Intraday Market Thoughts

US GDP Soft, but BoJ is the Focus

by Adam Button
Oct 29, 2015 23:09

The US dollar wobbled on a slightly soft GDP but expectations for December Fed hikes continued to rise. The euro was the top performer in a rebound from Wednesday's losses while the Australian dollar lagged. The BOJ decision is next.The Premium AUDUSD trade has been filled and is now in progress along with 7 other Premium trades.

US GDP rose at a 1.5% pace in Q3 as strong consumer spending and trade masked a fall in inventories. The report puts the US on a 2% growth pace this year after a 0.6% rise in Q1 and 3.9% in Q2. The Fed believes growth is set to accelerate, but if the economy can only muster 2% with rates at zero, how could growth improve with rates 100-200 basis points higher (as predicted by the dot plot) and the dollar surging.

According to MNI sources the dollar is already a concern from some US policymakers. They reported that the US asked the ECB to refrain from talking down the euro.

But it's the potential for action rather than talk that's weighing on the euro. The implied probability of a Dec Fed move is now 50% compared to 34% before the FOMC. The chance of ECB easing in December can't be measured by derivatives but it's at least 70% but it may have ticked slightly lower after German CPI numbers.

Click To Enlarge
US GDP Soft, but BoJ is the Focus - Pending Home Sales Oct 29 (Chart 1)

The general theme on the day was US dollar weakness as it retraced a portion of the Fed moves. The retracement may be short-lived because bond market hasn't stopped selling off. US 30 year yields rose 8 bps on the day and US 2s moved another 2 bps higher.

The focus now is on the Bank of Japan, which will render a decision at sometime around 0300 GMT. The rule of thumb is that the longer they wait, the higher the probability of action. The average release time of BoJ decisios has been around 12:22 pm in Tokyo 0322 GMT).

Before the decision the BOJ will get a final look at employment and CPI inflation with those reports due at 2330 GMT.

Nearly half of economists polled by Bloomberg expect the BOJ to announce fresh measures but the probability is lower than 50%. A number of local media reports say officials will push back the target date for hitting 2% inflation to H2 2016 from the current H1 forecast. Rather than triggering additional easing, they may continue with current policy and blame lower inflation on commodities.

The immediate result will be yen buying.

Act Exp Prev GMT
GDP Annualized (Q3) [P]
1.5% 1.6% 3.9% Oct 29 12:30
GDP Price Index (Q3) [P]
1.2% 1.5% 2.1% Oct 29 12:30
Eurozone CPI (OCT) (y/y) [P]
0.0% -0.1% Oct 30 10:00
Eurozone CPI - Core (OCT) (y/y) [P]
0.9% Oct 30 10:00
Germany CPI (OCT) (m/m) [P]
0.0% -0.1% -0.2% Oct 29 13:00
Germany Harmonised Index of Consumer Prices (OCT) (m/m) [P]
0.0% -0.1% -0.3% Oct 29 13:00
Germany CPI (OCT) (y/y) [P]
0.3% 0.2% 0.0% Oct 29 13:00
Germany Harmonised Index of Consumer Prices (OCT) (y/y) [P]
0.2% 0.1% -0.2% Oct 29 13:00
Eurozone Unemployment Rate (SEP)
11% 11% Oct 30 10:00

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