2 after the Fed exited quantitative easing, the Bank of Japan surprises the markets by expanded its own QE and unleashing a fierce wave of buying in global equities. What happens next? Full charts & analysis.
US GDP rose at a 3.5% pace in the preliminary Q3 report, beating the 3.0% consensus. The dollar jumped 30 pips across the board but the gains were almost immediately erased and the dollar continued to fall throughout the day.
What happened? Most economists pointed to the large boost in GDP because of US defense spending. That added about 0.6 pp. Others pointed to trade but that could continue to be a boost because of rising oil production. Consumer spending was also slower at +1.8% but it's a challenge to separate the effects of lower gasoline prices at the moment.
What was largely overlooked was the slowdown in inflation to 1.4% y/y compared to 1.5% expected and 2.1% in Q2. With commodity prices down, it's a challenge to envision any type of US inflation in the next six months.
The Fed flagged falling breakevens in the FOMC statement and 5-years are holding at 1.53% and 10 years have slipped to 1.90%.
Bank of England officials have been discovering that better growth and employment don't necessarily mean inflation as slack is slowly taken up and the Fed could soon be learning the same lesson. In Friday's PCE report, keep a close eye on the deflator.
But first, the focus will be on the BOJ. USD/JPY rose to a three-week high of 109.48 on Friday. The catalyst was a rehashed report that the GPIF will increase its domestic stock allocation to 25% in an announcement that will be formalized today.
But the larger announcement will be the BOJ at around 0200 GMT. But first at 2330 GMT it's the September CPI report. The national CPI is expected up 3.3% y/y with Tokyo up only 2.7% y/y for October. Stripping out the effects of the consumption tax hike, that's far below the BOJ's target.And that's why 3 of 35 economists surveyed by Bloomberg are predicting the BOJ increases asset purchases Friday. Such a move or a strong hint at a future move would easily send USD/JPY through 110. If those headlines hit, jump on them and ride them for as long as you can.
|GDP (Annualized) (Q3) [P]|
|3.5%||3.0%||4.6%||Oct 30 12:30|
|GDP Price Index (Q3) [P]|
|1.3%||1.4%||2.1%||Oct 30 12:30|
|Tokyo CPI (OCT) (y/y)|
|2.9%||Oct 30 23:30|
|Tokyo CPI ex Food, Energy (OCT) (y/y)|
|2%||Oct 30 23:30|
|Tokyo CPI ex Fresh Food (OCT) (y/y)|
|2.5%||2.6%||Oct 30 23:30|
|National CPI (SEP) (y/y)|
|3.3%||Oct 30 23:30|
|National CPI Ex Food, Energy (SEP) (y/y)|
|2.3%||Oct 30 23:30|
|National CPI Ex-Fresh Food (SEP) (y/y)|
|3.0%||3.1%||Oct 30 23:30|
|Producer Price Index (Q3) (q/q)|
|-0.1%||Oct 31 0:30|
|Producer Price Index (Q3) (y/y)|
|2.3%||Oct 31 0:30|
1. A 'significant' change
The Fed altered the assessment of “significant underutilization of labor resources” and instead said the underutilization is “gradually diminishing”. It's a nod to the fall in the unemployment rate falling below 6%.
The statement was only put in a few meetings ago and Yellen has championed the plight of workers so this is a meaningful change and so long as job growth continues at around these levels, the decision about when to tighten will be solely focused on inflation.
2. The Fed didn't just end QE
There was a small chance the Fed could continue QE so ending it gave the dollar a slight boost but it wasn't just that the Fed ended it. It's slammed the door
3. Better signs on the economy
When the Fed announced it was ending QE, the statement also said officials “see sufficient underlying strength in the broader economy” to support more improvements in unemployment
4. “Market-based measures of inflation compensation have declined somewhat”
This is a negative sign for markets and this refers to things like 5-year breakevens and that's something Bullard highlighted. They've come down to 1.53% from above 2% three months ago. That's an ominous sign and the Fed is surely hoping for a quick recovery.
The takeaway is that inflation data will grow more important that jobs data in the months ahead.
5. Sometimes nothing needs to be said
A large part of the US dollar rally, we suspect, would have come so long as the Fed didn't do anything extraordinarily dovish. The US dollar trade was crowded in the days leading up to the FOMC and the traders were jittery and pulled out on soft pending home sales and durable goods orders. Other trades that got shaken out in the risk rout were also probably simply waiting for the event to pass so they could get back into longer-term positions.The last point (and the dearth of good reasons to buy other currencies) is the best reason why the US dollar rally will likely continue.
As the Fed slammed the door on QE3, the upgraded view on labour markets and diminishing worries of disinflation boosted the greenback, while the maintaining of “considerable time” guidance on low interest rates avoided any bringing forward of rate hike expectations, thus, weighing on bond yields and helping stocks pare their earlier pullback. There was a reason why yesterday we re-confirmed our Premium shorts in GBPUSD, AUDUSD, NZDJPY and longs in USDCHF. Full analysis here
As we approach the Fed decision, the chart analysis below reminds us that stocks market consistently fell by more than 15% between the conclusion of the Fed stimulus programs; between the end of QE1 and start of QE2; and between the end of QE2 & start of Operation Twist. Full analysis