FOMC Review | EU Vaccine Threats | BoE & BoJ Preview

Good morning, Thursday, 18th of March. Hope you're doing well. Just before I begin, if you are watching this briefing delayed on our YouTube channel, don't forget to like and subscribe. If you would like to see the private live session we did for the FOMC last night with the team and myself, then just leave a comment on the video and I'll be happy to share that on Saturday at the weekend because I think it was a really good review of how to prepare and then with some of the guys how they're executing trades over a news-driven event. So as I said, if you like, subscribe, leave a comment, I'll be happy to share that at the weekend if that's of interest. But otherwise, look, let's get straight into it and talk about this morning. And definitely it's a kind of picking up the baton from where we left off. So generally speaking, equity index futures are still higher. We had a positive close on Wall Street across the three major indices, and that reverberated then across then the global market. Asia generally higher, perhaps the Aussie market touched lower despite very good jobs data there locally. Um, dollar still weak and weakening at this point. Um, in terms of the actual intraday session at the moment, it's down about 1/10 of a percent, but obviously got hammered yesterday on the back of the Fed. So both major currency pairs, EURUSD and Cable, continuing to move higher. EURUSD in close proximity now to retesting the initial aftermath high that we saw on the initial spike up on the Fed. Cable looking to reclaim 1.40 this coming, irrespective of vaccine delay information that we heard from the NHS yesterday, which we'll talk about in a moment. Uh, gold still elevated, having broken out of that range, really firm move there, and up $23, having just grinded it out as well, adding to the US pop on the Fed in the Asia-Pac session. And then in terms of yields, relatively static there. So let's have a recap then of the Fed. What exactly did they do and what has promoted this type of movement that I've just kind of talked through? So from a very top level, getting everyone up to speed, long story short, uh, the Fed done what we thought that they would do, what we discussed here yesterday in the briefing kind of materialized. And it was the idea then that people were really zoned in on the median dot plot for rates in 2023. Now here then, what they basically said is that they stuck to their projections of near-zero interest rates through, not in 2023. And that was the key trigger really for the markets. There were other things, of course, but that's what promoted that move, given the outside bets that there was going to be a potential bringing in nearer timeframe for the first rate hike from the Fed, which did not materialize. Our kind of view on this is that ultimately this isn't going to detract from the fact that yields are going to move higher in the foreseeable future, in the months to come. As the growth momentum picks up in the US to hit their targets of what they're looking for, which is around 6.5% in growth coming in the period ahead. Yields inevitably will go up with that growth scenario. However, the market taking heed from the relief then that there's no kind of signs at this point of early tightening. And I don't think that was a surprise. I think the markets were just kind of misaligned with what they were looking for. And the reason for a lot of that, I think, was down to the summary of, of projections. And you'll, you'll remember 2 days ago or so I was talking about Goldman Sachs, who put out a note, and they were talking about the fact that they saw actually around 11 members or so switching out to then bump the dot plot up, which would be this table here on the left-hand side. And this is what the combi— the composition of the actual dot plot looked like in the actual projections last night on the right-hand side. And as you can see here, only 7, nowhere near as many voting for that more optimistic view on the economy to subsequently lift rates. And so I think markets, you know, Goldman's was really banging the drum on this, and I think people were getting a little bit overly excited as we were kind of forecasting here on the desk that the idea here that we think, given recent communication from the Fed, not just Powell but everyone, that they weren't going to shift things at this point in time. And that's pretty much what he was echoing in the press conference, that look, we've always missed our inflation target, it's always undershot it, um, we haven't yet, um, it's very early to make those judgment calls about what it's going to be like in the future, albeit they see it higher, not wanting to pin down an actual figure as a threshold. And I think that type of language means that they're, as he has said before many times, that despite the kind yelled tantrum movement and focus that the markets had in recent weeks. For the Fed, they're just sticking to the plan at this point in time, not being bullied by the markets. And that's exactly, you know, the stance that we, we would expect Powell to take. So all in all, I think it was more a little bit of a function of markets positioning rather than a shock event so to speak. But definitely things still remaining, you know, of a continuation of the trend for the moment going into the European Open. The DXY has just, as we're speaking now, gone below the low that was seen post-event last night. So both major currency pairs on the front foot at the moment, and definitely a dollar weakness story driving those, those dollar-based pairs for the time being. So definitely will be a theme to account for in the session ahead. Here's what the actual projections look like. And yeah, for real GDP, then they do see real GDP— they've upgraded it marginally, 0.2 for both '21 and 2022. Unemployment revised down, so positive there with the quicker vaccination and the ability to reopen faster. And in the core PCE numbers, it was very marginal, only 0.1 increase on both '21 and 2022. Which probably also assisted some of that, that move as well last night. As I said then, overnight in Asia it kind of followed through. We got the BOJ later, we'll talk about that in a moment. There was some Aussie employment data, it was fantastic in fact, but really the Aussie not reacting a great deal, it being more driven by the weakening of the dollar. And Aussie, like with other dollar-based pairs, is rallying on the back of that. In fact, the Aussie has just broken out. Just quickly flashing the Aussie into shot here, you can see the Aussie dollar's just broken out of the double top from the Asia-Pac session as Europe comes in and hits the dollar again, and a breakthrough the R1 in the futures. So fresh session highs here for the Aussie. But I guess underpinning that as well, helping the kind of divergence there short term, being the good jobs data, but not much in the way of reaction to the actual numbers. On their release. The other thing I wanted to talk about was, was this. And, you know, one thing to be quite clear up front is the pound is rallying at the moment on the back of dollar weakness. And if anything, the actual pound is outperforming the euro on that basis. So this news, I think, is, is not really being impactful for market sentiment on the UK, on the roadmap or its general delivery. Perhaps the fact that the UK has got out in front with the speed of its vaccinations gives it a bit of wiggle room. If you remember when the UK issued their vaccination roadmap program a couple of weeks ago, the fact of the matter was that they were going to hit their targets well ahead of the actual fourth final step of reopening on 21st of June, but they actually give— have given themselves a degree of wiggle room for exactly the issue of what we're seeing and confronted with now. And so getting you up to speed, the UK's vaccination program is, is potentially being thrown a little bit off course as the NHS yesterday warned of a significant delay and a reduction in supplies of jabs in order to freeze on new vaccination appointments in the month of April. NHS staff were told that volumes for first doses will be significantly constrained and the start of inoculations for the under-50s would be delayed. The BBC have reported it's understood the AstraZeneca vaccine supply issue relates to a consignment from a manufacturer in India, half of orders being delayed by 4 weeks. So yesterday, you know, this is kind of the state of where we're at at the moment. Politicians looking to protect themselves, um, across the pond in mainland Europe, they're trying to point the finger AstraZeneca is trying to protect itself. I mean, it's quite, it's quite uninspiring to see given the fact that we're facing a humanitarian crisis, to be quite frank. But that aside, you know, yesterday you had UK government politicians pointing the finger at AstraZeneca saying it's, you know, it's their— in a similar vein to Europe— it's their fault for not meeting the criteria of part of the supply agreement. AstraZeneca said that there's nothing wrong at the moment with the supply chain or their delivery schedule, and then it transpires that, you know, they're exactly right. You know, it isn't. It's just to do with an issue which is always going to be that case given the fact that these drugs are manufactured all over the world and manufacturing, distribution, logistical issues are going to happen. A large part— and this is a good point that was made by Mike in our community on Amplify Live— he said the large part of the big ramp-up in UK vaccine supply was made up of an acquisition of 10 million doses of AstraZeneca vaccine from the India contract manufacturer Serum. So in fact, it's around 10 million— it's pretty sizable— coming out of that plant facility in India. So the point being here is half of that order is delayed, as the BBC have suggested, and that's leading to a slowdown of vaccinations, putting the UK government in perhaps a slightly tricky situation. And the reason for that is that it has to cover its bases on second shots. Remember, UK government came out with that report a few months back saying that there's a perfect kind of 12-week window to administer the second shot after the first, and those people are coming due now given those high-risk categories that were taken care of first. And there's also probably going to be pressure to preserve the Pfizer jabs, and the reason for that of course is that a lot of those are manufactured in mainland Europe, and at the moment Europe are not playing ball and making some quite threatening noises via the EU Commission President von der Leyen yesterday. Just to kind of go over that, von der Leyen said the bloc could activate Article 122, so 1-2-2, of the EU treaty, which allows it to take emergency measures to control the distribution of essential goods if severe difficulties arise in securing supplies. So basically just saying, right, we're going to use EU law. And part of the justification is that, is that the UK so far ahead in the vaccinations and most of the exports of European vaccines are going to the UK, right, you get the cut. And so they're almost weaponizing that situation. Again, I think a lot of that is political. I don't think it's perhaps going to get quite to that point and that drastic, but you can see then the precarious nature that the UK is in because there's only so many different drugs out there. And if Astra delay is, is meaningful and leading to just Astra alone, which we're heavily geared toward as a composition in our rollout of vaccines in the UK, gets delayed by a sizable amount, they're having to take that action about freezing new vaccination appointments in April while they take care of second shots being administered. You've then got the risk of Europe halting the Pfizer distribution, and Moderna, who's due to supply a few hundred thousand doses in the first delivery next month. If the EU puts in place stricter export controls, that could also be hurt. And the problem with Moderna, of course, what we've known from the start, we're talking a few hundred thousand. With AstraZeneca in India, we're talking 10 million. Moderna has real difficulties in producing mass amounts given that it doesn't have the type of infrastructure that some of these bigger pharmaceutical companies have. All the meanwhile, over our friends across the pond, um, more positive. Joe Biden, the president, is basically poised to meet his goal of 100 million vaccinations in the first 100 days. He's going to hit it on day 58, it's looking at. So nearly half the amount of time. He's scheduled to speak publicly actually later today. It's going to be this evening London time about the vaccinations. And he actually could well be in his right to double this target to 200 million in the first 100 days. And I just think the notion of under-promising and over-delivering is a fine thing in 2021 when it comes to politicians globally. It's a rarity. And so he really has stepped this up. And then, in fact, the pace of vaccinations in the US is at 2.5 million per day. And this is what that looks like in terms of the pace over January 1st, the current date of March 18th, and it's anticipated to get faster, hence the reason why they can be very ambitious with those targets. So yeah, definitely tying this back in, this is a key component of course for the Fed and what the Fed are going to do, because the economy is going to heat up even though the Fed are kind of holding off and being still ultra-accommodative for now. That time will come and that communications challenge will need to be met at some point. And at some point is coming relatively soon, probably going into May and then June FOMC meeting where we get the latest dot plots. That's going to be then very telling because at that point they're probably going to want to give themselves at least a 3 to 4 month run-in of communication subtlety changes to then give the discussion about tapering before then tapering commences perhaps towards Q4 of this year. So this is a key component to that, the vaccination story. The faster it happens, the more pressure there is then for the Fed to ultimately make a change at some point, because the economy is going to pick up at this— a greater speed of reopening and then increasing demand, inflation, so on. So that hopefully gives you a bit of context. But importantly, as I started that conversation, the pound isn't too fussed for those, those reasons I mentioned. Um, otherwise, bank decisions. We've got the Bank of England coming up now. Bank of England, I would say, is probably the most boring of the Fed, the BOJ, and the BOE. So of the trio, this is probably the least inspiring for an intraday trader for price movement. Not expecting any change in interest rates and their asset purchase facility, so their QE program. They're not going to follow the lead if you like, of what we heard from the ECB last week. If anything, I actually think that given the ECB's commitment to significantly increase their pace of purchases within their PEPP program, and also what the Fed have been doing with being resistant to commenting on this kind of movement higher in yields and getting the market kind of back into line with things, with Fed thinking, I actually think the Bank of England have caught a bit of a break here. And coming kind of after those banks comes with a little bit of upside that they've made their moves and the market's so kind of globally synchronized that they've already covered the bases, if you like. And the Bank of England could just sit back and just put it in cruise control for now. I think that no need to rock the boat. So language is key here, I think, for the Bank of England. As they said here in Bloomberg, tone and guidance are key in the decision to make no change. So just looking out for some of the surrounding commentary around it, but not expecting a great deal. The BOJ, on the other hand, a little bit more interesting, and that's because they've just got a— they've got this policy review that they've been working on, and they're due to make some potential tweaks to the variety of tools in which that they use. The bank, according to a Reuters survey, will scrap either or both of the numerical guidelines set for its purchases of ETFs, um, to make its stimulus program basically more sustainable. So this is about doing more, increasing flexibility here in a similar vein to a more dovish stance. The BOJ currently sets two guidelines for its ETF buying, which is to buy an annual pace of roughly ¥6 trillion but up to ¥12 trillion. Critics argue numerical guidelines prevents the BOJ from buying ETFs in a flexible format, such as slowing purchases significantly when stock prices are booming. So just having a little bit more agility to react to market conditions. The central bank, secondly, the other big thing to look out for, is expected to slightly widen an implicit band at which it allows long-term interest rates to move around its 0% target, according to Nikkei press overnight. And that's one that's, that's been talked about quite a lot as well. So that kind of yield curve control flexibility. But we'll have the answers to this. Obviously this is coming out overnight if you're looking at London time, so I'll talk about this more tomorrow morning when we have more details. Otherwise, for the calendar today, very quiet in the UK European morning. BoE then at 12 o'clock Um, no press conference this time around from them. Next one of that's not due till May. You've then got the weekly jobless claims coming out of the States, expected at 700,000. Remember, they printed at 712 last week, so we are looking for a further improvement here, the number to go lower. And that comes in the context of 712 last week being the lowest reading we've had since the first week of November, so it was a particularly strong figure then. and looking for these improvements. Philly Fed Business Index coming out at the same time. So remember, 12:30 rather than regular 1:30 with the clock change in the US. Uh, and that's pretty much it on the data side. Speakers though, Christine Lagarde speaks twice today, um, at 8 and at 11, but speaking at a parliamentary hearing, introductory remarks first, and then a, uh, women's rights event second. Equally Bank of England's Cunliffe is speaking at 11:00 with Chief Economist of the BoE Haldane speaking at 12:30. Again, both off topic, talking about payment systems and an annual Women in Banking event for Haldane. So of all of these speeches, these are meaningful people talking, but also layer in the context of the BoE rate decision happening. Those BoE guys are not going to say anything specific on economy or policy, I would think. And I don't think we're going to get much à l'égard given the fact that we heard the official communication from the meeting last week. Um, all right, that is it. Gonna leave it there. As I said, quite a lot, uh, to go over there, so hopefully it all made sense. Any questions at all, just feel free to leave a comment. If you're watching this on YouTube, don't forget to hit the subscribe button as well. We really appreciate you being part of our community. And for the rest of the guys at PhiLife, I'll see you in the Discord room. Alright, have a good day.