FOMC Review & Bank of England And OPEC+ Preview

Okay, very good morning. It is Thursday the 4th of November. Thanks to everyone who joined me online for the live FOMC coverage last night. And just to put it out there right now, I'll be covering the Bank of England live as well on the YouTube channel. All you need to do is subscribe to the channel, hit the bell icon, and you'll be notified when I go live at 11:45 GMT today. Talking about the Fed first, let's just wrap up of how that finished. And here's, here's quite a funny but very on-point graphic that I saw last night, which was of course the red button got pushed last night. That is, the Fed have begun tapering. And you know, the, the graphic kind of saying about all this talking and talking and talking, and in, in matter of fact, you know, comparative to what we had in 2014, which a lot of people have mental scarring of the taper tantrum we had at the time, which was when the Fed were going down a similar juncture in policy at the time of tapering down their kind of big QE programs. The market has really digested this with no problem at all. And take your hat off, I mean, to Jerome Powell and the Fed. This is the art of forward guidance and the fact that they've been able to execute this move without destabilizing markets. Is a function of forward guidance, you know, in motion in that respect. So it's been months and months. And as the graphic is kind of talking about here, it's talking about, talking about, talking about tapering, and then it's talking about tapering, and then it goes on and on and on the cycle to the point at which they do it. And so this is that drip feed approach so that investors, the marketplace can reprice then for the fact that policy is going to change at a point in the future. And their objective is to do it without causing shock and surprise, which can destabilize markets. So all in all, the Fed came out very much as expected. We're not talking about changing rates right now. The actual QE taper size was $15 billion, divvied up with Treasuries and MBS, $10 and $5 billion, absolutely as expected. One of the key comments, though, one of the first things, if you, you know, you can go back and watch my live commentary on the YouTube channel, it's there now recorded. But this is what the Bloomberg headlines look like when they hit the tape last night. And as you can see here, these top 3 here are what I often refer to as the stickies. Um, if you have a Bloomberg terminal, if you've ever seen one, what you tend to see is a whole drop of comments, maybe 20 or so, where Bloomberg have extracted out the main sentences from the statement, but they tend to keep them as all the comments start ticking down. 3 stuck at the top, which is what they deem the most important. And typically, given that most people have their eyes firmly focused on Bloomberg, uh, as the benchmark terminal, the market tends to react to those first. And so if I go through those top 3 headlines, the Fed says taper starting November, monthly reductions of $15 billion— completely as expected. They said prepared to adjust pace of taper as warranted— very much as expected. So that optionality to adjust things as conditions might evolve, because we're talking of a timeline over period of several months. And then this was the key one: inflation elevated due to factors expected to be transitory. So basically they've kept transitory, and despite then the market's aggressive repricing to bring forward the timing of rate hikes, chiefly on the basis of inflation being higher, more prominent, more long-lasting, more durable, um, than what they previously foreseen, they've stuck to their guns and they see it as transitory. And actually the reaction effect then was that equities— guess what? Fresh record highs again. No surprises there. The Nasdaq just raced higher. S&P followed and the Dow, you can see on the left, so uniform rallies, record closes, I think for a 5th consecutive session now. As far as some of the US indices are concerned, the dollar initially weakened, albeit that entire FOMC move has been reversed in the major currency pairs. So I would be aware of that. So the, the move definitely is sustained for equities, but FX, um, it's pretty much reversed already as you can see here. So initial dollar weakness, EURUSD up, and we reversed and we pretty much scratched where we were. Pretty similar price action for the likes of cable as well. Why it's more prominent for equities, I guess, is this whole idea I was talking about in the briefing yesterday. They're pulling the trigger, starting tapering very much as expected. But a more measured approach. And as I said last night, you know, the markets tend to be quite behavioral, always tend to kind of give an inch, they take a mile with the pricing. And therefore then when they've come out and said, you know what, we're just going to stick to our, our line of transitory, that's a supportive environment for a more cautious, measured normalization approach. That's supportive of equities in an environment where after that COVID-impacted weaker Q3. Things tend to pick up in Q4 is the expectation, as COVID at the moment, at least, touch wood, remains fairly suppressed in the US. And with earnings being pretty decent, so equities just continue on their merry old way for the moment. This morning then, T-notes pretty much unchanged, and really lack of movement to last night's announcement. You can see some of the whipsaw price action but not a great deal. And then gold had a little bit of a bounce. So again, it was not so much of a dovish reaction. I mean, it was in terms of the multi-asset reaction, but it was more a case of a less hawkish shock that created some of the moves last night. So the initial dollar weakness, weaker yields, higher stocks, and gold benefited from that initial move, which you can see here, and reversed about 50% of that initial move that we saw at the sell-off towards the open on COMEX yesterday. So that was, that was the Fed. But attention turns now, of course, to the Bank of England. And this one is set to be one of the most exciting ones actually we've had in a while, because economists, analysts are basically split between will they, won't they hike rates today. And that's right, we're not talking about the same sequence as the Fed and other central banks, which typically follow the uniform approach of just winding down QE and then having a period of kind of policy hold before then commencing rate hikes in the future. Don't forget, we're talking about rate hikes in 2022, '23 for the Fed. With the Bank of England, they might pull the trigger today, of course. And so what's— what are we looking for here? And there are a couple of different things to be aware of. For one, let's just jump over to this. This is inflation. and inflation is expected to peak at more than double the Bank of England's— obviously they have a 2% target. So because of the supply constraints, you know, the price pressures that we've seen globally, the UK is no different, and inflation has overshot on the upside, even over and above what generally analyst expectations have been. So going back to the black line, that was when they last released their monetary policy report. So remember The Bank of England have 8 meetings. Today's meeting is one of the alternate 4 where they release their forecasts for inflation and growth, and from that we can determine then over the medium-term horizon— this is all terminology, medium-term referring to effectively 2 years— where then interest rates are likely to be in time. So this is their method of giving you forward guidance through forecasting of growth and inflation. So you can see here things have changed. Back in August, there was a firm belief that inflation was indeed transitory. That belief has somewhat diminished given some of the data points that we've seen, and as I said, the more durable nature of— that the price pressures are now more widespread than just being concentrated in things more idiosyncratic to the pandemic pains, if you like, of reopening. And so we are expecting the latest forecast to probably pay heed to that. You can see the Office of Budget Responsibility in October had a little bit more punchy outlook, but it's inflation really that has people uncertain. However, I don't think I have a jobs market one here to hand, but the idea is that the furlough program that affected the jobs market won't be available in terms of the latest data of the winding up of that program until the middle of November. So essentially the Bank of England have gone to this meeting not really knowing fully about what ending furlough has done to the labor market in the UK. And remember, just like in the US, it's the labor market and inflation that people are looking at, these policymakers, to determine their decisions. And so can they make that call without having that data is what divides then the market's opinion of will they, won't they today. So a lack of clarity is what's causing this. One of the things then that we have been seeing is that much in a similar vein, I think that explains a lot of the reaction to the Fed last night, the Bank of England— I mean, UK rate market has been uber aggressive in pricing in rate hikes. And actually, in terms of today, as you can see here, Going back to the September meeting, this was the black bars. You can see just how much more aggressive the market is pricing in basis point rate hikes going forward in time from the Bank of England. And so looking at the numbers for today, the markets are betting a 15 basis point rate hike to counter inflation that may hit as high as 5%. And a lot of that's been fueled, you remember, by the Bank of England Governor Andrew Bailey, who spoke last week And despite this pricing, he didn't really push back against it. And that's what's fueled those more bullish-minded of the rate hikes to support that idea that they're going to go with that today, given the fact that the governor himself, you would have thought if they weren't committed to follow that course of action, then he would have pushed back against it and he didn't. So whatever the outcome today for the Bank of England, it's going to be a really close call. And that definitely is going to be reflected in the types of intraday immediate reaction you're going to get in sterling currency, for example, because when something's fairly 50/50, well, then there's 50% of the market that's going to be wrong. And so therefore, unlike the Fed with tapering, where, you know, markets are almost entirely priced for that outcome, when it happens, the reaction is, is nil, if you like. So Today's going to be a pretty spicy reaction, so I'm, I'm looking forward to covering it, uh, later. One of the things then to be aware of is the vote split. Obviously, this is a unique feature of the Bank of England. Um, of all of these members, the 9, you obviously get a vote split when you get the initial headline reading. And the split can go, um, any way, of course, but the idea here being that Saunders and Ramsden would be definitely in the camp of looking to hike rates given their commentary. Hugh Pill and Andrew Bailey, the governor, have both as well made commentary within the last week, which would suggest that they'd be in favor of a hike. Now, Kathleen Mann, Silvana Tenreira, and Jonathan Haskel are definitely on the wouldn't want to hike side. I think we know that pretty much for sure given the comments that they've made. And so really the balance of power lies with the deputy governors. And this is what gets quite interesting. Obviously, they are the deputy governors and the governor, the governor has been fairly, fairly clear that I think he wants to support a hike. Do the deputies go against their boss? Basically, they should. I don't think they should let their job title dictate their decision making. They should make a judgment on the basis of their analysis. And Cunnliffe and Broadbent, it's a little bit more uncertain. So the balance of power really lies there, I'd say, with those two. And the vote split could very well be 5-4 in either direction. And so hence, to show how really close, uh, this is, I did see a comment from a senior economist at HSBC this morning, Liz Martins. She said whatever the Bank of England decides to do on interest rates, they suspect it will at least push back a little on the extent of tightening that's been priced in via its inflation forecasts. So let me explain this in two steps. What this means is, let's say they do hike rates. Even if they do, they will want to kind of quell markets' probably initial assumption then that the Bank of England are going to immediately start a rate hiking aggressive cycle as per what the markets have planned. If they do hike, I think what they'll want to do is use the inflation forecast, which is the second point that HSBC are making, is that to say that inflation, if their forecasts kind of peak up and then decline again, it plays into that idea that the high level of which inflation is tracking at the moment will be temporary, albeit slightly more longer and protracted than what they thought before, but eventually will come back down towards in the right direction to target. And so therefore, reshaping that inflation expectation can then allow the markets to say, okay, they've hiked, but they're not going to go crazy and start hiking multiple times, as what markets are now starting to get into the mindset of. And so there's ways of which the Bank of England can manage this even if they do hike rates. So one thing I would say is that although the initial reaction on a rate hike might be an aggressive pop higher in sterling, Just be careful about a fading of that move if the inflation forecast then starts to suggest a moderation of inflation in a fairly sharp fashion, so that they just want to hike rates up to buy themselves some room, some ammunition in that sense, perhaps to, to offset some of the price pressures at the moment. Or as little as that, I think, would likely do. For me, I'm going to say they don't hike. Um, we'll see if I'm right or not by tomorrow, but let's see how it goes. And if they don't hike, uh, again, you're going to be looking at initial sterling weakness. It then really depends on what they say in the inflation forecast. But if they're not hiking yet, then one would think the inflation forecast would be more indicative of these current price pressures alleviating over time, which then could be quite an interesting, more persistent downward move in sterling for the rest of the session. UK yields would decline in that scenario, and the likelihood is FTSE equities would benefit from that, that scenario. All right, let's move on. The other thing we've got, of course, today— it's obviously a busy day— we've got the OPEC meeting. Oil yesterday fell the most in nearly 2 months. Let me just bring it up here. That sounds pretty sensational. Oil fell the most in 2 months. I mean, we were trading up, you know, if we go back to really the beginning of the week, we were trading at $85 mark and we've got down to $80. So we've shed $5. However, let's just put it on a weekly and let's just like take some perspective here. We've rallied from $60 to $85. So coming off $5 for me is nothing to sweat about as far as the, uh, the idea, you know, coming out of the intraday environment. Of course, I wouldn't over-interpret this weakness thinking, oh my goodness, this is, you know, there's China, COVID's picking up in a number of provinces, and that's going to impede demand and all these types of things. I think as much as that may play into the short-term price mechanics. I think long term, even if we pull back further, the area of solid support I would look at is $76.88, as you can see here on the weekly bars, which would be these areas here defined by those two circles. That's a peak of price activity we had in 2018 and in the summer of 2021. So even if we moderate further, it wouldn't necessarily make me feel in any way negative about this current oil price, even if we came back down another $4 or $5 from where we are at the moment, to be quite honest. Um, a couple of things then to be aware of. One is, talking of OPEC, um, yesterday we had crude inventories, um, the DOE's rising to their highest level since August. We've also got Iran who said nuclear talks are set to resume this month. And that being on the 29th of November. I always find it a bit hard to buy into this idea. So Bloomberg saying here losses after Iran announcement. Um, can't help but we've been here before, right? Many times if you followed this briefing over the course of the last year, how many times has the market, um, just got super giddy and excited about the fact that Iran's entering dialogue with the West again? Only then for the inevitable to happen, that it's a very hard thing to reestablish a relationship that just basically was, you know, destructed over the course of the Trump administration. And so I still find it— this move that's happened, this moderation in prices from these recent highs, is more profit-taking, and the news is just a catalyst to do so rather than the news being the driver of the move. If that makes sense. So it's good they're going to chat. Are they going to broker a deal and Iran's going to flood the market? No, I don't think so. Not anytime soon, for sure. Um, so a couple of other things. OPEC then is meeting virtually today. The US has called on the group to raise supplies faster to quell the high domestic price that they're seeing at the moment. Just another, another headache for Joe Biden at the moment, who I don't know if you followed, and I haven't really covered in the briefings, but there's been some quite interesting political movements happening in Virginia, um, where the Democrats lost. They got wiped out effectively by, I think he was a prior, a previous private equity guy who stormed an area which the Democrats ruled by a long distance only not that long ago when the election happened. And it's not, it's not a big deal, but it's not a good sign for Biden. And certainly he's under multiple pressure points at the moment. We're trying to get passage with his bills and foreign policy and lots of other things at the moment. But back to the point of OPEC, the US have been putting a lot of pressure on OPEC because of course high prices at the pump are not then conducive of high consumer morale for the administration. I guess the question then comes is, is OPEC going to react to this? The answer to that is no. I think they've been fairly clear. Russia, who's like one of the key players in this, as well as Saudi, they're just going to stick to their plan of gradually returning oil to the market of 400,000 barrels per day. That's their predetermined kind of game plan. And I think they'll stick to that and they will not react to what the US is saying. Don't forget as well, there is a degree of optics in what the US is trying to construct at the moment. So whether or not OPEC reacts to what the US say or not doesn't, I don't think, really matter for Biden and the administration. They just need to appear to be putting pressure on to deflect then the blame of high prices onto the Middle East, for example, which I think tactically is a sensible approach. So yeah, that's pretty much it. Other reasons for caution, as I mentioned, the COVID situation in China is deteriorating. Deteriorating might well lead then to the idea that, look, we are going to return crude to the market, but we're going to follow the plan. There's no need to get more aggressive with it as we adopt a more cautious approach to see how some of these COVID outbreaks play out in, in mainland China. All right. Otherwise, what else have we got today? Well, we've already had some German data. Industrial orders came in just a slight bit weaker than expected. Expected, nothing dramatic, 1.3% against 2%. Otherwise, the morning fairly quiet. You do have the service PMIs, but these are final readings for October. So then really it's the Bank of England, and remember you've got 12 o'clock and then Governor Bailey speaks at 12:30. And we also have— don't forget, you get the minutes, you get the vote split, you get the monetary policy report, those forecasts all coming out today. So once again, I'll be a lot live on the channel at 11:45. Then in the US afternoon, your regular weekly jobless claims coming out, expected to decline once more to 275,000 against the previous 281,000. Speaker-wise, aside from Bailey, it's probably worth noting that Christine Lagarde and Schnabel from the ECB speak at 12:45. Now, Lagarde's speech yesterday, she pushed back against market bets for an interest rate increase in 2022. She was a little bit more explicit yesterday, and that comes after the fairly timid approach that people interpreted from her ECB meeting that we saw most recently. So despite the likes of the Fed tapering and potentially the Bank of England hiking, Lagarde kind of taking Europe out of that group and being a little bit more passive in terms of controlling, and the European rates market not getting caught up in that more kind of hawkish mindset, um, and that's what she was trying to push back against. Otherwise, Elberson, Schnabel speak again at 2 and 6:15 respectively. Supply fixed income out of Spain and France, fairly sizable amounts this morning, uh, and then that is pretty much it. So I'm gonna leave it there. Hopefully I'll see you guys as well later on, um, on the YouTube channel, and, uh, good luck for today. Take care.