, we will be paying attention whether the Fed enshrines the rate of purchases in its statement (currently around USD 80bln per month, but that is not explicitly stated within its statement); some have suggested that this is something more likely to be seen when the Fed eventually raises the rate of its bond buys.
YIELD CURVE CONTROL: Fed Vice Chair Clarida and Governor Brainard both recently suggested that yield-curve control policies were still in the toolkit, though both believed that they were not likely to be implemented in the near-term. The remarks were particularly notable given that the Fed’s July meeting minutes had heavily leaned against the policy. It is therefore likely that Powell will give a similar nod if he is asked about it at the press conference, and will likely suggest the tool needs more study.
MARKET REACTION: Morgan Stanley says that, for the rates complex, the structural shift in monetary policy supports lower front-end real yields and steeper curves in the medium-term, but the market needs specific details on how the new framework will be implemented. Additionally, MS adds that a long-running QE programme and the possibility of more QE will keep a lid on how much the curve can steepen over the medium term. In that sense the USD's reaction will be a function of how rates markets respond. Traditionally, lower real yields have been a negative for the USD, but context will be needed; "When real yields are falling amid wider breakevens, USD weakness tends to be both consistent and widespread," MS explains, "however, when real yields fall alongside breakevens or when breakevens are tightening and real yields are rising, USD performance tends to be both positive and far more mixed."
SUMMARY: The immediate focus will be on whether the Fed has concluded its framework review fully, or if it is near completion. The Fed is expected to announce Average Inflation Targeting (AIT), but will this come with specific figures and commitments, or will it be of a fuzzier variety, allowing the Fed more flexibility? What are the implications for yield curve targeting, which the Fed appears to have cooled on? Does the Fed choose to retain that tool within its toolkit, or will it be dismissed more aggressively? How will the framework review evolve the Fed’s forward guidance? Will Powell provide any steer as to whether a consensus is developing around a certain type of forward guidance? On the outlook, Powell will likely highlight the uncertainty facing the US economy, and urge fiscal authorities to lend further support to the recovery.
FRAMEWORK REVIEW: Has the Fed fully concluded its framework review? If the framework review is only near completion, it might imply that Powell is still struggling to engineer a consensus on some of the key issues. An updated ‘Statement on Longer-Run Goals and Monetary Policy Strategy’ is expected at the September 16th FOMC. Either way, Powell is expected to reveal excerpts, and will likely announce that the FOMC is to adopt a regime of Average Inflation Targeting.
AVERAGE INFLATION TARGETING (AIT): The theory is that such a target would aim to overshoot the inflation goal while the economy is at full employment, to make up for shortfalls during downturns. The question is whether the Fed explicitly commits to make up the inflation ‘shortfall’, or will there be a willingness to let inflation ‘run hot’ for a period? Additionally, will the Fed state a numerical value for its AIT regime, say 2.00-2.25%, or 2.00-2.50%? Specifying the target comes with its own problems, such as having to define exact points of a business cycle.
YIELD CURVE TARGETING (YCT): Applying ‘caps’ to the short-end of the yield curve would effectively be a ‘stick’ to force the market to trade within defined levels, in line with the Fed’s guidance, and preventing any market tantrum that leads to an unwarranted tightening of financial conditions (in the Fed’s opinion, of course). But the July meeting minutes made clear that the Fed is not warm to outright yield curve targeting just yet. Nevertheless, the central bank will likely want to retain it as an option in case it is needed in the future. Accordingly, the review may discuss how the tool might be useful in certain conditions, though reiterate that the Fed was not intending to use these in the near-term.
FORWARD GUIDANCE: The immediate consideration is what the new policy framework will mean for forward guidance. Explicit changes to forward guidance – via either outcome-based or calendar-based – are likely to come after the September FOMC. The July minutes did not commit to a specific type of forward guidance, and even discussed a hybrid of the calendar/outcome options. We therefore look for a steer from Powell. Another area to keep an eye on is what the framework review and new forward guidance means for the infamous dot plot. Finally, what are the implications for the Fed’s asset purchases? The Fed has yet to formalise the pace of its bond buying within its statement – which some analysts had expected to be announced in July.
CURRENT OUTLOOK: If Powell comments on the current outlook, he is likely to reiterate his views from the July FOMC, where he generally leaned dovish, noting that the momentum of high-frequency data had slowed since June. Powell also suggested that household spending had recovered, around half of its pandemic decline, partly due to fiscal stimulus, though business investment was yet to recover. In July, the Fed chair reiterated that the labour market has a long way to go to recovery, though on inflation, price pressures were running significantly below the Fed’s target due to weaker demand. Powell will mostly likely again call on fiscal authorities to lend support amid the extraordinary uncertainty facing the economy.
POTENTIAL MARKET REACTION: JPMorgan notes that stocks have continued to do well, but there is scope for disappointment if Powell is ambiguous around AIT. But if the Fed chair sets the stage for a roll-out of the framework at the September meeting, the USD may have scope to sell-off, the bank thinks, and it could be by a decent degree if Powell reveals specifics and assurances that the Fed is moving forward.
Overall, a relatively contained European session for the Dollar, with the index consolidating throughout the day within a 92.150-388 band (ahead of the YTD low at 92.124) as participants zeroed in on the FOMC Minutes (Full preview available in the Research Suite), whilst State-side stimulus could involve a “skinny” deal of some USD 500bln, although an agreement is yet to be reached. Looking ahead, tomorrow will see the weekly release of the Initial and Continuing Jobless claims, alongside the Philly Fed Survey and comments from Fed’s non-voter Daly.
NZD, AUD, CAD
All non-US Dollar have displayed varying degrees of gains vs. the USD during European trade, albeit more so on technical factors given the absence of fresh fundamentals. NZD/USD remained the top performer in the G10-space having had rebounded off support at 0.6600 and thereafter topping its 21 DMA (0.6621) before encountering a barrier at 0.6650. Similarly, AUD/USD surpassed mild resistance at 0.7237-43 before rising above its 200 WMA (0.7255) to a high of 0.7275 as it eyes 0.7295 (Jan 31st high) ahead of 0.7300. Meanwhile, the Loonie experienced modest weakness (some 10 pips) as CPI metrics missed across the board, whilst the average of the BoC measures also cooled. Nonetheless, the Loonie kept its composure, with the pair remaining below its 200 DMA (1.3169).
Divergence in the core European FX after initially taking their cue from broader Dollar action. Cable gave up its post-CPI strength and some more amid Brexit-related commentary highlighting that the scope for successful negotiations remains narrow. That being said, BBC’s Adler noted that the EU still believes that a post-Brexit deal is more likely than not, albeit only just. GBP/USD trickled lower from its CPI high of 1.3267 to briefly dip below 1.3200 in the latter part of European trade. Conversely, EUR/USD remained flatlined since the start of the day and is poised to end the session towards the middle of a tight 1.1924-52 band, with eyes on Belarusian developments as EU leaders met to draw up a sanctions list after officials reaffirmed that they do not recognized the results of the elections. A sanctions list is expected to be revealed towards the latter part of the week.
Another display of deviation, with the JPY poised to end the European session around the middle of its 105.103-605 intraday parameter, with technicians flagging 104.86 (78% Fib of the Jul-Aug rise) upon a break below 105.00. CHF meanwhile reversed course after earlier strength, with central bank intervention not to be dismissed. EUR/CHF looks to end the European day back on a 1.08 handle having had printed a base at 1.0770.
A firm European session for the Yuan as a result of firmer PBoC CNY setting. USD/CNH was driven lower during the APAC session and briefly traded sub-6.9000 for the first time since January, but the pair is poised to end the European day little changed and in the middle of a 6.8977-9175 range. Meanwhile, the Yuan strength influenced some EMs to join in, notably the Turkish Lira ahead of the CBRT rate decision tomorrow. USD/TRY fell from a high of 7.3800 to levels sub-7.2800.
WATCH LIVE: The event can be streamed online via the Peterson Institute.
Powell’s remarks are likely to be a reiteration of his post-FOMC comments on 29th April. However, there are a few key themes we will be paying close attention to:
NEGATIVE RATES: Last week, some Federal Funds Futures contracts rose above par, signalling a modest but non-zero probability that the US will see negative rates. Fed officials including Powell have largely pushed back against this notion both recently and historically, stating it would not be an appropriate policy in the US. However, some officials (like dovish voter Kashkari), while not favouring the policy, have not completely ruled it out in the future. And then there is the political pressure from US President Trump, who has previously given mixed signals, this week called negative rates a “gift”. While Powell will likely argue against the policy again, analysts will be watching how aggressively he does so; leaving any optionality to use the policy in the future will likely keep those Fed Funds futures next year pricing some probability of negative rates, albeit moderate for now. In terms of market reaction, negative rates, while assumed to be dollar negative, might not be as negative as first perceived, Credit Suisse says; the bank notes USD-negative repercussions may be limited by the fact that most other major central banks will also be toying with negative rates and QE policies. For equities, when those FF futures began rising above par, it stoked equity upside.
YCC: Analysts believe that the Fed will eventually announce a yield curve control policy to put a lid on shorter-dated yields, and it could be used in combination with a pledge to keep rates low for a long, long time. This would keep rates low for both businesses and consumers during the recovery phase, but also provide favourable conditions for the US government to borrow at low levels to finance relief measures. Many think that the Fed would likely exhaust policies like YCC before resorting to negative rates. While the expectation is that such a policy might be announced at the June FOMC, some suggest it will still be a while before the Fed is ready to implement it. Accordingly, any commentary about timelines will be of use. BMO's analysts have suggested that a YCC policy would help the curve steepen out (short-end yields anchored by the Fed guidance and yield control, while longer-dated yields would rise on large Treasury issuance and the theoretical inflation and growth that recent stimulus fosters).
STIMULUS: The Fed chair is likely to reiterate that both fiscal and monetary authorities will need to do more to ensure that the recovery is robust. His remarks will be interesting given that Democrats in the House unveiled Stimulus v4.0, which Republicans have pushed back against, preferring to see how current measures play out before launching further largesse.