FOMC Preview: Time For Turbo Taper

Okay, a very good morning to you. It is Wednesday the 15th of December, and of course we start now to kick off the central bank announcements, the major ones for this week, with the Fed, the FOMC later today. Then we get the Bank of England, the ECB, tomorrow on Thursday. And so I'm gonna jump straight in and start talking about the Fed rather than looking too much at the charts this morning. Things are relatively flat. We did have, in terms of the close on Wall Street, a slightly negative finish Um, NASDAQ once again slightly underperforming, down around 1.1%. The S&P down around 0.75%. In terms of where we're trading at the moment, very much sideways price action, as you would imagine. A lot of people sitting on their hands now just awaiting the FOMC announcement later. In terms of the currency markets, we have got, um, cables a touch firmer, and we've just had the UK inflation figure come out, and it was quite a bit stronger than expected, 5.1% against the expected 4.7%. Upward contributions to the change on the 12-month inflation rate between October, November 2021 were quite broad-based. So as we've been seeing elsewhere in the likes of the US, kind of moving away from those more pandemic kind of idiosyncratic issues related to more supply constraints and so on. So becoming more broad-based, the largest coming from transport, particularly motor fuels, clothing and footwear was the rationale there. So cable outperforming EURUSD a little bit, a bit of sterling strength this morning. But let's talk straight on the Fed, because that is really the main feature of, of today. And this is a timeline from the analysts at Goldman Sachs. And of course, we're looking at turbo tapering to be announced later today. It's been very well telegraphed. So the fact of that happening, them increasing their tapering amount from $15 to $30 billion, it's probably not going to come as a huge surprise. I'd say the consensus is very much leaning in that direction. And it comes amid, of course, the transitory word being dropped by Jerome Powell in a recent Senate speech, and also generally the more hawkish turn that we've heard from him and his fellow colleagues on the FOMC. And so yeah, this is the timeline we're looking at: a tapering pace to be picked up. And if they announce it now, it's really to execute that plan from January. And that means then by January through to then March, they will look to conclude and wrap up then the process of of tapering, that then leaves a period of, let's say, roughly 2 to 3 quarters, of which then, according to Goldman's, they're looking and anticipating rate rises from the Fed in May, July, and November. And we'll have a look at a little bit of a difference then of what different banks are looking at for that. But this is what's ultimately going to be quite key because not only do we get the statement, the tapering obviously announcement coming out from the Fed, but because it's the December meeting, This is one of the four of a year on a calendar quarter. Excuse me. That will also get the economic projections. And of note, and the one that people will be most focused on, of course, is the dot plots. This is what I'm referring to here, which is the composition of the voting of the members of the FOMC. And generally what we're looking at here, not to go into too much detail right now, is this is mapping then What Goldman's are looking at is the current composition of dots on the left on each box. So each box would signify where interest rates would be at the end of each subsequent year. So, um, then looking at— so I'm just getting my bearings here. So the end of next year would be here, 2022. So this would be one of the closest ones watched to see how many rate hikes they're anticipating by the end of next year, '23, '24, and then the long run. And as you can see here, the general idea is that in the near term, so particularly '22, '23, there's a slightly more distinct move higher in the average median dot plot. And that then is indicative of interest rates rising. And Goldman's like Morgan Stanley, they've come out, they expect the Fed to double the pace of tapering, as we've discussed, and they believe the dots will show 2 hikes in 2022 3 in 2023 and 4 in 2024 for a total of 9. And so slightly more aggressive in fitting then with the general hawkish turn we've had from Fed commentary. Now, a couple of things to be aware of with the dots them themselves. The one thing is, is that any more hawkish kind of trajectory of rates for the future is likely going to be somewhat offset by downside risks linked to Omicron. So you'd expect a fairly tactful approach from Powell to come out perhaps in a press conference. And if the projections are quite aggressive, to then talk it down, saying, look, this is quite a fluid situation with Omicron. We will adapt and change as we see fit and guide the market appropriately. That type of classic central bank language. The other thing as well is that President Joe Biden still has 3 nominations to make for the Fed board, and 2 regional Fed banks are in the process of searching for new leaders. So when you think about that, then particularly the fact that there's 3 nominations for the Fed board— White House officials have talked about this happening relatively soon— well, it actually means then the composition of the Fed for next year might look a little bit different, or at least unknown, to what we actually know at this point in time. And so it's hard to really take too much away from these dots because, A, they're hardly ever accurate, B, That's because, based on the reason, it's very hard to predict the future, and that future has become ever more uncertain under the Omicron pandemic environment. And then 3, there's a number of people yet to be determined, and so we don't have full visibility or clarity yet of their policy stance. So although definitely intraday tonight you'll probably see quite a large reaction to tonight's announcement, the overall takeaway might be not crystal clear until actually another month or two down the line. And obviously there we'll be better equipped with where inflation is at this point point in time? Has it now peaked? And so forth. So yeah, this is what we're generally looking at. Um, there's also here that Goldman Sachs have mocked up the December FOMC statement. This is really useful. They're nearly always on point, and the reason why is because there's very rarely too much text change here that happens, so it's fairly easy to predict. But if you want to check this out, just jump on my Twitter. I shared all of those graphics I've just flashed up on my screen. If you want to prepare for the FOMC. But essentially there's some slight tweaks at the, the top of the paragraph, and essentially this is about previously the statement reflected factors that are expected to be transitory, and we've of course now that that's going to be dropped. So that's why that's been kind of X'd out in that sense. And then the others are fairly limited changes, but the notable one will be further down here and around the fourth paragraph when they talk about accelerating of of tapering from $15 to $30 billion. And of course, that split $20 billion for Treasury securities and up to $10 for MBS securities. All right. Otherwise, before I move on, don't forget, I'll drop the link as well on the bottom of the video. If you go to AmplifyMe.com/market-maker, pop in your email, you'll get the daily email from me deconstructing typically macro events on a day-to-day basis. So if you're a student and you are thinking about a career in finance, and you really want to up your game and your commercial awareness. This is what I'm attempting to do with my daily emails. I also put out kind of job adverts that I get from my contacts in industry, from investment banking to quant roles and everything in between. So definitely worth checking out. And we put together a weekend one where we comprise then live M&A deals, SPAC deals, fundraising, as well as global market stuff and crypto and DeFi as well. So do check that out and feel free to subscribe. Otherwise, the other big news, of course, came last night, which was a slightly perplexed Boris Johnson, because he remains very much so under pressure. And he suffered his biggest rebellion since becoming Prime Minister last night. Almost 100 Tory MPs voted basically against his proposal. And that meant then that the ruling Conservative Party had to lean on the opposition Labour Party to support part of the key strategy for containment of this latest Omicron outbreak. The Tories, the rebels opposing the plan to mandate the use of so-called COVID passes at nightclubs and other venues in England as they try to stem the tide of what's anticipated to be much further rising in COVID cases led by Omicron. This particularly sensitive timing because tomorrow we get the parliamentary seat of North Shropshire which in normal times should be a fairly safe seat for the Tories. They're defending a majority of almost 23,000, but they're in danger according to reports. So it's apparently very tightly run against who were third place in 2019, which is the Liberal Democrats, who are going to run that Tory candidate close. And again, somewhat symbolic then of how the, the needles kind of shifted a little bit on the popularity of the Conservative Party at this point in time under many different issues they've been confronting. Um, the government strategy for tackling the UK surge in Omicron infections is already facing setbacks, as well as what some reports are suggesting. As you can see here, commented in Bloomberg, medics warning of bottlenecks, staffing shortages. You've also had— I don't know if you've done it, but I certainly did— try Trying to book online your booster shot was— took, took me about an hour because the site kept crashing. You'd get through, pick a date, and there was no actual time slots and so on. So there's a lot of pressure at the moment actually because the rollout program is facing, as you would anticipate, logistical issues. The Times newspaper has also reported citing the NHS leaders as saying the year-end deadline is unlikely to be met at this point in time. So that's the latest that you've got on the, the situation of COVID in the UK. As I said though, the pound this morning is actually moving a little bit higher, so it's not really reacting to politics, it's reacting short-term to some of the inflation metrics that we've had. As I mentioned, the year-on-year CPI for the UK came in hot at 5.1% above the expected 4.7%. And if anything, it then, it just makes the decision for the Bank of England all the more awkward tomorrow, which is they don't want to get behind the curve with tackling inflation. But at the same time, Omicron is going to get worse before it gets better, and that's going to— Omicron leads to probably more onerous restrictions, which is going to impede economic activity going forward. And so the pound's just running up to a near-term area of technical resistance from some of the price action of recent sessions going back to last week and the beginning of the week on Monday. And so a little bit of strength and outperformance in sterling for now, but we'll talk more about the Bank of England, of course, tomorrow. The other thing then is talking about COVID a little bit more on a global level. Initial lab findings indicate that China's Sinovac shot, which is actually just given the population terms, one of the world's most used in the world as far as vaccines are concerned. This latest finding suggests that the vaccine itself doesn't provide sufficient antibodies to neutralize the Omicron virus, virus variant. Some 2.3 billion doses of the vaccine have been administered so far, mainly in China and the developing world. So yeah, somewhat concerning on the fact that given those locations, the size of populations, obviously the pandemic in itself is a global issue, and so given the differences in these different vaccines. This is much more of a long-term effect, but one that's quite important. All three US-authorized COVID vaccines, Moderna, J&J, and Pfizer, appear to be significantly less protective against the Omicron variant according to laboratory testing, but a booster dose likely restores most of the protection. That came out of the Massachusetts General Hospital, Harvard, and MIT study as well over overnight, yet to be peer-reviewed, but not too dissimilar from what our initial assumptions have been anyway at this point. From a restrictions point of view, Italy, Scotland, Netherlands are tightening restrictions. South Korea is strengthening its social distancing measures at this point in time. So everyone's trying to get ahead of the curve and contain, at least limit, the impact of what Omicron is likely to have going forward. A few other final points just to cover off. We'd have some Chinese data overnight. Um, we had the Chinese industrial production number for November year-on-year came in touch firmer than expected, 3.8% against 3.6% expected. Retail sales though were a touch weak, 3.9% against 4.6%. Markets really for the European Open not reacting or too bothered by those Chinese metrics. And we've had the UK data, so then we move over to what else is in store for this afternoon. Ahead of the FOMC, we do get the latest US retail sales report. Analysts at ING note that it's set to post another decent outcome thanks to rising incomes and wealth providing a strong underpinning for spending. Industrial production should also grow strongly since manufacturing surveys have all been pointing to robust activity. And then, yeah, we go to Before the Fed, the oil inventory numbers. Just to recap, we did have the APIs last night, and we had the headline figure was a drawdown of 815,000, slightly smaller drawdown than anticipated at 1.7. Cushing, though, sizable build, 2.257. Gasoline, 426. Distillates, a draw of a million. No real definable impact, though, short-term in WTI front-month futures. And then the Fed at 7, obviously a two-part event as usual. And then we'll get the press conference of Jerome Powell. What my plan of action is, is I'm not going to cover the Fed live, but what I will do is I'll come on and I will do a video debrief at the close of Wall Street trade so you're fully up and running then for what happened and also then for Thursday's trading session. All right, with that, have a good day and yeah, catch you later on this evening. Take care.