Daily Market Outlook - Wednesday, Dec. 13

By Patrick Munnelly of Tickmill

Wednesday, December 13, 2023 4:38 AM EDT

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Asia - Asia-Pacific stocks traded mixed as investors were cautious ahead of the FOMC announcement. The Nikkei 225 increased modestly thanks to an encouraging Tankan survey, which showed improved sentiment among Japan's large manufacturers and non-manufacturers. On the other hand, the KOSPI fell due to an increase in the Unemployment Rate. The Hang Seng and Shanghai Composite also declined despite China's policy focus for next year and support pledges, as there were no major stimulus announcements in the statement from the Central Economic Work Conference.

Europe - UK GDP unexpectedly contracted by -0.3% in October on a 3m/3m basis, with all sectors (services, construction, and production) experiencing declines. Despite this, Pantheon Macroeconomics does not believe the MPC will signal a willingness to cut Bank Rate at this week's meeting. Looking ahead, Pantheon predicts that activity will pick up in November and December, leaving Q4 GDP unchanged Q/Q. For 2024 as a whole, Pantheon forecasts 1.0% Y/Y growth, while Capital Economics predicts just 0.1% due to the subdued economic climate.It is anticipated that industrial production in the Eurozone will decrease even more in October, although there is expected to be a slight improvement in the annual rate of decline.

US - Stateside,The FOMC is scheduled to make a policy announcement tonight, which will be followed by updates from the Bank of England and the European Central Bank tomorrow. Despite no immediate changes to interest rates being expected, the central banks' guidance on next year's policy actions will be closely watched since markets are anticipating significant rate cuts in 2024. The Fed's comments have been less forceful than their European counterparts, and some Fed policymakers have suggested the possibility of decreases before mid-year. The Fed will use Wednesday's forecast updates to shape expectations, and Fed Chair Powell's comments in his post-meeting press conference will also be important. Overall, market expectations are already bullish, and a small negative surprise seems likely, but a major market pullback is unlikely as the Fed is expected to provide support to rate cut hopes.

FX Positioning & Sentiment

Japanese companies may actually be correct about the yen. Their expectations for the yen have been significantly different from reality. Currently, Japanese firms predict that the USD/JPY will reach 139.35 in the current financial year, whereas previously they anticipated an average of 135.75 for the year ending in March 2024. Due to profit-taking at the end of the year, the USD/JPY has dropped from 151.92 to 141.60. The new forecast for the USD/JPY represents approximately 50% of the rise seen in 2023. Additionally, Japanese firms expect the EUR/JPY to average 148.80, compared to 144.62 in September.

CFTC Data

During the period from November 29 to December 5, the net speculative position for the USD shifted from long to short. The $IDX increased by 1.35% during this period. The EUR$ decreased by 1.77% and speculators now hold 152,360 long contracts. The $JPY decreased by 0.24% and speculators now hold 104,956 short contracts. The Yen gained value after the period ended due to more hawkish talk from the Bank of Japan (BoJ), with a BoJ meeting scheduled for December 19. The GBP$ decreased by 0.88% and speculators now hold 11,665 long contracts. The AUD$ decreased by 1.4% and speculators now hold -57,681 contracts. The $CAD increased by 0.15% and speculators now hold -57,848 contracts. Bitcoin (BTC) increased by 15.6% during this period, with speculators reducing their contracts by 505 into new highs for 2023.