FOMC Review & Expectations for Bank of England Announcement

Hi there, I'm Anthony Cheung and I'm the Head of Market Analysis here at Amplify Trading. Every weekday morning I'll deliver a fundamental rundown ahead of the European Open, but if you subscribe to the channel you'll also get content from the rest of the team. So let's begin. Good morning, it is Thursday, 17th of September. Hope you're doing well, very Big thank you to everyone who joined us for the live FOMC session last night. I hope you found it useful. You can access the recording if you just go on to the Amplified Trading YouTube channel, scroll down in the categories to the live recordings, and you'll be able to watch that back if you, if you missed it. But overall, looking at the markets this morning, and definitely a carry-through from the end of that event, and we've seen some ongoing selling pressure into the close on Wall Street. Which contributed to underperformance in the tech sector. So the NASDAQ down the sharpest, and then that spillover handing over the baton to the Asia-Pacific session. The Australian market was down around 1%, the Nikkei lower by around a similar margin, the Hang Seng down around 2%, Shanghai Comp down around 1%, also weighed upon a little bit by the PBOC draining net liquidity from the interbank market after being a flush of liquidity over recent weeks and months. So a bit of downside pressure coming into markets going into the European Open this morning. The DAX is already down around 160, the NASDAQ future down about 215 here just going through 7 AM in London, and the S&P, as you can see, has continued to remain under a bit of pressure. Technically, the S&P now just coming up to around 3316.75, which was that low we printed back on the, the late evening on the 10th into the US close on Wall Street. Also responded back on the 9th and late session on the 8th. So a technical level support just coming up here. But in terms of this selling pressure we've had just going through the European open, I wouldn't say it's been one singular headline. I think a technical break directionally with what's happened since the sell-off that occurred last night on Wall Street. Europe playing a bit of catch-up, bit of time to digest what otherwise was at the time of release a little bit of initial mixed reaction to the FOMC. You'll remember if you're watching it live, initially bumped higher. It was only until the press conference kind of went on and he started to make some further commentary, started to break down a little bit as we went into the late hours on Wall Street and the final half an hour of trade breaking through then what had been holding as the general range low through yesterday's session got broken. It added to some of the selling pressure, and then that carrying on during the Asia hours. So I think this is just Europe coming in, technical break of the level, a little bit heavy, uh, the short-term, uh, kind of speculators just jumping, jumping on that. Um, elsewhere, it's definitely much more prevalent, the move in the equity space. In terms of fixed income futures, I mean, the T-note uh, moved up a touch yesterday but generally has just gone sideways ever since. And in terms of the actual reaction in the aftermath of the Fed, I mean, it's been pretty much zero, if anything, in 10-year at least. Gold, a little bit of pressure, but probably comes by way of fact that the dollar is up fairly substantially, and much of that gain happening, uh, partially late US hours but predominantly during the Asia-Pacific hours And the DXY is up about 0.4% this morning. So EURUSD has been under a bit of pressure, down around 0.3930, a bit of underperformance against cable, down to 0.2121 at the moment. So overall dollar strength has been a, a bit of a key theme for the open. Let's just have a bit of a recap then of what exactly went on, and then we'll talk about some of the other news stories in play. We've had the BOJ overnight, we've got the BOE coming up as well shortly, and what can we expect from these events. So what did the Fed actually do yesterday? So just getting you back up to speed, the Fed held interest rates near zero and signaled that they would stay there for at least 3 years. Remember, this was the Summary of Economic Projections, one of the alternate meetings that happens 4 times a year, when they will outlay then their future forecasting for what does the, the world in the US look like on various different metrics which we can, we can see in a moment. But importantly, in terms of the federal funds rate expectations at year-end and subsequent years thereafter, it included 2023, of which basically rates are going to flatline thereafter. And that, in combination with the fact that there were no real tangible new measures or details in terms of tools or forward guidance, I think overall has left the market a little bit underwhelmed. And I think this is, if you're listening to our previews for the Fed, This is exactly the type of move that we had as our baseline scenario that's unfolding now, which was that the market generally tends to err on the side of being quite dovishly priced and therefore subsequently positioned. And so anything short of that, like an underwhelmed type situation, the market tends to act in a relative kind of hawkish reaction, and that being dollar strength. If anything, there was a little bit of the Treasury yield curve steepening, only slightly, but Powell obviously stopped short of offering new specifics on the Fed's approach to monthly bond purchases in their QE program. Some traders have been expecting signals regarding plans to target longer maturities, which obviously didn't materialize. And so yeah, equities, a little bit of that comes off the, off the table, just given the fact that Obviously equities respond normally much more positively to further accommodative moves from the Fed, and that not coming forward yesterday has just disappointed a few and we just move a little lower. And so yeah, overall I don't think it's that surprising. I mean, the sell-off that's happening now, um, would it create kind of panic at this point? I don't think so. I think it's, it's right to do that move. I think ultimately people who were looking for the Fed to really come out with clarity on forward guidance. I think perhaps that's a little bit wishful thinking if you think about it from their side of things. If you're saying rates are going to be at zero in through 2023, so effectively, uh, the next 2 and a bit years, well then it's a bit early to start talking about then what are going to be the definable metrics that will cause you to raise rates in the future when there's such big uncertainties around obviously COVID and vaccine and other things, of course. But just looking at the S&P 500 here, let's put it in a bit of context on a, on a daily continuation. And we're right back down to that 50 DMA again this morning. We just moved this— Astra restarting their trial, which obviously caused the markets to come back up. And yeah, that the, the blue line is the 21 DMA, and that's been such a good level of support on prior occasions and actually acting as a really strong level of resistance through much of September thus far, and was the, the turning point in yesterday's session, in fact, before we've now come back down. So where we close today is going to be quite interesting. Of course, it's very early hours yet, US yet to come in. If we continue moving south here on a longer time frame, I'd probably be keeping an eye around that low that we printed on the 11th. That would come in at 3308.75. That in itself, although briefly broken, did hold as well on the 9th of September around a similar price point. Next areas of interest then come in at around 3284.5. That would be that high point before the renewed China tensions really started kicking in. And also then that starts to bring in some of those areas of around when we gap down. This was back in late February when the coronavirus started to leave the the shores of mainland China. So a couple of key support levels to be aware of on the intraday if things do continue in the way of which the selling pressure has materialized overnight. But at some point, I'd probably expect the markets to find a bit of a footing. Whether or not then we need to come down a little bit lower to get to that point, as there's definitely room, I think, from a technical perspective, to come down a little further. Um, but overall, I think that, um, I don't think what the Fed had done yesterday is like a definable game changer that means we're going to get a big, uh, continuous correction in equity markets like that, what we were seeing, um, just in the last week and a half or so. Um, with that type of, uh, thing, how can I make that type of assessment or judgment call? One thing I typically used to reinforce any type of view is what is the kind of correlated movement across different assets. And as you can see here, the equity market is coming under some significant pressure this morning, but otherwise nothing else is really moving. The dollar sure strengthened overnight but hasn't really moved too much. If anything, it's coming off a little bit from its most elevated levels in the Dixie from the Asia session. And so, you know, with technical levels breaching, you can see here with the S&P on the right and the NASDAQ in the center. Both did break through what was a holding point in the futures of the overnight Asia-Pacific session. So a little bit heavy with technical breaches as well. But if the T-notes not moving, gold's not moving, and the FX markets, as you can see here, are not seeing much reaction at the moment, I'd say this is more kind of momentum-based technical trading here. And the equities is just exacerbating some of that short-term trend that's materialized overnight, would be my, my perception. Okay, um, a few other things as well just to wrap up the Fed side of things. One of the final points I'll make is he said that the recovery has progressed more quickly than generally expected, but caution on the pace of activity will likely slow and the path ahead remains uncertain. So these were the actual economic projections that they put out. So dot plots aside for the federal funds rate, they actually saw a slightly more shallow contraction in terms of the end of the year. So that actually was a positive. They revised up, but then they see slightly softer growth going forward into the end of '21 and 2022. Unemployment rate was actually more favorable in that sense, that they see— they revised it from June 9.3 down to 7.6, and also subsequent down revisions in the, the pre— the previous or next years, I should say, and inflation was rise up a touch. So all of those would be also somewhat more indicative of relaying to dollar strength on the balance that they see inflation picking up and unemployment going down and actually a slightly shallower contraction, albeit with slightly softer growth going forward. But on the balance there, you could argue that their economic assessment of things has improved, as I think was expected though. Not to read too much into it given the macroeconomic data we've had. It wasn't that surprising that they, they made those upgrades. But again, another reason why we thought at the time, if you watch the live session, that the market potentially could have seen this type of movement— dollar strength and equity weakness over what we saw. The other final points were about the necessity Powell was saying about getting a fiscal deal passed. Still remaining a bit of an impasse on that issue, of course, and Trump has been out urging his fellow Republicans yesterday, and he's been tweeting, uh, frequently, to put it mildly, for numbers to go much higher after a Republican bill of around $500 billion got rejected last week. There was a few rumors swirling on Capitol Hill about a potential compromise over around a $1.5 trillion type dollar deal, which is quite a big coming down from the Democrat side from around the $3.5 trillion where we were at just a few weeks ago. So Powell putting the pressure on that, that really is a necessity for the ongoing recovery of the US. But then also there, there was also some members who were looking for a hiking cycle to start when you looked at the details, uh, to in 2022-23, which is also a little bit earlier than perhaps some people were anticipating. So it wasn't completely unanimous in terms of those views. And again, that kind of fits the narrative of some of the moves we're seeing unfolding this morning. So yeah, that was the overall take, but I'm gonna leave it at that for the time being. Let's see how it plays out throughout the rest of the day. Moving on then, overnight we had the Bank of Japan. They took a less gloomy view on the economy and they stood pat on their asset purchases and bond yield targets. That's completely as expected. The new Japanese PM Suga who was elected yesterday, has indicated he sees no need for any immediate changes in the Bank of Japan policies. So very much normal status quo, I'd say, with, with Japan. No real surprises or anything to really comment on. Otherwise, elsewhere overnight in the Asia-Pacific kind of session, we did see a little momentary blip in the Aussie dollar but failed to sustain it. And it came after We had surprisingly good jobless data. Australian unemployment unexpectedly fell as fiscal and monetary stimulus helped the labor market withstand that Victoria renewed lockdown that we saw when we had that recent outbreak in Melbourne, Australia over the last month or so. With more than half of the jobs lost since the pandemic have now been recovered, in fact, the jobless rate in Australia came in at 6.8%, below the expected 7.7%. 37. So there's a little flurry higher on the Aussie, but it's failed really to sustain it, uh, going forward. Just shackled, if you like, by the ongoing dollar strength that was seen overnight, uh, just outweighed that, that brief period of Aussie strength. So remain on the back foot, down about 36. So uniform really moves seen across those dollar pairs, um, is what I would kind of summarize it as. That moves us on then to the Bank of England. Obviously we'll cover this later for our guys, um, we'll go into it a little bit more detail, but really not expecting a great deal, uh, is the overall take. No change to the bond buying program or interest rates are expected. The bond buying program, uh, but potentially one that will become a focal point perhaps towards the end of the year. Um, most market expectations are kind of honing in on November for that, and if there's going to be any cut to zero or even lower rates in the UK is probably not going to happen until thereafter. It's because there's kind of a sequence, if you like, of the policy tools of which they're likely to go to first, ramping up QE, and then if that isn't working, then, then looking to move the rate thereafter. And there's obviously three major points which are impacting potentially whether or not that's going to be the case, and it's really the coronavirus pandemic, the Brexit situation, and the government's fiscal plans. And all three of those are really rearing their head right now and over the coming weeks. And really October is a real focal point for those three things. And so by November, hence the reason why we should be in a better position to know, uh, the status and therefore is then action needed in order to further support the UK economy, which is obviously still under immense pressure at the moment. Um, looking at the updated, uh, I know it's always useful for, for for some of the guys to, to have a good updated crib sheet of who are the hawks and the doves on the Bank of England. I think calling them hawks is a little bit rich. I'd probably say who's more dovish than others, because definitely everyone's tilted to the left-hand side here at the moment. And as we've heard of late, the chief economist Andy Haldane has definitely been the most vocal of wanting to hold back a little bit on being so accommodative with policy he's a little bit more optimistic. On the flip side though, if there were to be— and obviously the Bank of England a little bit unique that we see a vote split whenever they have a decision— and of the 9 members, it could be then if there's any dissenters looking for immediate QE as soon as now, then those names would likely be the likes of Michael Saunders, Jonathan Haskel, if that were to be the case. Um, but yeah, other than that Really not much for me to say. I'm not expecting a great deal right now. I can't really see how these monetary policy committee members can really make that type of decisive call on doing any extra additional stimulus right now without then the actual outcome being known of those three factors over the pandemic, Brexit, and government fiscal plans, which we will know. Be— they'll be more equipped to make a better call on that when they meet in November. On Brexit, there's obviously been a lot of headlines here if you're based in the UK. It seems like we're right back in the thick of it again. So the latest is that Prime Minister Boris Johnson has made a key concession on his controversial Brexit law-breaking plan in a bid to get it through Parliament. Richard Keane, probably not heard of him, but he's one of the government's most legal or senior legal officers, and he quit over the recent proposals, kind of said his position is no longer tenable given the situation that's ongoing. So after meeting Conservative MPs who are threatening to rebel against him, apparently Boris Johnson has agreed to give the House of Commons a veto over whether the government can exercise its proposed powers to override parts of the Brexit divorce treaty. So again, very similar to what we were seeing through 2018, 2019, the government has a very firm firm stance, it passes the initial vote in the lower house, but then when it comes to the potential for various different amendments to come forward, he then has to start brokering, cutting deals, making concessions in order to again appease Parliament that they feel like they've still got some control and so on. So all of this so far I don't think is that scary in terms of what's unfolding. Um, Johnson has likely seen off any parliamentary rebellion now by making these types of concessions and boosted his chances of passing the legislation. And at this point, this is kind of seen as a, lack of a better word, a backstop contingency planning in terms of the Internal Market Bill. Johnson did say he believed the bloc was negotiating in— he didn't believe the bloc, i.e., Europe, was negotiating in good faith in their trade talks, and he would impose formidable tariffs on EU products if a free trade agreement could not be agreed this year. So he's definitely hardballing it at the moment with Europe, and hard to criticize. You know, we're not— I'm not here to give my political kind of bias on what I think personally. You know, if you look at it tactically, perhaps then, you know, taking a strong-arm approach and kind of using the type of wording that would be somewhat akin to a Trump-style tactic of threats and, and so on. Perhaps that is the most prudent way to go forward. And there are some signs that even though he's making these top-level comments, that behind closed doors there are still some room where there's some appetite still to do some deal-making. And look, this is the normal passage of negotiation There's still a bit of time, of course. These parliamentary legislation kind of process does take time though, but I do think that that's a little bit of noise on the side at the moment. So I don't really see it as too much of downside pressure, certainly not for today for sterling. I think it's more going to be dollar-led, and obviously we keep an eye on the Bank of England. Obviously any surprise announcement there could well liven things up, but As far as the open is concerned, at the moment it's more kind of equity-focused. As I said, we're under a bit of pressure at the moment, but I think people are just jumping on the, on the bandwagon, so to speak, trying to take advantage of the short at the moment given some of the technical breaches that we've seen in some key levels downside. But the other asset classes are pretty quiet, to be quite honest. So how sustainable, as I said, that is, I'm not anticipating there to be a, you know, a big 3-4% sell-off day just on the back of what the Fed did last night. Calendar-wise, having a look then, uh, what is to come for the rest of today. So you've got the eurozone, but these are final HICP readings coming at 10 o'clock, so unlikely to be market-moving. Bank of England then at 12. This is a regular kind of statement. We'll get the vote split we'll get the minutes, but there's no press conference this time around. That's not coming until November, hence the reason why a lot of people have penciled in that date as well. Historically, the Bank of England likes to change policy, if they're going to do so, such as an increase in QE for example, during an ability then for further clarity and communication offered in projections and also in the press conference with Mark Carney. Mark Carney, Andrew Bailey, and, uh, and his team. Otherwise, in this afternoon, you've got building permits, housing starts, weekly jobless claims coming out of the States, and you've got the Philly Fed Business Index. And then fixed income, you've got Spanish and French supply coming to market, and you've got the October options expiry and WTI futures as well. All right, that is it. Gonna leave it there. Any questions at all, feel free to leave a comment. I'm always happy to help. But otherwise, I'm gonna wish you a good day, and I'll catch you guys tomorrow. Thanks very much.