FOMC – where’s the surprise? Norges Bank keeps rates unchanged, but pondered a hike today.
BoE unity boosts the pound. Strong NZ GDP report sends NZD into the stratosphere.
Economic Data Highlights
- US Weekly ABC Consumer Confidence rose to -46 from -49 last week
- New Zealand Q2 GDP rose 0.1% QoQ vs. -0.2% expected and -0.8% in Q1
- Germany Sep. Preliminary Manufacturing PMI rose to 49.6 vs. 50.8 expected and 49.2 in Aug.
- Germany Sep. Preliminary Services PMI fell to 52.2 vs. 54.0 expected and 53.8 in Aug.
- EuroZone Sep. Preliminary Manufacturing PMI rose to 49.0 vs. 49.7 expected and 48.2 in Aug.
- EuroZone Sep. Preliminary Services PMI rose to 50.6 vs. 50.5 expected and 49.9 in Aug.
- Bank of England voted 9-0 on its policy decisions at the latest meeting.
- UK Aug. BBA Loans for House Purchase fell to 38095 vs. 40500 expected and 38186 in Jul.
- Norway Norges Bank kept rates at 1.25% as expected.
Upcoming Economic Data Highlights
- US Treasury Secretary Geithner to Speak (1330)
- US Weekly DOE Crude Oil and Product Inventories (1430)
- US FOMC Rate Decision (1815)
- New Zealand Westpac Consumer Confidence (2200)
- Japan Aug. Merchandise Trade Balance (2350)
- Australia Aug. HIA New Home Sales (0100)
FOMC – an event risk pivot?
The USD plumbed new depths in early Asia, though the action smacked of stop running or a large order roiling a low-liquidity market as the move was quickly erased into the European session this morning. NZDUSD went ballistic on a positive GDP report. With the market so extended ahead of the FOMC meeting, it has to seem that the greater risk for the immediate reaction to the meeting – regardless of the degree of dovishness/hawkishness – is a sharp correction to a stronger USD, even if that move ends up being reversed in the coming days. The two key developments to watch for: One – any defensive sign (in light of the rampant risk taking now taking place) from the Fed that suggests they are pondering a move toward a reduction of QE programs – particularly in mortgages. Two – any mention of the USD’s weakness and whether the Fed suggests any degree of concern.
The USD plumbed new depths in early Asia, though the action smacked of stop running or a large order roiling a low-liquidity market as the move was quickly erased into the European session this morning. NZDUSD went ballistic on a positive GDP report. With the market so extended ahead of the FOMC meeting, it has to seem that the greater risk for the immediate reaction to the meeting – regardless of the degree of dovishness/hawkishness – is a sharp correction to a stronger USD, even if that move ends up being reversed in the coming days. The two key developments to watch for: One – any defensive sign (in light of the rampant risk taking now taking place) from the Fed that suggests they are pondering a move toward a reduction of QE programs – particularly in mortgages. Two – any mention of the USD’s weakness and whether the Fed suggests any degree of concern.
Two scenarios: One – the Fed hints at exit strategies, even if these lie somewhere off in the mists of the future, and the risk appetite corrects sharply lower. Two – the Fed suggests no change is in the offing and easing remains at full speed ahead. Risk appetite celebrates sharply, but very briefly, and we get a correction in risk appetite late today or early next week. Either way, it seems a tactical pivot point may be nearing, even if it is not necessarily a trend-changer further out.
Exit strategies: the evidence
A couple of interesting items overnight escaped much market attention. First, the Bank of Canada announced on its website that it would be ending some of its emergency lending programs in late October. The Second was a report from "sources in the industry" that the Fed has been discussing with dealers how it could go about reverse repos – instruments used to drain the system of excess liquidity. There is no signs that the Fed is planning to do this, rather it may only have been an investigation of the marketplace to gauge the potential effect if it decided to do so. Still – this is an increase in noise on the exit strategy front.
A couple of interesting items overnight escaped much market attention. First, the Bank of Canada announced on its website that it would be ending some of its emergency lending programs in late October. The Second was a report from "sources in the industry" that the Fed has been discussing with dealers how it could go about reverse repos – instruments used to drain the system of excess liquidity. There is no signs that the Fed is planning to do this, rather it may only have been an investigation of the marketplace to gauge the potential effect if it decided to do so. Still – this is an increase in noise on the exit strategy front.
BoE stands together – breathing a bit of life into the pound.
The BoE voted unanimously to keep the Asset Purchase plan unchanged at £175 billion at the last meeting. The vote helped the pound pull back vs. the broader market after last week's furious sell-off. The two dissenters at the previous meeting, one of which was governor King himself, decided to vote with the other members this time, claimed that a bigger APP "could still be justified". Apparently, most members are hopeful that the worst is in the rear view mirror and that the "possibility that the recovery in asset prices and confidence could mark the start of a virtuous upward spiral for the economy", while at the same time warning of the risks of a "false dawn". The expression "flying blind" comes to mind when reading central banks' assessments of what is going on, and it is certainly hard to blame them. This recovery has been so dependent on public spending everywhere in the world, and central bankers are justifiably nervous about the degree to which it can be self-sustaining down the road if it takes the economy off public spending life support.
The BoE voted unanimously to keep the Asset Purchase plan unchanged at £175 billion at the last meeting. The vote helped the pound pull back vs. the broader market after last week's furious sell-off. The two dissenters at the previous meeting, one of which was governor King himself, decided to vote with the other members this time, claimed that a bigger APP "could still be justified". Apparently, most members are hopeful that the worst is in the rear view mirror and that the "possibility that the recovery in asset prices and confidence could mark the start of a virtuous upward spiral for the economy", while at the same time warning of the risks of a "false dawn". The expression "flying blind" comes to mind when reading central banks' assessments of what is going on, and it is certainly hard to blame them. This recovery has been so dependent on public spending everywhere in the world, and central bankers are justifiably nervous about the degree to which it can be self-sustaining down the road if it takes the economy off public spending life support.
Norges Bank primed for an October hike.
Norges Bank decided to keep rates unchanged at 1.25% as expected, but said in its statement that it considered raising rates today, definitely keeping it in the vanguard of the G-10 on the monetary policy cycle. This makes an October hike a near certainty, which will make Norway the first G-10 central bank to make a move for the cycle. The announcement brought EURNOK down to the 8.54 support area that has held since last November.
Norges Bank decided to keep rates unchanged at 1.25% as expected, but said in its statement that it considered raising rates today, definitely keeping it in the vanguard of the G-10 on the monetary policy cycle. This makes an October hike a near certainty, which will make Norway the first G-10 central bank to make a move for the cycle. The announcement brought EURNOK down to the 8.54 support area that has held since last November.
Chart: EURNOK
EURNOK swooned on the Norges Bank’s admission that it discussed a rate hike already for today’s meeting. This 8.54 area has been significant in the recent and more distance past and represents. A go lower could open up a try toward 8.40. It would be interesting to see, however, if the NOK rally is able to thrive if risk aversion comes back on the radar screen in the wake of a more hawkish than expected FOMC (all speculation – but NOK may need continued risk willingness here across markets to continue to thrive.).
EURNOK swooned on the Norges Bank’s admission that it discussed a rate hike already for today’s meeting. This 8.54 area has been significant in the recent and more distance past and represents. A go lower could open up a try toward 8.40. It would be interesting to see, however, if the NOK rally is able to thrive if risk aversion comes back on the radar screen in the wake of a more hawkish than expected FOMC (all speculation – but NOK may need continued risk willingness here across markets to continue to thrive.).
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