1. A 'significant' change
The Fed altered the assessment of “significant underutilization of labor resources” and instead said the underutilization is “gradually diminishing”. It's a nod to the fall in the unemployment rate falling below 6%.
The statement was only put in a few meetings ago and Yellen has championed the plight of workers so this is a meaningful change and so long as job growth continues at around these levels, the decision about when to tighten will be solely focused on inflation.
2. The Fed didn't just end QE
There was a small chance the Fed could continue QE so ending it gave the dollar a slight boost but it wasn't just that the Fed ended it. It's slammed the door
3. Better signs on the economy
When the Fed announced it was ending QE, the statement also said officials “see sufficient underlying strength in the broader economy” to support more improvements in unemployment
4. “Market-based measures of inflation compensation have declined somewhat”
This is a negative sign for markets and this refers to things like 5-year breakevens and that's something Bullard highlighted. They've come down to 1.53% from above 2% three months ago. That's an ominous sign and the Fed is surely hoping for a quick recovery.
The takeaway is that inflation data will grow more important that jobs data in the months ahead.
5. Sometimes nothing needs to be said
A large part of the US dollar rally, we suspect, would have come so long as the Fed didn't do anything extraordinarily dovish. The US dollar trade was crowded in the days leading up to the FOMC and the traders were jittery and pulled out on soft pending home sales and durable goods orders. Other trades that got shaken out in the risk rout were also probably simply waiting for the event to pass so they could get back into longer-term positions.The last point (and the dearth of good reasons to buy other currencies) is the best reason why the US dollar rally will likely continue.
As the Fed slammed the door on QE3, the upgraded view on labour markets and diminishing worries of disinflation boosted the greenback, while the maintaining of “considerable time” guidance on low interest rates avoided any bringing forward of rate hike expectations, thus, weighing on bond yields and helping stocks pare their earlier pullback. There was a reason why yesterday we re-confirmed our Premium shorts in GBPUSD, AUDUSD, NZDJPY and longs in USDCHF. Full analysis here
As we approach the Fed decision, the chart analysis below reminds us that stocks market consistently fell by more than 15% between the conclusion of the Fed stimulus programs; between the end of QE1 and start of QE2; and between the end of QE2 & start of Operation Twist. Full analysis
As the clock winds down to the FOMC decision, data on Tuesday showed dramatically different views on the US economy. The market is waiting for signals The Canadian dollar was the top performer while the yen lagged on buoyant risk appetite once again. Japanese industrial production is due later. A new set of Premium Insights will be issued later tonight.
The US dollar dropped 30-60 pips across the board on a soft durable goods report early in US trading. That sent EUR/USD to 1.2765 from 1.2710. Capital goods orders non-defense ex-air fell 1.7% compared to a 0.7% rise expected. Over the past three months, the metric has averaged -0.5% in a statistic that's often seen as the best proxy for business investment. It's certainly something that will have gotten the Fed's attention and could temp their assessment of the economy.
Just 90 minutes later the US dollar bounced back as consumer confidence rose to the highest since the crisis and the Richmond Fed climbed to the best levels since 2010. That erased all of the decline in USD/JPY and about half the EUR/USD move.
Consumer confidence was the bigger driver but it's a dubious indicator and correlates to gasoline prices and little else. Moreover, it was entirely driven by the 'expectations' component rather than 'present situation.'
Overall trading was surprisingly robust with the Fed looming. The market is divided on the removal of “considerable time” from the FOMC statement. Betting on a dovish Fed has been the trade for years and after this meeting it could grow clear that inflation is a larger concern for the Fed than employment and growth.
The other headline that caught our attention was from the Bank of England's Cunliffe who sounded a strongly dovish tone. He doesn't speak often and when combined with similar rhetoric from Shafik yesterday it could mean the BOE is on the sidelines for longer than markets anticipate. Cable stalled out just ahead of the Oct 20 high of 1.6184 after durable goods and then stumbled to 1.6133 after the comments.
Markets may continue to consolidate ahead of the Fed in the hours ahead but Japanese data could also deliver some intrigue ahead of Thursday's equally important BOJ meeting. Sept industrial production is due at 2350 GMT and expected down 0.1% y/y. NOTE THAT GMT IS NOW EQUAL TO LONDON until late March 2015. NEW YORK, or EASTERN TIME this week is 4 hrs behind London/GMT, but changes to 5 hrs behind London/GMT starting next week.
|Industrial Production (SEP) (m/m) [P]|
|2.2%||-1.9%||Oct 28 23:50|
|Industrial Production (SEP) (y/y) [P]|
|-3.3%||Oct 28 23:50|
|Durable Goods Orders (SEP)|
|-1.3%||0.5%||-18.3%||Oct 28 12:30|
|Durable Goods Orders ex Transportation (SEP)|
|-0.2%||0.5%||0.4%||Oct 28 12:30|
|BoC Governor Poloz Speech|
|Oct 29 20:15|
|Cap Goods Orders Nondef Ex Air (SEP)|
|-1.7%||0.7%||0.3%||Oct 28 12:30|
|Cap Goods Ship Nondef Ex Air (SEP)|
|-0.2%||0.7%||0.1%||Oct 28 12:30|
|CB Consumer Confidence (OCT)|
|94.5||87.0||89.0||Oct 28 14:00|
|Richmond Fed Manufacturing Index (OCT)|
|20||11||14||Oct 28 14:00|
US pending home sales rose 1.0% year-over-year compared to 2.2% expected, which is hardly a dramatic miss but the market was clearly rattled as the euro immediately rose to 1.2722 from 1.2680 against the dollar. Similar, albeit smaller, moves came across the board.
We're highly skeptical that the market has a newfound fear about US housing. Rather, the market looks skittish about the Fed staying dovish and US dollar longs may have been looking for a reason to head to the exits.
The Fed focus is on guidance but inflation is a growing concern. 5-year breakevens indicate inflation at just 1.50% through the end of the decade and that's hardly something Yellen can ignore.
In the UK, the market finally got a taste of where the BOE's Shafik stands as she released a dovish interview with the FT. She sees “no significant evidence” of inflation and didn't sound like an MPC member in any hurry to hike.Looking ahead, the focus shifts to retail sales at 2350 GMT. The consensus is for a 0.8% y/y improvement and the BOJ could be watching closely ahead of the meeting on Oct 31. There is some talk of fresh dovish indications at that meeting and it shouldn't be overshadowed by the Fed.
|Pending Home Sales (SEP) (m/m)|
|0.3%||1.0%||-1.0%||Oct 27 14:00|
|Pending Home Sales (SEP) (y/y)|
|3.0%||2.2%||-4.1%||Oct 27 14:00|
|Retail Trade s.a (SEP) (m/m)|
|1.9%||Oct 27 23:50|
|Retail Trade (SEP) (y/y)|
|0.6%||1.2%||Oct 27 23:50|