FOMC Review And BoE & ECB Preview

Okay, very good morning to you. It is Thursday the 16th of December and going to recap briefly what happened last night for the FOMC and why equities rallied and the dollar is still on the back foot this morning, having weakened substantially irrespective of a hawkish policy change from the Federal Reserve. So we'll dig into that. Then we're going to talk about a preview for the Bank of England. We've also got the ECB and the Turkish Central Bank decision. We got an update on the Build Back better stimulus timeline in the US. And of course, we'll also update on the UK Omicron situation following the Prime Minister's Conference with Chris Whitty yesterday. But first off, let's have a look at the charts. And yeah, back to all-time highs for US equities. And just for an example, I'm going to bring up the S&P 500 chart here, and this is the FOMC-inspired move that we saw yesterday. Right here. And you can see then we've completely reversed all of the losses that were seen at the beginning of the week, namely on the back of the increasing global Omicron fears as that variant continues to spread. But you can see completely reversed. We're back now to— on the daily chart here, we've briefly touched on the previous record high seen on the 22nd November, just finding some resistance here this morning as Europe come in, pick up the baton from the higher close on Wall Street. The S&P finished up 1.6%, the Dow 1.1%, the Nasdaq up 2.2%. And so we've just touched on that 4740.5 mark again this morning. So very bullish, um, outcome for US equities. In step with that, oil also moved higher, gold was up as well, and the major currency pairs here top left also rallied on the back of weakness in the dollar despite an initial blip higher confirmation on some of the hawkish changes in policy, the dollar has declined thereafter, and I'll explain why in a second. But you can see here cable has broken out above this morning quite a key level of technical resistance that's held since last week on multiple occasions. We've just ran up higher to around 1.3293 at the moment, ahead of course what is another knife-edge Bank of England rate decision we'll get at midday. The battle and trade-off between heightened inflation against a deterioration in the Omicron situation as to determine their course of action today. But you can see here sterling seeing a bit of a breakout, and again the pound accelerating really yesterday through what was a couple of things. We had the Bank of England come out— well, the latest data I should say came out for CPI, and that was what we had yesterday morning. So this was this move and peak in price here. Then had a bit of a reversal on that, on the Omicron situation developing in the UK, going from bad to worse quite quickly. But then the Fed came out with their announcement and the dollar weakened, and so it sprung back up, and now we've just broken back above higher again this morning. So quite a seesaw roller coaster for, for cable. But look, let's get straight to the headlines. And first off, just going to very quickly recap what the Fed said last night, and I did do a specific video on this Yesterday evening, so I'm just going to do a top-level overview now. If you want to check out in more detail, check out that video on the YouTube channel. But in terms of the overall takeaway, the Fed did pretty much as we were expecting. So they increased the speed of tapering, they doubled that from $15 to $30 billion. That's as very much expected. The projections published alongside the statement showed officials expect 3 quarter-point increases in the benchmark federal funds rate would be appropriate next year. And then they flagged concerns about the new Omicron strain. They said specifically risks to the economic outlook remain, including from the new variants of the virus. And one of the things here that I thought was quite interesting was this is the table of the summary of economic projections. When I was looking at this last night, even though the word transitory has now been eliminated from the Fed's kind of comms, the one thing is, is that this table basically is still showing a belief that inflation is indeed transitory. It's almost like the word's been dropped, but the idea from Fed officials still remains. And actually, Fed's Powell said in the Q&A that bottlenecks will alleviate over the course of next year, inflation will come down significantly towards the back end of next year, and if the economy turns out not to be as strong, we'll adapt policy accordingly. And so actually here, looking at core PCE, PCE inflation, you can see they've had to ratchet that up a few notches for the end of this year from what they previously thought back in September. However, they do see it dropping quite substantially then by this time next year. And so I think overall a fairly balanced takeaway. It wasn't too far from what markets were expecting. Some definite hawkish changes to policy overall, accelerating tapering, raising inflation forecasts, seeing continued progress in the labor market. However, it's a fairly well telegraphed managed situation from from the US central bank, and, and the market's liking it, as we've just seen on the charts. We did see the new dot plots, as I mentioned. Again, you can grab these graphics from my Twitter account. I did reshare them this morning. This just looking at the rate trajectory over each subsequent year thereafter this, and there has been a slight tweak, but again, as very much markets were anticipating. So let's turn our attention then to the Bank of England. Because following yesterday's November CPI print, which came in at 5.1%, a decade high, much higher than expected, that has seen market pricing move expectations for a hike today from the Bank of England to around 66% probability. If we go back to Monday prior to that inflation print, it was tracking on an even 50/50. So the market is now leaning on the probability that the Bank of England will hike rates. And the pound certainly is moving higher this morning, but as well, and byproduct of the weakening dollar following what I've just described from the Fed. So euro-dollar is also higher at the moment on the back of that greenback weakness. Now for me, I don't think the Bank of England are going to hike, and the obvious and main reason why, of course, is Omicron. And I'm going to talk about Omicron Well, let's wrap in Omicron and what's going on there at the moment, because inflation aside, this is what's been going on in the UK. And as we saw yesterday, the UK reported 78,610 coronavirus cases, the most since the beginning of the pandemic, um, underlining then this fear of how highly transmissible this new variant is. COVID hospitalizations are up now 10% nationally week on week and up by almost a third in London, where if you look at the actual national breakdown of cases, it is definitely the most apparent that it's accelerating in London the most. Now, this is one of the things that I was talking about, uh, one, two weeks ago, which was even though, let's say, symptoms in some fashion can be more mild, the understanding here is simply a numbers game whereby if more people get infected, even though the proportionate ratio of people who then have more severe symptoms is lower, given the more mild symptoms of this particular Omicron variant, if the number is great enough, well then proportionately, even if it's a small percent, hospitalisations are going to go up. And of course, this is at a very challenging time of year anyway, seasonally, just given the, the weather and so forth. So yeah, there was a, a somewhat sense of inevitability about this. But it's certainly starting to come to fruition. UK officials said they confirmed the number of positive test results as well as a significant underestimate of the spread in the country. Going back to the beginning of the week, you remember Sajid Javid, the Health Secretary, said that he thought there were 200,000 infections each day. And the latest estimate now is that— you remember when they gave the press conference, it was last week on Thursday— they were saying that Omicron is basically doubling every 2 to 3 days, it's now seen at more like 1.9 days. So it's definitely gonna get worse before it gets better in that sense. So just flicking back to the Bank of England then, for me this really does then cement in my head that yes, inflation is worryingly high, and yes, as a marker of statistics, it's a decade high. However, I think that just like what the Fed have done yesterday with their projections, I think the Bank of England will hold the same view. They're not going to be stubborn enough to think that they're going to get this absolutely nailed on. But if you think about the projections and how the Bank of England sets policy, they look at policy on a 2-year horizon. Now, will a rate hike now in December by 15 basis points or one in February by 15 basis points make a difference on that rate trajectory in the economy over a 2-year horizon, I find that a hard case to kind of spin, to be honest. And, you know, you start to layer in committee members like Michael Saunders, who is one of the outlying hawks who of course voted for a rate hike in that 7-2 split we saw previously and has done for a while. He suggested in the past that new facts surrounding the virus may require a pause for additional thought. And, you know, since he spoke, this was prior to really Omicron outbreak happening. And so, yeah, I think for these reasons I side much more with the economists who are on the side of they stand pat for now, and if things remain the same, they look to hike in February. And that would be against market expectations, which are for a rate hike to be executed today. Now, in terms of market impact, obviously just looking at the positioning of sterling at the moment, the market is pricing in whether by dollar weakness on the Fed or by Bank of England prepositioning, cable is tracking quite high in the relative range of what we've been trading in the last week. So failure to execute the hike could well see quite a large snap back down lower in the price of cable. So do be aware of that when it comes out later on today. But obviously commentary that follows will be key. Not only do you get the announcement, you get the statement, you get the vote split, you get the minutes. Um, so quite a lot of intel coming out later from the Bank of England. All right, moving on, let's talk about the ECB because they're also happening. So you get the Bank of England at 12:00, 12:40, uh, 12:00, you get the ECB at 12:45. So within that hour slot, 12:01 is when the main kind of action might occur. Analysts at ING, the Dutch bank, they expect the ECB to stick to the transitory narrative when it comes to inflation, with staff projections that may see only small changes. This should delay any discussion on tightening to a much later stage, with the focus set to be on the fate of the asset purchase program. Again, to be clear, with the ECB, I think they're not at the same place as where the Bank of England and the Fed are at this point in time. Time. I think any talk of tightening is a little bit premature. This is more about the tactical or strategic way of which they're managing then the end of tapering. So they're kind of in a much earlier cycle of ending these pandemic-induced kind of policies that were put into play. Economists— and here's a look at the, the current PEPP and asset purchase program— economists surveyed by Bloomberg expect the PEPP purchases to drop to €50 billion a month in February. From around €68 billion in October-November. Bond buying under the regular asset purchase program, which would be the yellow one, will double to €40 billion a month starting in April before gradually slowing, with all asset purchases then ending in the final quarter of 2023. So if you've been following these briefings, nothing really new here to, to talk about. What The Economist expects is that transitional effect decreasing slowly then before turning the tap off on PEPP. At the same time increasing temporarily the asset purchase program to just smooth out any kinks on the market being concerned about a too rapid a pace of withdrawal of stimulus. Before I talk about the next stories, uh, just a reminder, we've got our final simulation happening, our Finance Accelerator, later on today. I think it's 4 to 6 PM London time. So if you are a student If you've not done this before, then just jump on AmplifyMe.com and you can register for that. That's happening later on today. It's absolutely free simulation, takes about 2 hours, but gives you a real hands-on practical experience for you to apply perhaps some knowledge that you have already, or to just come from ground up from scratch and see what it's like to be a sales trader, a market maker, or an asset manager in a, in a real-world scenario. So check that out on AmplifyMe.com. Final one of the year is happening today, and we've already trained well over 15,000 students over the last 3 months. Moving on then, back to central banks. It really is a busy one, and there's 2 more I've got to go— Turkey and Australia. And for Turkey, they've got their interest rate decision, and it comes in the context of the lira still under pressure. Another record low was hit yesterday as traders are kind of bracing themselves for further easing and the currency has fallen past a psychologically important 15 per dollar mark for the very first time. The bank is expected to reduce the 1-week repo rate by 100 basis points to 14%, well below inflation, which is currently tracking at over 21% as far as November data is concerned. And that was the fastest pace of inflation in Turkey in 3 years. The announcement comes— President Erdoğan has replaced 2 deputy finance ministers So just the latest in a long string of casualties to just kind of inaction his will, which is this somewhat controversial and, and different view on monetary policy. And at this point in time, it looks like he's going to get his way. So if that is the case, then the Turkish lira could be highly susceptible to some more weakness going further forward in the rest of the session. The other thing then was Australia. They didn't have an interest rate decision, But this is the Governor Philip Lowe, and he said the bank may end its asset purchase program as early as February of 2022. But Lowe suggested he was in no hurry to raise interest rates, and any move to halt asset purchases would not affect the timing of that decision. So again, it's kind of like what the Fed were doing previously, is just trying to disassociate any singular decision to be overall policy and showing that there's a sequence of events like i.e., stopping tapering, reevaluating before then going with the rate hiking cycle, which is normally the traditional pattern we've seen in history. Overnight as well, the Aussie is a little bit firmer. Um, worth noting Australian unemployment rate for November after they were somewhat ravaged by their own coronavirus situation and lockdowns. The November unemployment rate came out overnight at 4.6%. That was considerably lower than 5% and quite a sharp drop from the prior month's 5.2%. So the Aussie dollar, as I speak, is actually at session highs at the moment. And of course, again, comes in the context of that weaker dollar post-FOMC. Um, and then the final thing I wanted to comment on is just an update on US stimulus. As you would imagine, um, politicians are just digging their heels at this point in time. Doesn't look like anything's going to get done this side of Christmas. Talks between Senator Manchin and President Biden are now not going well on Build Back Better, according to sources. This is after reports on Monday that everything was looking more positive. We've kind of reverted back to type. US Senate Majority Leader Schumer is likely to push back a vote now on the Build Back Better plan until next year, according to different sources as well in the overnight session. All right, um, and that is it. So gonna leave it there. Wish you guys a good day. Any questions at all, feel free to drop me a comment. I'll probably be tweeting out a few updates around the Bank of England and the ECB later. So there's my handle if you want to stay informed. Don't forget to check out AmplifyMe.com, whether for the simulation or for the daily newsletter we put out, which you can find at the bottom of the website. All right, take care, guys. Have a good one.