FOMC Review, Evergrande Up On Debt Restructuring Talks & What To Expect From The BoE

Okay, very good morning. It's Thursday the 23rd of September, and thank you to everyone who joined me live on the YouTube channel last night for the live coverage of the FOMC. I will be going live as well at around 11:45 London time, late morning, to cover the Bank of England announcement at midday. So if you'd like to join me, there'll be a full chat function absolutely happy to have you on board and ask lots of questions as we go through that latest announcement in real time. Otherwise, going to talk about the main man, Jerome Powell, and to be quite honest, he's doing a good job. And as far as markets are concerned at the moment, I wouldn't have too much in the way of hesitation to say that we saw relatively muted reaction even though the strongest signal has been given yet that the central bank will begin most likely scaling back its asset purchases in November and complete the process by mid-2022. Powell himself said in his own view that the substantial further progress test has been all but met. And in terms of market reactions that have been seen this morning and how the charts look, equities— we did have volatility on initial release It was kind of a threefold reaction as far as I saw it. Initially, you saw stocks drop, dollars and yields spike. This was on the initial move that only lasted perhaps several seconds. And that was because some of the first information to hit the tape was talking about, as I said, on tapering, but was also some changes on the dot plot in a more hawkish fashion. However, then as this continued to kind of be digested, I think the overall takeaway here is that there there wasn't anything really that was too unexpected. Shifts in a more aggressive trajectory of rate hikes in the future, commencement of tapering, the fact that inflation is still seen as transitory— all of these things aren't that outside of what people, most people were looking for anyway. So there was a bit of gyration in market price, but if you actually look at things at the moment, gold remains lower now despite initial rallies that were seen last night. Yields also on the front foot, so T-notes a little lower, equities holding up, and the dollar has held on to a partial amount of the gains seen yesterday but well off its best levels. So overall, I would say it was a relatively controlled response to what otherwise is the Fed just on track at the moment. I'm just going through then a couple of comments here from Powell in a little bit more detail. So other than the headline, as you can see here that a lot of the media agencies are covering this morning. Officials also published their latest quarterly projections, and of course, this is the infamous dot plot which we were looking at last night, and it showed officials are now evenly split, 9-9, on whether or not it will be appropriate to begin raising the federal funds rate as soon as next year, next year, 2022. So actually, the first rate hike has been brought forward Previously it was for 2 rate hikes here in 2023. That's now gone up by 1 to 3. And then there was an even split, so indicative of 1 singular rate hike coming as soon as next year. So liftoff happening a little bit earlier than anticipated. Powell, as to be expected, was very conscious, though, of trying to decouple that of tapering and rates. He said that, I quote, the timing and pace of the coming reduction in asset purchases would not be intended to carry a direct signal regarding the timing of an interest rate liftoff. Um, a few other things then. Um, overall it's a very good outcome from the Fed really in terms of signaling their intent to get the market information well ahead of this tapering decision. As you all know, they've been talking about tapering now for several months, but this is very normal tactical approach in order to kind of drip it feed it into market expectation and pricing so that the actuality of it happening now is very much baked into prices. The equity market specifically looks to be taking some of the early cue and initial rally that we saw last night on the fact that there was quite an upbeat growth outlook. Both 2022 and 2023 outlooks were upgraded, and also there were perhaps some some looking for more of a cleaner break to a move to a 2022 hike. But in fact, that split of the 18 FOMC members was even at 9-9. And so equities remain pretty unaffected at this point in time and continue to just track higher. And yeah, as I said, overall conclusions is we continue on. It looks like the Fed then will look set to commence tapering in November. So there's still much to look out for in terms of the composition of how they'll do that. But timing-wise, they've also said as well about the process being completed by mid-2022. So that information now into the market, and that in itself was also a little bit more on the hawkish side because the more dovish expectations were for a 12-month tapering process, and this would be of course shorter than that. Otherwise, some of the big news from overnight was that in regards to China Evergrande, um, so the kind of beaten down Chinese shares of property developers in particular and tech giants, which obviously have been impacted heavily from the crackdown we've been seeing for many weeks. Casino stocks in Macau as well getting hurt by a similar rhetoric coming out of the state. They all moved higher overnight amid hopes that China Evergrande Group is making progress with dealing with payment deadlines, much to a similar ilk of the headlines that we had yesterday. We also had that large-scale, nearly $19 billion liquidity injection from the PBOC. The latest here now is that Chinese authorities, as per this article, have begun laying the groundwork for a debt restructuring. And that in itself would greatly reduce the risk of contagion from any uncontrolled collapse of the, of the company. So the Hang Seng Property Index gained as much as 5.2%. Overnight, the tech companies, Macau casino operators were up in excess of 3%. Evergrande shares themselves overnight were at one point up as much as 32%. They have come off that highest level. It's the biggest pop they've had to the upside obviously in a long time, more than a decade. They're actually— they've pared some of that, but they're still up around double digits of around 10 to 11% at the moment. So as well, the That's providing a bit of relief to the equity space, which otherwise was under pressure on some of the nervousness about a complete collapse and the spillover effect that that could have, not just in China, but for the global economy. Powell himself was actually questioned on Evergrande, as you would expect, in the Q&A. He said the situation seems very particular to China and not a lot of direct exposure for the US to the Evergrande situation. And of course, this is kind of comes in the context of Powell would very much be in dialogue with some of the major banks in the US day to day over these types of situations because they would want the latest intel of exposures, if any, so they can make any appropriate liquidity adjustments and so on in their own market. But as we heard yesterday, Citigroup, they already said according to their spokeswoman that there's no direct lending exposure to Evergrande. And sources on Bloomberg were also saying that JP Morgan and Bank of America have no such links which of course is in fitting then with what Powell said yesterday with there not being a lot of direct exposure. So again, a degree of relief on the back of that. So yeah, China really positive overnight. I wouldn't say we're out of the woods yet on Evergrande, but short term it's just helping stabilize sentiment from compared to where we were a couple of days ago at the beginning of the week. Looking forward, got the Bank of England coming up. Definitely not expecting anything from a policy perspective. So, uh, record low interest rates. The asset purchase program currently stands at £895 billion is going to be unchanged. Um, at least one of the 9 members of the MPC, uh, this being the new constructed board because there's 2 new members here, uh, you've got Hugh Pill and Catherine Mann, uh, will be voting for the first time. Bloomberg Economics reckons Pill's previous remarks questioning the wisdom of QE make him a little bit more neutral to hawkish side, comparative to Catherine Mann on the dovish side, who has shown some sensitivities to the plight of unemployment rates, which would kind of tip her more onto the dovish side here, hence her more left-leaning on this kind of chart. Saunders is the one that's going to be outlying. Saunders did break the pack and voted for an immediate end to QE in the last meeting. One would very much expect him to do the same again this time. Um, I guess, but perhaps someone could join him. Um, maybe not that being the consensus, but if they did, obviously initial knee-jerk reaction could be a momentary blip higher in the sterling currency. So something to just be aware of. There is no projections coming out. It's not a monetary policy report month, and so that's not going to come until November. Now given the last one in August. And so it's just going to be the rate, the statement, and we'll also get the vote split and then the minutes as well, which all come out uniquely to the Bank of England at the same time. A few things in the backdrop here, um, the economic picture kind of has dimmed a little bit in the UK. The Bank of England, its latest forecast they published in August anticipated a 2.9% expansion in Q3 2% in the 3 months of the year for Q4. Median forecast for economists polled in September by Bloomberg would say that that 2.9% for Q3 is likely to be moderated to 2.5% in this quarter. So growth being a little bit less, um, as, as good a recovery as what they were anticipating at that point in time. For inflation, meanwhile, that's actually got above a little bit more aggressively the Bank of England's 2% target hitting 3.2%, of course, in August. The bank's outlook though, and the reason why markets have been fairly managed in their response to that increased inflation, is because of their guidance that it will touch 4% this year, um, in response to the lifting of virus restrictions. Before then, of course, being this transitory effect and it would fall back in 2022-23. Another point which might keep the hawks at bay at this bit particular juncture is the fact that 1.6 million people are on furlough and millions more are unemployed. And the question is whether a slowing economy can absorb all those who are looking for work, particularly as furlough comes to its conclusion at the end of the month. So as I said, I'll cover this all live, so feel free to join me. If you're not subscribed to the channel, just do so, click that button, hit the bell icon, and you'll get a notification when I go live. Otherwise, I'm just having a look this morning, some interesting data actually coming up. You've got the flash manufacturing service PMIs for the eurozone and the UK, so France at 8:15, Germany 8:30, UK at 9:30. These do tend to have an impact on market prices in the intraday environment. In terms of actual expectations here, looking for pretty much constant performance from last month in August. If anything, maybe slightly downside figures could, could be anticipated, but nothing too dramatic. So anything other than that would be more on the surprising side, whether strong or weak. So definitely has the impact to move euro in the initial aftermath, as well as European yields, rates market, and DAX and European indices. So Definitely worth keeping an eye on those. Bank of England at midday. The US session, weekly jobless claims expected to see another drop down to 320 from 332 seen last week. And then you get the market manufacturing service PMI flash data coming out of the US at 2:45 today. CAD retail sales also coming out this afternoon for any loonie traders. And then you've got a 2, 5, 7-year refunding announcement for any fixed income traders for the US afternoon announcement come from the Treasury at 4 PM. All right, that is it. So I'll leave it at that. Any comments at all, feel free to just ask a question below. Otherwise, I'll see you online live at 11:45 for the Bank of England. All right, take care.