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FOMC Meeting Trading Preview

Stock markets have bounced back overnight amid a flurry of earnings and manufacturing PMI reports. In the US this morning NASDAQ futures are up 0.5% propelled higher by positive earnings reports out of Apple and Electronic Arts while Dow and S&P futures are up 0.2%. In Europe the Dax is up 1.0% and the FTSE is up 0.5% while in Asia, the Nikkei gained 0.5% and the hang Seng fell 0.2% on its return to trading from Lunar New Year holidays.

Currency markets are mixed today. Sterling is rallying on indications that opposition to PM May’s Brexit bill is in disarray and that it is expected to pass the House of Commons perhaps as soon as today. Sentiment toward Brexit has been changing with each step closer and additional clarity being seen as a positive particularly since UK economic data has been so strong since the vote. On the other hand, JPY has come under renewed pressure with Governor Kuroda being forced to defend his policies from accusations by President Trump that the Bank of Japan has been manipulating its currency lower. Gold and most of the other major currencies are consolidating yesterday’s gains against USD at a higher level. 

There is a lot of news due in the US today that could potentially move the markets. The main event is this afternoon’s FOMC decision and statement. The central bank is not expected to change interest rates having announced a 0.25% increase at its last meeting in December. This time around there are three new regional Fed Presidents who have never voted before (Harker, Kaplan and Kashkari), but dissent is unlikely this time out. 

The statement is likely to attract the most attention with traders looking for signs of whether  the Fed is thinking about raising interest rates in March or not. With the new administration accusing China, Japan, Germany and others of currency manipulation and complaining about the high dollar, political pressure on the Fed from the campaign to raise rates aggressively appears to be fading heading into Chair Janet Yellen’s last full year of her term. 

For traders, the number of increases is important because at 100 and over the US Dollar is pricing in 4 or more increases this year. To get to four, and keep to gradual increases, the Fed would need to raise rates in March. If the Fed passes on March, the party line of 3 increases would still be possible, but my forecast of 2 would become more likely. A move away from March for the next hike would be seen as dovish (or at least less hawkish) and could decrease dollar support. 

Also keep an eye on the statement for any discussion of the Fed’s balance sheet. There has been chatter the Fed is starting to think about starting to slowly unwind the massive QE stimulus of the last several years. Any hints toward shrinking the balance sheet could be seen as hawkish and could offset one or more rate hikes and support the dollar.   

Ahead of the FOMC decision, there are a number of significant US economic reports including ADP payrolls and Manufacturing PMI. ADP is expected to come in just below 170K. The ISM PMI report could attract interest following yesterday’s big miss in Chicago PMI. Both of these reports may be viewed through the lens of whether they increase or decrease pressure on the Fed to raise interest rates soon. 

Corporate News

Apple    $3.36 vs street $3.22, sales $78.35B vs street $77.31B, guides next Q sales to $51.5-$53.5B below street $53.6B

Electronic Arts        $0.00 vs street ($0.13), guides March year to $2.91 above street $2.72 

Economic News

NZ employment change/quarter        0.8% vs street 0.7% vs previous 1.4%
NZ unemployment rate            5.2% vs street 4.8%

UK Nationwide house prices        4.3% as expected

Manufacturing PMI reports:

China official        51.3 vs street 51.2
Japan            52.7 vs previous 52.8

UK            55.9 as expected
Germany        56.4 vs street 56.5
France            53.6 vs street 53.4
Italy            53.0 vs street 53.3
Spain            55.6 vs street 55.0
Norway            51.4 vs street 51.2

Upcoming significant economic announcements include:

8:15 am EST        US ADP Payrolls            street 168K
10:00 am EST        US construction spending        street 0.2% vs previous 0.9%

10:30 am EST        US DOE crude oil inventories        street 3.0 mmbbls
10:30 am EST        US DOE gasoline inventories        street 1.5 mmbbls

2:00 pm EST        US FOMC decision            0.75% no change expected

Manufacturing PMI reports:

9:30 am EST        Canada         previous 51.8

9:45 am EST        US Markit        street 55.1
10:00 am EST        US ISM PMI        street 55.0
10:00 am EST         US ISM prices paid    street 65.5
10:00 am EST        US ISM new orders    previous 60.2
10:00 am EST        US ISM employment    previous 53.1

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