Markets: Bluejays

Jay Powell leads today and sets the tone for risk taking into October. He has a difficult task in sounding appropriately hawkish but with enough constraint to not stifle the ongoing economy. The balancing act is between the push to get rates to neutral where they don’t hurt growth but but squelch inflation. For many this will be on display with the FOMC dot-plot charts. 2.75-3.00% is seen by most as that neutral level. Yet 1-year rates in 5-years time trade at 3.19%. The peak in FOMC rates is seen by the dot plot at 3.1% - likely going up to 3.6% in 2020 given the growth in 2018 has beaten expectations and there is a general shift up in the potential growth rate – how much so will be watched and investigated appropriately. So there is plenty to wait for and little for markets to be sad about so why would the FOMC Chair be blue? He has a more difficult task than his predecessors as he has to move up rates to a magic level and then stop. Guiding him along in this process is the board and the Fed economists, with the headwinds of political pressure and his own doubts about models. Remember in Jackson Hole he talked about the limits of nowcasting and R* debates. This leaves plenty of room for error and mistakes will follow. Perhaps that is all we need to worry about today given the otherwise light economic news where New Zealand trade and business confidence point in different directions making clear that the RBNZ is most assuredly on hold. The UK CBI retail survey was good but not great and the obsession with Brexit politics still overwhelming. This leaves the world watching US/China, listening to the UN speeches with Trump anti-globalism still ringing in ears but not generating the same fears as money flows are prices for the FOMC hike today and more trouble from Trump on global trade. The other Bluejay team is Canadian as they still have threats of a breakdown to bilateral deals as NAFTA talks waver. This leaves markets watching the US rate markets for a larger break out risk with no one terribly scared for Powell or Trump in changing the set up for global growth and policy normalizations. The lack of fear is notable and probably the key reason to think that Jay Powell will be unhappy as rate hikes are supposed to dampen the financial conditions and reduce the risks for bubbles in asset markets. That puts USD/JPY as the barometer to watch for today’s performance – just in case Powell’s talons are lost in a flurry of cooing. The dovish feather cover could lead to a quick test of 114 and target 115 in short order. While the chart suggests that the steady march up leaves room for a hawkish surprise back to 111.50.

Question for the Day: What rate really matters to markets? There are many in the FX space that will argue that it’s the real rate spreads that matter and help to explain the current stall in the USD uptrend. There are others that see the yield curve and the terminal rate as key and take spreads against that – with the FOMC terminal rate debate central today to the USD path. 3.1 or 3.6%. This is against 2.5% in Europe with the next 2-3 years expected to be one where the ECB sprints rates higher and the Fed walks if not sits out further action. The EUR/USD path isn’t just about overnight rates or 2Y or 10Y spreads. The other significant story for rate hikes mattering is what happens to the real economy and how do banks and the shadow banking sectors pass on the higher costs. This is an important point to consider – as the Goldilocks moment of the last 3 months rests on the view that the FOMC gradualism hasn’t yet mattered to the consumer or to business. The chart below from the WSJ might be worth considering ahead of those that see rates not mattering yet.

What Happened?

• New Zealand August Trade Deficit NZ$1.6bn after NZ$0.196bn– worst on record. The annual deficit rose to 9-year highs at NZ$4.8bn after NZ$4.44bn. In August 2018, imports rose NZ$675 million (14 percent) on the same month last year to reach NZ$5.5 billion, the third-highest total on record. Exports were up N$366 million to reach NZ$4.1 billion. On a y/y basis though exports were up 9.9% and imports rose 13.9%.
• New Zealand September ANZ business confidence rose 12 points to -38.3 – best since May. Activity outlook also rose in September but at 7.8 points was at a relatively low level. A key disappointment in the survey and one that has significant implication for monetary policy was investment intentions which fell further into negative at -9.2 points from -4.7. Most other indicators saw improvement in September, with export intentions in particular, rising to 18.6 from 7.8, Inflation expectations fell for the second straight month, though the decline was relatively modest -- 2.12% in September vs 2.16% in August and 2.24%.
  in July.

• French September Consumer Confidence drops to 95 from 97 – weaker than 97 expected – lowest since April 2016. Still below long-term 100 average. The financial situation 12M forward fell to -17 from -12. Unemployment fears improved to 18 from 22. Savings intentions fell to 6 from 12 but major purchase plans 12M -7 from -8 while standard of living fell to -36 from -29. Consumer price outlook 12M forward fell to -17 from -21. 
• UK September CBI retail sales survey slips to 23 from 29 – better than 15 expected. The 3M average is 24. Supplier orders rose to 3-month highs at -1 from -19. Growth was strongest amongst other normal goods, durable household goods, non-store goods and hardware & DIY. This could suggest promotions seen in August's ONS retail sales data carried into September. However, sectors dragging on performance were department stores, footwear & leather, and recreational goods sub-sectors.

Market Recap:

Equities: The S&P500 futures are up 0.1% after losing 0.13% yesterday. The Stoxx Europe 600 is flat with focus on Italy budget and UK Brexit politics. The MSCI Asia Pacific rose 0.1% with China focused on MSCI EM stocks and more capital flows following.

• Japan Nikkei up 0.39% to 24,033.79
• Korea Kospi closed for holiday
• Hong Kong Hang Seng up 1.15% to 27,816.87
• China Shanghai Composite up 0.92% to 2,806.82
• Australia ASX up 0.14% to 6,307.80
• India NSE50 off 0.12% to 11,053.80
• UK FTSE so far up 0.15% to 7,520
• German DAX so far off 0.10% to 12,363
• French CAC40 so far up 0.35% to 5,498
• Italian FTSE so far off 0.25% to 21,615

Fixed Income: Waiting for the FOMC, watching BTPs continue to rally with budget optimism, seeing Gilts rally with politics heating up, EU core bonds see curve flattening. The UK Gilts are leading the core – with 10Y yields off 2.5bps to 1.603%, German Bunds off 1bps to 0.53%, French OATs of 0.6bps to 0.84% while periphery is about Italy – BTPs off 7bps to 2.805%, Spain off 1.5bps to 1.505%, Portugal off 07bps to 1.875% and Greece off 2.5bps to 3.995%.

• Germany sold E2.42bn of 5Y Oct 23 BOBL at -0.04% with 1.55 cover – previously -0.18% with 1.67 cover – post Bundesbank holdings cover 1.9 from 2.0. 
• US Bonds are bid with bull flattening into FOMC – US 2Y off 0.4bps to 2.835%, 3Y off 0.8bps to 2.905%, 5Y off 1.5bps to 2.977%, 10Y off 1.5bps to 3.082% and 30Y off 1.3bps to 3.212%. 
• Japan JGBs rally after good 40Y sale, tempered by risk-on mood – The MOF sold Y400bn of 40Y JGBs at 1.025% with 3.236 cover – previously 0.88% with 3.302 cover. 10Y off 1bps to 0.113%
• Australian bonds hold firm after supply – The AOFM sold A$1.5bn of 2.5% May 2030 TB155 bonds at 2.8035% with 2.466 cover – previously 2.5859% with 3.295 cover.  10Y off 1.7bps to 2.73%
• China PBOC skips open market operations, net drains CNY40bn on the day. Money market rates rose with O/N up 1.5bps to 2.54% and 7-day up 1bps to 2.694%. The yield on 10-year bonds rose 0.5bps to 3.68%. 

Foreign Exchange: The US dollar index is up 0.1% to 94.26.

• EUR: 1.1735 off 0.25% - still watching 1.1680-1.1800
• JPY: 112.95 flat. With 113 broken but 113.40 holding 114 next against 112 with EUR/JPY 132.60 off 0.2% despite stocks – worth noting risk for 130.50
• GBP: 1.3170 off 0.1%. Stuck with 1.3050-1.3250 for now with EUR/GBP 0.8910 off 0.15%. Brexit and politics still driving.
• AUD: .7240 off 0.1% with nothing new until next week – RBNZ key – with NZD flat at .6640 with risk for .6550 and .6720 on Orr guidance. 
• CAD: 1.2960 flat. The NAFTA debate and FOMC hike leave 1.2880 holding with 1.3050 key. 
• CHF:.9685 flat with EUR/CHF up 0.15% to 1.1370 – Italy driving. 
• CNY: 6.8571 fixed 0.21% weaker from 6.8440, trades flat at 6.8765 into London from 6.8770 official close yesterday. 

Commodities: Oil down, Gold down, Copper off 0.1% to $2.8250

• Oil: $72.11 off 0.25%. Range $71.83-$72.38. Brent off 0.2% to $81.64 – watching $80 pivot and base for $87 and $90 targets.. WTI watching $75 and $79 targets with $70 base building. API reported a surprise building of 2.3mb and this puts EIA report into key focus today. Trump at UN blaming OPEC mostly ignored. 
• Gold: $1197 off 0.35%. Range $1196-$1202. Gold watching 55-day at $1206.70 for upside against $1200 pivot and $1183 base. Silver flat at $14.40till watching $14.555 Sep 3 highs for upside with $13.94 base

Conclusions: Is the US Consumer Confidence overshooting? On one hand, you have the best labor market in decades, low inflation, slightly higher wages, better household balance sheets, and a rising asset market; on the other hand you have political noise, rising oil prices, wages that aren’t rising faster than inflation, and the rest of the world sharply divergent in their future outlooks and moods. Confidence maybe the key to understanding if the FOMC rate hike today matters and we just won’t know when rates matter until they do – so this barometer will be on watch again in October to see if today’s action changed anything. In Tuesday’s Conference Board report, 68.2% of respondents expected interest rates would be higher a year from now. The index tracking expectations for the future rose to 115.3 this month from 109.3 last month. Most respondents, 42.5%, expect stock prices to continue rising over the next 12 months, while 35.1% expect them to hold steady and 22.4% expect a decline.

Economic Calendar:

• 0900 am Swiss SNB 3Q bulletin
• 1000 am US Aug New Home Sales (m/m) -1.7%p 0.5%e / 0.627mn p 0.6emn e
• 1030 am US weekly EIA crude oil stocks -2.057mb p -3.7mb e
• 0200 pm FOMC rate decision – 25bps hike to 2.25% expected,
• 0230 pm FOMC Powell press conference