Stocks rally, USD sinks following the Fed, RBNZ as expected, Oil rallies as inventories fall
Breaking news! The RBNZ has maintained its OCR at 2.00% as expected after cutting rates last meeting. The statement was a mishmash of hawkish and dovish comments. Governor Wheeler remains concerned about the lack of global growth, the drag of the higher Dollar and high interest rates relative to other developed countries and inflation expectations falling but also at the same time appears really concerned about rising house prices.
The central bank didn’t threaten to intervene in forex markets or signal future rate cuts, so overall the tone appears to be neutral to slightly dovish with the potential for more cuts in future if needed but for the moment, they appear prepared to wait and assess the results of previous moves. NZD is trading down slightly on the news.
It’s been a big day for news and a busy day for trading between three central bank meetings and two oil inventory reports.
The main event of the day was the FOMC meeting where the central bank once again held interest rates steady, but signalled toward a December increase. Three Fed members voted for a hike up from one in July with Mester and Rosengren joining George. In the statement, the Fed indicated that “The Committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives.”
On the flip side, FOMC members cut their GDP forecast for this year to 1.8% from 2.0% after the OECD cut its US GDP forecast to 1.4% from 1.8% earlier in the day. Fed members also cut their fed funds rate targets with the median estimate suggesting to 1 hike this year and 2 hikes in 2017. Overall, today’s decision can be seen as a hawkish hold, leaving the door open to a December increase as had been widely expected. The forecasts also confirmed statements from several Fed members that the neutral rate for this cycle has dropped into the 1.00% to 1.25% range.
Markets were choppy in the first half hour following the news spiking in both directions as traders scrambled to adjust positions but then after Fed Chair Yellen’s press conference started, stocks advanced into the close while USD retreated. Her comment that that the economy has more room to run than thought (before building inflation pressures and other imbalances) provided support for a Goldilocks scenario of strong growth (supporting corporate earnings) but not strong enough to force the Fed to hit the brakes.
The biggest moves in US trading today were in energy commodities where WTI soared over 3.0% on the back of more big drawdowns in DOE oil (6.2 mmbbls) and gasoline inventories confirming yesterday’s positive API report where stockpiles fell by 7.5 mmbbls. This news provides fundamental support heading into this weekend’s informal talks between OPEC and Russia about stabilizing the market with the potential for an OPEC meeting next week if weekend talks get anywhere.
In currency trading, a big rally in JPY against USD, EUR and JPY has been the biggest story. As time has progressed, traders have started to increasingly view the Bank of Japan's decision to shift the focus of its stimulus program to yield curve management as a sign monetary easing has reached the limit of what it can do. Yield curve management sounds more like the Fed's Twist operation and an attempt to help the country’s banks than a new effort, and essentially a shift into neutral.
Japanese markets are closed for the Equinox holiday today so it looks like the impact of today’s developments may continue to rock the markets through the rest of the week.
There have been no major corporate announcements after the US close today
Significant announcements released overnight include:
US FOMC interest rate 0.50% no change as expected
US FOMC GDP forecast cut to 1.8% from 2.0%
US FOMC core PCE inflation forecast 1.7% unchanges
US FOMC unemployment rate forecast raised to 4.8% from 4.7%
US FOMC Fed Funds end 2016 mdpt cut to 0.6% from 0.9%
US FOMC Fed Fuinds end 2017 mdpt cut to 1.1% from 1.6%
NZ RBNZ interest rate 2.00% no change as expected
OECD cut its world GDP growth forecast from 3.3% to 3.2%
OECD cut its US GDP growth forecast to 1.4% from 1.8%
US DOE crude oil inventories (6.2 mmbbls) vs street 3.25 mmbbls
US DOE gasoline inventories (3.2 mmbbls) vs street (1.4 mmbbls)
Upcoming significant economic announcements include:
(Note: 11:30 am in Sydney/Melbourne is currently 1:30 pm in Auckland, 4:30 pm in Vancouver, 7:30 pm in Toronto/Montréal, 12:30 am in London and 8:30 am in Singapore)
9:00 am BST Norway interest rate 0.50% no change expected
2:00 pm BST ECB Draghi speaking
6:10 pm BST Bank of England Carney speaking
8:30 am EDT US jobless claims street 261K
10:00 am EDT US existing home sales street 5.45M
10:00 am EDT US leading index street 0.0% vs previous 0.4%
10:30 am EDT US natural gas street 54 BCF
11:00 am EDT US KC Fed street (3)
1:00 pm EDT FOMC Lockhart speaking
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