Today Janet Yellen and the FOMC will go back to square one and try to reset global expectations unleashed by the ill-fated December rate "policy mistake" hike, when at 2pm the Fed will announce assessment of the economy (even if not rate hike is expected today) followed by Yellen press conference half an hour later. Just like in December the Fed will be forced to telegraph that it is hiking rates as a signal of a strengthening US, and global, economy where "risks are balanced" and hope that the subsequent global reaction will not be a rerun of what happened in January and February when confusion about the Fed's intentions led to a global market rout.
Just as important this time around is that as of yesterday, stocks have largely entered a buyback blackout period, meaning the biggest (and according to many, the only) marginal buyer of equities has been sidelined for the next month.
Financial markets are being swayed by divergent monetary policies in the world’s leading economies. Fed funds futures show the odds of a U.S. rate increase by the end of June have shot up to 54 percent from about 6 percent in the past month as data has indicated growthrecent has strengthened modestly and taken off the immediate risk of a recession off the table.
The U.S. currency will probably respond favorably to signals from the Fed, which will look to keep its options open, Alan Ruskin, Deutsche Bank AG’s global co-head of foreign-exchange research in New York, wrote in a research report. "This also means leaving the door wide open to a June hike, and even ajar to an April hike,” he wrote, saying the March payrolls report and global risk sentiment will be important deciding factors. “The market will see this as more hawkish than currently discounted.”
"We’re waiting for U.S. monetary policy so its difficult for investors to rush in and buy,” said Chihiro Ohta, general manager of investment information at SMBC Nikko Securities Inc. in Tokyo. “We need to see whether we’ll have one or two rate hikes this year, and whether the next one will come in June.”
As a result Fed officials are broadly expected to reduce the number of rate hikes they see in 2016 and leave the target range for the federal funds rate unchanged at 0.25 percent to 0.5 percent.
So as we await Yellen in a few hours, European stocks rose initially then took a modest leg lower following downbeat comments from the UBS CEO detailing that 2016 has remained a challenging year for the company while markets speculated about the Credit Suisse CFO dropping out of a Morgan Stanley conference. The sentiment has now breached into the broader European sphere with the likes of Deutsche Bank lower by 2.2% and European stocks in the red. Asian equities fell as Japan’s Topix extended Tuesday’s retreat from a five-week high, while China closed modestly higher after Premier Li Keqiang said that China isn’t headed for a hard landing and the government will ensure expansion hits targets.
Meanwhile, WTI has halted its 2-day slide after API data overnight showed U.S. crude stockpiles climbed last week around half expectations for today’s more definitive EIA data. The price extended gains gains after Qatar said it would host an April producers meeting where the topic would be what else, a production freeze, one which however would not include Iran; Brent recovers above $39, moving in parallel w/ WTI market.
"OPEC/non-OPEC is doing its best to keep the verbal intervention going, indicating a production freeze might be done without Iran’s participation,” said Ole Hansen, Saxo Bank head of commodity strategy. “Prices have also been helped by API data yesterday. We broke some technical levels and that attracted selling, but with the API data and renewed talk of an April mtg this has enabled prices to resume higher."
The dollar strengthened against most major currencies while US equity futures are broadly unchanged.
Market Snapshot
- S&P 500 futures up 0.1% at 2008
- Stoxx 600 down 0.1% to 340
- FTSE 100 up 0.2% to 6154
- DAX up 0.6% to 9997
- German 10Yr yield down less than 1bp to 0.31%
- Italian 10Yr yield down 2bps to 1.35%
- Spanish 10Yr yield down 2bps to 1.5%
- MSCI Asia Pacific down 0.6% to 126
- Nikkei 225 down 0.8% to 16974
- Hang Seng down 0.2% to 20258
- Shanghai Composite up 0.2% to 2870
- US 10-yr yield down 1bp to 1.96%
- Dollar Index up 0.19% to 96.81
- WTI Crude futures up 1.6% to $36.92
- Brent Futures up 1.2% to $39.19
- Gold spot up less than 0.1% to $1,233
- Silver spot up less than 0.1% to $15.29
Top Global News
- Oracle Cloud Growth Shows Promise as Company Tops Estimates: 3Q adj. EPS 64c, est. 62c; sales of key cloud-based products exceeded the co.’s outlook and Co-Chief CEO Safra Catz said growth rates could rise further
- Trump, Clinton Tighten Grip as Kasich Wins Ohio; Rubio Drops Out: Trump lost Ohio to John Kasich, Florida Senator Marco Rubio suspended campaign after losing in home state; Rubio’s Disappointing Presidential Run Ends With Florida Defeat
- Kasich Vows to ‘Go All the Way to Cleveland’ After Ohio Victory
- LSE to Merge With German Rival to Create European Titan: LSE’s equity holders will own 45.6% of the enlarged group, while Deutsche Boerse stockholders will get the remaining 54.4%
- Apple Takes Swing at U.S. Over Demand to Help Unlock IPhone: Apple said in a court filing Tuesday that forcing it to create software to degrade iPhone security features would inevitably endanger the privacy of hundreds of millions of people
- Chipotle Forecasts First-Quarter Loss as Food Crisis Lingers: Sees 1Q loss at least $1-shr vs est. EPS 3c; Feb. comp sales down 26.1% vs est. down 23%
- Most U.S. Dealmakers See Volume Drop This Year After Record 2015: Brunswick survey finds 70% expect N. America activity to fall
- FCC May Circulate Draft Order Approving TWC, Charter Deal: WSJ: FCC Chairman Tom Wheeler likely to circulate draft order approving Charter Communications deal to buy Time Warner Cable with certain conditions, WSJ reports
- Mitel Said in Talks to Buy Polycom: Reuters
Looking at regional markets, we start in Asia where stocks traded mixed following the lacklustre close from Wall St. with price-action muted as participants remained cautious ahead of today's FOMC decision. ASX 200 (+0.2%) saw choppy trade as financial and tech gains counter-balanced weakness in material names. Nikkei 225 (-0.8%) underperformed amid losses in financials and a firmer JPY post-BoJ policy decision, while Sharp shares declined around 10% as Foxconn continued to delay a deal agreement. Chinese markets were also indecisive amid a lack of catalysts to spur trade, with the Shanghai Comp (+0.2%) relatively flat. 10yr JGBs initially extended losses following yesterday's BoJ inaction although prices have rebounded from their worst levels, with the BoJ in the market for JPY 1.27tr1 of government debt ranging from 1yr-10yrs.
BoJ Governor Kuroda said will ease on all 3 dimensions if necessary and added there is still a possibility of further rate cuts if additional easing is judged to be appropriate. Kuroda added he cannot say now which tools would be utilised if they decided to ease further and said it was theoretically possible to reduce rates when asked if BoJ could lower rates to -0.5%.
China's Premier Li said downward pressures on the economy continue to expand, but added he is fully confident in long-term growth prospects. Premier Li also stated that China find new jobs for workers in over capacity sectors and that China is willing to spend more than planned for re-employment.
Asia Top News
- Kuroda Says Minus 0.5% Rate Is Theoretically Possible for Japan: Governor says BOJ has quite a lot of room to cut key interest rate further
- Asia Hedge Funds Had Worst-Ever Start to Year, Eurekahedge Says: Returns are also the worst among major global regions
- China’s Li Outlines Dual Growth-Reform Plan as Challenges Mount: Chinese premier says economic reforms and development are not in conflict
- Singapore Wireless Battle Heats Up as Entrant Taps Goldman, DBS: MyRepublic enlists banks to help raise S$250m
- BlackRock’s India Venture Buys Long Bonds as Rate Cut Room Seen: Quarter-point RBI rate cut more or less priced in, fund says
In Europe, equities initially kicked off the session in the green today, benefitting from upside in the energy and materials sector (Euro Stoxx: 0.0%). However, stocks were then dragged lower by the SMI (-0.2%) amid softness in UBS (-3.0%) and Credit Suisse (-4.6%) following downbeat comments from the UBS CEO detailing that 2016 has remained a challenging year for the Co. while markets also speculate about the Credit Suisse CFO dropping out of a Morgan Stanley conference, although the Co. have denied to comment on such speculation. Nevertheless, the sentiment has now breached into the broader European sphere with the likes of Deutsche Bank lower by 2.2% and European stocks in the red.
European Top News
- Volkswagen Europe Market Share Continues Drop Amid Recalls: Volkswagen’s brands accounted for 24% of new auto registrations in Feb. vs. 25.4% y/y; industrywide European car sales jumped 14% in February to 1.09m vehicles
- Munich Re Continues Share Buybacks Amid Lower Profit Outlook: Plans to repurchase EU1b of its stock before 2017 shareholder meeting; targets EU2.3b-EU2.8b FY profit after EU3.1b in 2015
- BMW CEO’s Strategy Puts Focus on Electric, Luxury Vehicles: Plans to roll out more electric cars and add self-driving features faster than rivals, also roll out more sport- utility vehicles; targets "slight’’ rise in 2016 pretax profit, revenue
- Bilfinger Scraps Payout as Widening Losses Pile on Pressure: Won’t pay a div. for 2015; net losses widened almost 7-fold
- Zodiac Shares Tumble After Profit Forecast Cut an Eighth Time: Current operating income in the year ending Aug. 31 will “come in close to” the amount reported last year
- Osborne Seeks Low-Cost Vote Winners as Budget Tightens Austerity: Schools in England to be freed from local- authority control, school days will lengthen under GBP1.5b package of measures designed to improve education standards
In FX, it has been mostly a morning of consolidation in Europe today, with the FOMC ahead keeping most players on the side-lines for now.
The Bloomberg Dollar Spot Index rose 0.2 percent, climbing for a third day on bets the Fed will reaffirm its commitment to raising interest rates. The U.S. currency will probably respond favorably to signals from the Fed, which will look to keep its options open, Alan Ruskin, Deutsche Bank AG’s global co-head of foreign-exchange research in New York, wrote in a research report. "This also means leaving the door wide open to a June hike, and even ajar to an April hike,” he wrote, saying the March payrolls report and global risk sentiment will be important deciding factors. “The market will see this as more hawkish than currently discounted.”
The yen retreated 0.5 percent to 113.70 per dollar, after strengthening 0.6 percent on Tuesday as the Bank of Japan kept its policy rate at minus 0.1 percent at a review. The central bank has quite a lot of room to cut the key rate further and theoretically it could go to minus 0.5 percent, Governor Haruhiko Kuroda told parliament on Wednesday.
China’s yuan was headed for its biggest three-day loss since January as the central bank lowered its daily fixing for the currency amid concern a potential tax on foreign-exchange transactions will hurt investor sentiment. It slipped 0.14 percent from Tuesday’s close. Indonesia’s rupiah slumped 0.7 percent before a central bank policy meeting on Thursday at which interest rates are forecast to be cut.
In commodities, oil prices were boosted today as producers agreed to meet in April, WTI rose USD 0.50/bbl and a smaller than expected build in the APIs. West Texas Intermediate crude climbed 1.3 percent to $36.82 a barrel, after sliding 5.6 percent over the past two days as Iran indicated it won’t be joining other major producers in freezing output. It’s tumbled 38 percent since the middle of last year.
U.S. crude inventories increased by 3.2 million barrels last week, according to a Bloomberg survey ahead of government data Wednesday, with a report from the American Petroleum Institute said to indicate an increase of 1.5 million barrels. Total SA Chief Executive Officer Patrick Pouyanne sees the oil market back in balance during 2016, he said in an interview with Le Progres newspaper.
Copper was little changed in London, while nickel added 0.2 percent. Gold for immediate delivery fell 0.1 percent to $1,231 an ounce, set for the lowest close in two weeks. It’s still up 16 percent for the year.
"Gold has pulled back over the last few days, which was long overdue after an otherwise continuous rally since the start of 2016," Jordan Eliseo, Sydney-based chief economist at trader Australian Bullion Co., said in an e-mail. “All eyes will be on the Fed meeting, and any clues as to potential pace of monetary tightening throughout 2016."
Bulletin Headline Summary from Bloomberg and RanSquawk
- Softness in banking names has dragged European equities in the red amid downbeat comments from the UBS CEO and reports of the Credit Suisse CFO dropping out of a conference
- FX markets have seen a morning of consolidation in Europe today, with the FOMC ahead keeping most players on the side-lines for now.Looking ahead, highlights include FOMC Rate Decision, UK Budget US Housing Starts, US Industrial Production, New Zealand GDP
- Treasuries little changed in overnight trading, global equity markets mixed before today’s FOMC rate decision and updated SEP at 2pm ET to be followed by Yellen presser at 2:30pm ET.
- Treasuries are the world’s worst-performing bonds over the past month on speculation the Federal Reserve will signal it’s sticking to its plan to raise interest rates -- even if it delays the moves
- The Bank of Japan has quite a lot of room to cut its key interest rate further and theoretically it could go to minus 0.5 percent, Governor Haruhiko Kuroda said in parliament; Japan’s regional banks are shifting their investments toward riskier assets abroad or outside of fixed income as yields below zero erode the appeal of Japanese government bonds
- Oil producers from OPEC and beyond are finalizing a plan to discuss freezing output at a meeting in Qatar in mid-April, the latest move in a campaign by financially-stricken crude exporters to shift the dynamics of an over-supplied market
- If Saudi Arabia and Russia were to pull off a diplomatic coup and persuade producers all over the world to join their oil-output freeze, it would have little impact on the global surplus
- U.K. unemployment held at its lowest rate for a decade and wage growth ticked higher as the labor market continued to improve
- Donald Trump’s road to securing the Republican presidential nomination got longer while Hillary Clinton’s got shorter as the split decision on Trump in two critical states in Tuesday’s voting increased the possibility of a chaotic Republican national convention
- $8.81b IG corporates priced yesterday; WTD $17.11b, MTD $103.53b, YTD $397.78b; $350m HY priced yesterday, $6.65b MTD, $21.5b YTD
US Event Calendar
- 7:00am: MBA Mortgage Applications, March 11 (prior 0.2%)
- 8:30am: Housing Starts, Feb., est. 1.150m (prior 1.099m)
- Housing Starts, Feb., est. 4.6% (prior -3.8%)
- Building Permits, Feb., est. 1.200m (prior 1.202m)
- Building Permits, Feb., est. -0.2% (prior -0.2%)
- 8:30am: CPI m/m, Feb., est. -0.2% (prior 0%)
- CPI Ex Food and Energy, Feb., est. 0.2% (prior 0.3%)
- CPI y/y, Feb., est. 0.9% (prior 1.4%)
- CPI Ex Food and Energy y/y, Feb., est. 2.2% (prior 2.2%)
- CPI Index NSA, Feb., est. 236.873 (prior 236.916)
- CPI Core Index, Feb., est. 245.595 (prior 245.232)
- Real Avg Weekly Earnings y/y, Feb. (prior 1.2%, revised 1.1%)
- 9:15am: Industrial Production m/m, Feb., est. -0.3% (prior 0.9%)
- Capacity Utilization, Feb., est. 76.9% (prior 77.1%)
- Manufacturing (SIC) Production, Feb., est. 0.1% (prior 0.5%)
Central Banks
- 2:00pm: FOMC Rate Decision (Lower Bound), est. 0.25% (prior 0.25%)
- FOMC Rate Decision (Upper Bound), est. 0.5% (prior 0.5%)
- 2:30pm: Fed’s Yellen holds news conference
DB's Jim Reid concludes the overnight wrap
Today is one of those days to get the pulses racing as we hear the latest from the Fed after their FOMC. The probability of a June hike has gone up to 54% (from 2% at the lows last month) and the Fed are probably going to be in a more confident mood than they were at the end of January. For reference as to prevailing conditions we've tracked where important assets were the day before the Dec and Jan meetings and where they are now. The S&P 500 was 2,043, 1,904 and 2,016 now. 10y Treasuries were 2.267%, 1.995%, and 1.956% now. WTI Oil has gone from $37.35/bbl to $31.45/bbl to $36.86/bbl now. US IG spreads from 165bps to 190bps to 175bps now. US HY from 688bps to 766bps to 663bps now. Finally the 5y5y inflation swap forward has gone from 2.145% down to 1.920% and back to 1.952% now. So if you looked at current vs Dec the world appears fairly calm. However the volatility in between needs to be acknowledged.
As a prelude to today’s main event, DB’s Peter Hooper expects the Fed to be very much in wait and see mode but also see risks as close to balanced and a rate hike by June as likely if economic and financial conditions develop along the lines they are expecting. Economic data on the whole has been improved since January (yesterday’s retail sales data aside – which we go into below) which should allow the FOMC to sound a bit more upbeat. Wage inflation indicators are pointing to a small net acceleration on balance, while the price inflation picture, although still mixed, is also moving in the right direction. US financial conditions, after deteriorating sharply earlier this year, have returned most of the way to their end-2015 levels in recent weeks. Peter thinks that on balance, the BoJ and ECB actions will not restrain the Fed. Clearly a lot of the focus will also be on the dot plots which will likely be revised down with the median number of rate hikes this year reduced from four to three. It’s also possible we see the longer-term neutral dot move down from 3.5% to 3.25%. All this at 6.00pm GMT tonight.
Price action and activity this week leading into the meeting, has been very subdued. Yesterday was another lower than average volume day (by over 25%) for the S&P 500 with the index closing -0.18% and a second consecutive small daily loss, with the intraday range of 0.53% taking over from Monday as the smallest this year. Prior to this we’d seen European equities snap two days of strong gains (Stoxx 600 closing -1.10%), but it was credit markets which were the under-performers again. Itraxx Main was 4bps wider by the close of play and combined with the weak day on Monday (+5bps), has now given up close to half of the post ECB gains. Crossover was 11bps wider also, while financials also had a rough day (iTraxx senior and sub fins +5bps and +15bps respectively) despite the FT reporting that yesterday was the biggest supply day for new financials issuance in Europe in 15 months. US credit markets had a weak day too with CDX IG ended 4bps wider also.
Another weak day for commodity markets more than played its part with WTI (-2.26%) extending its poor start to the weak and going below $37/bbl in the process, seemingly on the Iran news we touched on yesterday. Base metals were also soft (Aluminium -1.46%, Zinc -2.35%) while Iron Ore tumbled 4.81% and has now plummeted an impressive 17% from those highs made just over a week ago. Also weighing on sentiment (and most notably the healthcare sector) was the latest news from the big North American drug developer and distributor Valeant. As well as slashing full year profit guidance for the second time in just five months, prospects of a technical default on its $30bn debt load was also raised unless the company can negotiate an extension on its 10-K report. That saw the shares close down -51.49% yesterday while the bonds were also hammered. The longest dated 2025 bonds were down over 10pts and are trading around 77c, while bonds due in just two years were down over 7pts and quoted around 91c. A big deal given the sheer quantum of debt and the fact that the company is the 4th largest US HY corporate issuer.
This morning in Asia we’ve seen markets generally follow the lead from the US and Europe yesterday with pre-FOMC caution in full display. Despite a bit of a rebound for Oil, the Nikkei (-0.75%), Hang Seng (-0.14%) and ASX (-0.15%) are all down. China is a bit more mixed with the Shanghai Comp (+0.31%) in positive territory after the midday break, but with the Shenzhen (-0.63%) lower. Credit indices in Asia and Australia are a tad wider. Meanwhile there’s been some further comments from Bank of Japan Governor Kuroda, who, when questioned this morning has indicated that ‘an additional rate cut to -0.5% is possible, in theory’.
Elsewhere the other main news overnight is the latest on the US President race where Hilary Clinton is one step closer to securing the Democratic nomination with victories in Florida, Ohio and North Carolina over Sanders. In the Republican race, Trump has secured victory in the important Florida vote as well as Illinois and North Carolina. Kasich has secured Ohio, while Rubio has now announced that he is ending his campaign.
A quick recap of that US data now. Retail sales last month were a little better than expected (with the exception of the control group component), but it was the material downward revisions to the January readings which most disappointed. In February the headline (-0.1% mom vs. -0.2% expected) and core (+0.3% mom vs. +0.2% expected) both beat, however there was a six-tenth downward revision and five-tenth downward revision to the respective January prints to -0.4% mom and -0.1% mom respectively. The control group component came in flat last month (vs. +0.2% expected) while the January reading was also taken down four-tenths to +0.2% - the most concerning given its input into GDP. That gives a very different read to retail sales so far this year, while the Atlanta Fed downgraded their Q1 GDP forecast for this year to 1.9% from 2.2% previously on the back of the data.
Elsewhere, the rest of the data was a bit of a mixed bag. Headline PPI last month was in line following a -0.2% mom decline, while the core was also as expected at +0.1% mom. The big positive surprise came from this month’s empire manufacturing print which saw a robust 17pt rise to +0.6 (vs. -10.5 expected) and the highest since July 2015. Business inventories nudged up +0.1% mom in January (vs. 0.0% expected) and finally the NAHB housing market index remained unchanged this month at 58.
Treasury yields did actually rise post the data, although were little changed by the close of play with the 10y benchmark hovering around 1.970%. Sovereign bond yields in Europe had previously crept higher while some of the sharper moves were reserved for currencies. Commodity-sensitive currencies were the big underperformers, while Sterling tumbled over 1% as investors reacted to the latest Brexit referendum poll and today’s looming Budget. On the former, an ORB poll conducted for the Telegraph newspaper showed that voting is tight, but the number of votes for the leave campaign slightly outweighed the stay campaign at 49% vs. 47%. However interestingly the same poll also showed that, accounting for the likelihood of voting being taken into account, the leave campaign actually rose to 52% versus 45% to remain.
Taking a look at the day ahead now then, where this morning in Europe the bulk of the attention will be on the UK where we will first receive the latest employment report (no change in the unemployment rate expected) followed thereafter by the release of the Budget. This afternoon in the US, its another busy session with the most notable release being the February CPI report where currently expectations are running for -0.2% mom at the headline and +0.2% mom at the core. February housing starts and building permits data is due at the same time, before the February industrial production (-0.3% mom expected), capacity utilization and manufacturing data is released. Of course this is all before the main event tonight with the conclusion of the March FOMC meeting, the outcome of which we will know at 6.00pm GMT with Fed Chair Yellen due to speak shortly after.