None Too Soon

December Rate Hike Probabilities:

USD   66.8% (Worries about a dovish surprise today)

EUR     2.7% = (Think December 2019)

GBP   89.9% + (Done deal, probably tomorrow)

CAD   21.4% (Ain’t gonna happen now, maybe May 2018)

Fed Rhetoric               25bps


At two o’clock this afternoon

The Fed will explain, none too soon,

That rates are on hold

But on the threshold

Of moving ere the next blue moon


In what has to be one of the least anticipated Fed meetings in the past several years, the FOMC will release its latest statement at 2:00 today. As there is no press conference scheduled to follow the meeting, expectations for any rate movement are essentially nil. Interestingly, the Fed Funds futures market rallied pretty sharply yesterday as can be seen by the 20% decline in the probability of a rate hike by December. However, I would dismiss that idea completely.

One of today’s minor narratives is that the Fed statement is far more likely to be seen as relatively dovish given the growing expectations of a December hike and the still notable absence of inflationary pressures. With the most recent core PCE release at 1.3%, the doves want to believe that the Fed could walk back talk of a December move. But I think that hope is misplaced. Given the ongoing strength of the economy as evidenced by recent GDP and PMI data, the Fed is going to cling to its Phillips Curve model and offer no indication that December is in question. While they won’t promise a rate hike then, they will not dispel the idea either. All told, I would fade any moves representative of the Fed changing their ideas.

But this morning, there are precious few of those ideas, quite frankly. The dollar has had a mixed session, with both winners and losers in both the G10 and EMG blocs. The biggest gainer overnight was NZD, which rallied nearly 1.0% after better than expected employment data was released. Remember, kiwi had suffered on the political changes that had occurred after the election several weeks ago, so it was likely a bit oversold as well. While it remains some 3.5% lower than before the election, last night’s move was impressive nonetheless. Away from that, though, the G10 has shown modest movement overall with the yen’s 0.3% decline (risk-on anyone?) the next largest move. We did see one interesting piece of news, UK Manufacturing PMI was released at a better than expected 56.3. This number continues to show that the pound’s post-Brexit depreciation has been beneficial for the sector, especially exports. The data also showed that price pressures continue to rise thus underpinning the BOE’s desire to raise rates tomorrow. While the pound is slightly higher, the 20-pip move is hardly enough to generate excitement.

Pivoting to the emerging markets, the biggest mover was TRY, falling 0.75% after the central bank governor warned of higher inflation in both October and November. This comment hurt Turkish equities and bonds as well as the lira. But away from that news, the other currencies in the group that fell all did so in minimal fashion. On the other side of the spectrum, KRW rallied 0.55% overnight, as relations between China and South Korea seem to be warming somewhat. If you recall, the Chinese were quite upset when the US sold South Korea the THAAD missile defense system in an effort to help protect against North Korean actions. The Chinese claimed it was a threat to them. But after a year, and arguably given just how erratically North Korea has behaved, the Chinese seem to be a bit more forgiving of the action and so economic ties are beginning to warm again. With China as Korea’s largest export destination, those relations are critical to South Korea’s economy. If these problems are now past, I would expect KRW to outperform most of its APAC brethren for a while. But away from that news, the rest of the gainers are unimpressive with no real storylines to follow.

Ahead of the FOMC this morning we will see the ADP Employment number (exp 200K); ISM Manufacturing (59.5) and Prices Paid (67.8); as well as Construction Spending (-0.2%). With yesterday’s blowout Chicago PMI number (66.2, exp 60.0), I would expect that traders are looking for even better data this morning. And it is this data that will continue to underpin the Fed’s drive to raise rates in December. Finally, at 2:00 the Fed statement will be released. I remain firmly in the camp that they will acknowledge the continued improvement in the economy and do nothing to dissuade from the idea that rates are set to move higher soon.


Good luck