t’s been all about crude oil and central banks today with three big decisions on the schedule plus an ECB conference generating chatter.
For the last several days, crude oil had been under pressure after dovish central banks increased concerns about weakening economies and energy demand, but staged a major relief rally today after the DOE implied demand report showed another increase sending bears back to the sidelines in what looks like a short squeeze.
Today’s FOMC decision and statement also has generated a lot of action in the markets. As expected the FOMC left rates unchanged with one hawkish dissenter, same as last time. The statement was viewed by the street as a hawkish hold, sending USD sharply higher while stocks, EUR and gold fell like stones.
The FOMC showed no sign of panic from recent soft US data indicating the economy continues to grow at a moderate pace. There was also no major change to its tone on employment and inflation and it dropped prior comments of concern about overseas economies. The Fed left the door wide open to a potential interest rate hike at its December meeting (particularly if the US budget crisis blows over by then an important but unmentioned factor).
It seems many traders had been expecting a more dovish statement out of the Fed, and had to scramble to get back on side. The USD rally steamrolled over everything in its path even gold and SEK which had been among the stronger performers in the morning took big hits in the afternoon amid bearish reversals.
One major market that has been able to hold on to its gains was crude oil as the combination of DOE and FOMC news indicated that the risk of falling US demand has subsided and could continue to increase from here. GBP fell the least among major currencies with the Bank of England still widely expected to raise interest rates in early 2016. Continental currencies (EUR, CHF, SEK, NOK) took the biggest hits with the ECB expected to join the Riksbank in increasing QE and the SNB reviewing its policy amid concerns of a weakening Eurozone economy. CAD fell less than NOK, helped by WTI’s strong rally and Canada’s closer ties to the US economy.
As the afternoon has progressed, the action in stocks appears particularly important. Initially the hawkish hold news sent US stocks sharply lower, but after a while, they regained their footing and managed to pretty much get back to where they were before the news. This major show of support from traders indicates a growing recognition that a hawkish FOMC means a strong economy and positive prospects for corporate earnings and resource demand. This mirrors the concerns about a weak economy that had been sparked by the FOMC’s September dovish hold, and indicates that the “bad news for the economy is good news for stocks” liquidity sentiment that had dominated market thinking for so many years has truly been kicked to the curb.
NZD, like other currencies has been crushed by the USD rally but the reaction to its own interest rate news have been more muted. The RBNZ held the OCR at 2.75% after giving back 3 of last year’s 4 interest rate increases. The central bank indicated that while dairy prices have rebounded it’s unclear if this will continue. Meanwhile, it has taken measures to try and keep a lid on house prices. It left the door open to further cuts if needed, but on balance, no major surprises.
JPY also fell only moderately and may remain active through tomorrow’s rate decision as traders try to determine whether the Bank of Japan will increase QQE at its own meeting later this week amid mixed signals.
US markets may remain active overnight and through tomorrow morning’s first crack at Q3 GDP which is expected to confirm that the economy slowed down in the summer. Today’s FOMC decision suggests that the GDP report could meet or even exceed street expectations.
Corporate news will return tomorrow.
Significant announcements released overnight include:
NZ interest rate decision 2.75% no change expected
US interest rate decision 0.25% no change expected
Sweden interest rate (0.35%) no change as expected, increased QE program by SEK 65B or US$7.6B, Riksbank indicated rates have not reached a floor and it could cut them further, also indicated it’s seeing inflation start to rise and indicated it could intervene in forex markets if SEK appreciates too quickly
US advance goods trde balance ($58.6B) vs street ($64.3B)
US DOE crude oil inventories 3.3 mmbbls vs street 3.5 mmbbls
US DOE gasoline inventories (1.1 mmbbls) as expected
US DOE oil implied demand 15,662 mmbbls vs previous 15,420 mmbbls
Upcoming significant economic announcements include:
TBA US house to vote on budget deal and Ryan speaker nomination
10:50 am AEDT Japan industrial production street (2.6%)
7:00 am BST UK Nationwide house prices street 3.8%
8:00 am BST Spain retail sales street 3.0%
8:00 am BST Spain consumer prices street (0.6%)
8:30 am BST Sweden retail sales street 3.0%
8:55 am BST Germany unemployment change street (4K)
8:55 am BST Germany unemployment rate street 6.4%
1:00 pm BST Germany consumer prices street 0.2%
11:00 am BST UK CBI retail sales street 35 vs previous 49
8:30 am EDT US Q3 GDP street 1.5% vs previous Q 3.9%
8:30 am EDT US Q3 personal consumption street 3.3%
8:30 am EDT US Q3 core PCE inflation street 1.4% vs previous 1.9%
8:30 am EDT US initial jobless claims street 265K
8:30 am EDT US continuing claims street 2,160K
8:30 am EDT Canada industrial prices street (0.1%)
8:30 am EDT Canada raw material prices street 1.1% vs previous (6.6%)
9:10 am EDT FOMC Lockhart speaking
10:00 am EDT US pending home sales street 7.3%
10:30 am EDT US natural gas storage street 70 BCF
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