The data from China last night
Could, President Xi, give a fright
While IP was fine
Show’s everything there’s not quite right
Now, turning our focus back home
The question that’s facing Jerome
Is should he increase
The speed that they cease
QE? Or just leave it alone?
Clearly, the big news today is the FOMC meeting with the statement to be released at 2:00 and Chair Powell to face the press 30 minutes later. As has been discussed ad nauseum since Powell’s Congressional testimony two weeks ago, expectations are for the Fed to reduce QE purchases more quickly than the previously outlined $15 billion/month with many looking for that pace to double. If that does occur, QE will have concluded by the end of March. This timing is important because the Fed has consistently maintained that they would not raise the Fed funds rate while QE was ongoing. Hence, doubling the pace of reduction opens the door for the first interest rate hike as soon as April.
And let’s face it, the Fed has fallen a long way behind the curve with the latest evidence yesterday’s PPI data (9.6%, 7.7% core) printing much higher than expected and at its highest level since the series was renamed the PPI from its previous Wholesale Price Index in 2010. Prior to that, it was in the 1970’s that last saw prices rising at this rate. So, ahead of the meeting results, investors are trying to analyze just how quickly US monetary policy will be changing. Recall, yesterday I made a case for a slower reduction than currently assumed, but as of now, nobody really knows.
What we do know, however, is that the economic situation in China is not playing out in the manner President Xi would like. Last night China released its monthly growth data which showed Retail Sales (3.9% Y/Y) Fixed Asset Investment (5.2% Y/Y) and Property Investment (6.0% Y/Y) all rising more slowly than forecast and more slowly than last month. Only IP (3.8% Y/Y) managed to grow. As well, Measured Unemployment rose to 5.0%, higher than expected and clearly not the goal. For the past several years China has been ostensibly attempting to evolve its economy from the current mercantilist state, where production for export drives growth, to a more domestically focused consumer-led economy like the West. Alas, they have been unable to make the progress they would have liked and now have to deal with not only Covid, but the ongoing meltdown in the property sector which will only serve to hold the consumer back further. Interestingly, the PBOC did not adjust the Medium-term Lending Rate as some pundits had expected, keeping it at 2.95%, and so, it should not be that surprising that the renminbi has maintained its strength, although has appeared to stop rising. A 2.95% coupon in today’s world remains quite attractive, at least for now, and continues to draw international investment.
Aside from these stories, the other headline of note was UK inflation printing at 5.1%, its highest level since 2011 and clearly well above the BOE’s 2.0% target. Remember, the BOE (and ECB) meet tomorrow and there remains a great deal of uncertainty surrounding their actions given the imminent lockdown in the UK as the omicron variant spreads rapidly. Can the BOE really tighten into a situation where growth will clearly be impaired? It is this uncertainty that has pushed the timing of the first interest rate hike by the BOE back to February, at least according to futures markets. But as you can see, the BOE is in the same position as the Fed, inflation is roaring but there are other concerns that prevent it from acting to stem the problem. In sum, the betting right now is the Fed doubles the pace of taper and the BOE holds off on raising rates until February, but either, or both, of those remain far less than certain. Expect some more market volatility across all asset classes today and tomorrow.
With all that in mind, here’s a quick look at markets overnight. Equities in Asia (Nikkei +0.1%, Hang Seng -0.9%, Shanghai -0.4%) mostly followed the US declines of yesterday, although Japan did manage to eke out a small gain and stop its recent trend lower. Europe, on the other hand, is having a better go of it with the DAX (+0.3%) and CAC (+0.6%) both performing well as inflation data there was largely in line with expectations, albeit far higher than targets, and there is little concern the ECB is going to do anything tomorrow to rock the boat. In the UK, however, that higher inflation print is weighing on equities with the FTSE 100 (-0.2%) underperforming the rest of Europe. Ahead of the open, and the FOMC, US futures are little changed in general, although NASDAQ futures continue to slide, down (-0.25%) as I type.
The rally in European stocks has encouraged a risk-on attitude and so bond markets are selling off a bit with yields edging higher. Well, edging except in the UK, where Gilts (+3.7bps) are clearly showing their concern over the inflation print. But in the US (Treasuries +0.3bps), Germany (Bunds +1.2bps) and France (OATs +0.9bps) things are far less dramatic. Given the imminent rate decisions, I expect that there is a chance for more movement later and most traders are simply biding their time for now.
The commodity picture is a little gloomier this morning with oil (-1.2%) leading the way lower and weakness in metals (Cu -1.5%, Ag -0.5%, Al -1.4%) widespread. Gold is little changed on the day and only NatGas (+2.1%) is showing any life. These markets are looking for a sign to help define the next big trend and so are also awaiting the FOMC outcome today.
Finally, the dollar continues to consolidate its recent gains but has been range trading for the past month. The trend remains higher, but we will need confirmation from the FOMC today to really help it break out I believe. In the G10, the biggest gainer has been AUD (+0.4%), but that appears to be positional, as Aussie has been sliding for the past week and seems to be taking a breather. Otherwise, in this bloc there are an equal number of gainers and laggards with none moving more than 0.2%, so essentially trendless.
In the emerging markets, TRY (-2.1%) continues its decline toward oblivion with no end in sight. Elsewhere, ZAR (-0.6%) has suffered on continue high inflation and the SARB’s unwillingness to fight it more aggressively. INR (-0.5%) suffered on the back of a record high trade deficit and concerns that if the Fed does tighten, funding their C/A gap will get that much more expensive. Beyond those, though, there has been far less movement and far less interest overall.
We do have some important data this morning led by Empire Mfg (exp 25.0) and Retail Sales (0.8%, 0.9% ex autos) at 8:30 and then Business Inventories (1.1%) at 10:00 before the FOMC at 2:00. The inventory data bears watching as an indication of whether companies are beginning to stockpile more and more product given the supply chain issues that remain front and center across most industries.
And that’s really what we have at this point in time. A truly hawkish Fed should help support the dollar further, while anything else is likely to see the dollar back up as hawkish is the default setting right now.
Good luck and stay safe