Markets Await 'Forward Guidance' From The Fed

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. Hi guys, Anthony here, hope you're doing well. It is Wednesday the 16th of September. Just a reminder, we will be covering the FOMC completely live, me and the rest of the team, from 6:30 London time today. So giving us enough time for a full fundamental technical kind of preview ahead of the event, then watching the actual live announcement and how the guys are trading it. So look forward to speaking to you then. But just having a look overall at the charts this morning at the European Open, just gone through 7 AM here in London, and yeah, relatively quiet ahead of a big event. It's quite, quite quite typical in terms of the normal behavior that we'll see. So it could well be a fairly quiet European open. And we have had some data already this morning in the form of UK inflation metrics. But as per UK data in the context of timing, I would say right now, given all the other things that are going on, both from a fiscal and monetary expectation point of view in terms of the Bank of England's tomorrow— not expecting too much there— but in terms of then what decisions they might take towards end of the year after what the government does with a lot of its fiscal policies that have been put in place during the pandemic, which obviously come up for expiration, most importantly furlough in October. And then you've got the Brexit saga kind of ongoing at the moment. Not too much new to mention on Brexit, lots of headline national news talking about the various different private conversations Johnson's been trying to have in order to stop the revolt within the Conservative Party before before we get to these further kind of procedural hurdles for his internal market bill. But I wouldn't see any of that as too destabilizing short term for right now, this session, for the British pound, which is likely to be more driven by, particularly later on, the movement and reaction in the US dollar, and then subsequently how those major FX pairs perform in respect to that. Inflation metrics this morning from the UK, just to tie them off, Um, the CPI numbers were a touch higher than expected in terms of the core year-on-year, 0.9% against expected 0.6%. The month-to-month reading was -0.4%. Expectations were for a slightly deeper -0.6%, but there's no real movement being observed here in the British pound on the back of that. Otherwise, in terms of the equity index futures, we're pretty flat overall. It comes after what was generally positive finish on Wall Street. Gains were, yeah, up. NASDAQ outperforming, up around 1.4%, but pretty flat elsewhere. The Dow unchanged, S&P up about half a percent. I'll talk about Apple in a moment, but nothing really too exciting there, I'd say, is the main takeaway in their shares finishing broadly flat. Otherwise, WTI crude continues to remain quite bullish, and we had quite a surprisingly deep draw of nearly 10 million in the API inventories released last night. That of course comes ahead of some of their upcoming data this afternoon. And that does come after, with crude, what we've seen is an improvement in some, in some Chinese data, New York Fed manufacturing yesterday in the US. So some of these demand-type signals on a global economic front helping. And then with the supply-side drawdown that we've had last night and a bit of pre-positioning ahead of the DOE numbers later, seen oil recover back to a $39 handle As you can see here down at the bottom, we're already trading back to, um, 39, which is the R1, up just shy of a dollar already on the session. Fixed income is flat, the Dixie is flat. So again, major currency pairs, uh, pretty quiet overall in the overnight session and very much awaiting the Fed. With the Fed, just going to quickly go over a kind of top-level summary, I guess. I don't want to go into too much detail because I've prepared some slides which I'll go through in depth later on when we do the Fed event live. But just giving you an overall assessment here of some of the things you're looking out for. The Fed is expected to maintain a dovish stance at its policy meeting, of course coming on the coattails of having adopted now average inflation targeting, or AIT. Officials are expected to project interest rates staying near zero through 2023 And that's likely to be ratified in the fact that their updated latest summary of economic projections, and importantly that dot plot matrix which plots then at the end of this and subsequent years where interest rates will be according to FOMC members, that now is inclusive of 2023 for the first time, just given where we are calendar-wise now. And that means then the interest rates very much expected to remain where they are on ground zero, if you like, for the foreseeable future. However, do note that with those projections does come things like growth, inflation, these types of other metrics, and overall the expectations are that the Fed will produce a rosier set of economic projections on that front than what they did in June, given some of the economic data that we've had of late in recent weeks. The main kind of sweet spot that most people are looking at is of course forward guidance It's likely to be a major focus of the press conference with Jerome Powell, and the chairman is expected to be asked on how much and how long of inflation overshoot would the Fed be willing to tolerate without then taking action. Because before it was much more uniform, it's kind of, here's your 2% line of inflation that you're targeting, as it comes up to it, then the action then gets taken. But if you're talking about then a period where it can go below a and then go above, but you're looking at an average over time. Well, what is that over time period, and will they be more explicit? Here's a couple of good pieces I clipped out of the FT this morning, which talks about then looking at the actual nuance of language. And they said a phrase in the FOMC statement to watch whether the central bank changes is its commitment to maintain rates close to zero, uh, quote, until it's confident that the economy has weathered recent events to something a little bit more firmer. Another is whether the Fed will maintain its pledge to assess economic conditions relative to its, quote, maximum employment objective and its symmetric 2% inflation objective. Some economists then have suggested the Fed might tweak that to include a reference to an average 2% inflation objective over time. So not so much, um, let's say time-specific, but just moving the goalposts slightly to be referencing over time, reflecting that new policy framework. There has been other things where contingent tied kind of policy movement on the, on the rate, i.e., kind of like what we saw Mark Carney at the Bank of England many years ago adopted his strategy of defining, say, a metric like unemployment hitting X means policy reaction Y. I think that's unlikely. Um, but this is going to be the bulk of where a lot of the focus will lie. Several regional Fed presidents, um, Bostic and Chicago's Charles Evans, have said that there's no rush to provide additional clarity with markets anticipating a long run of near-zero interest rates. And therein lies perhaps quite a key point to look at when we're trying to ascertain how the markets might react and subsequently how to trade this event, is that there's a risk that the Fed doesn't deliver on these market hopes for more detail, so explicit on forward guidance, and that risks unwinding some of the goodwill that's been created in markets over recent months. That's led to arguably one of the main reasons for underpinning this, this big rise we've had in equity index futures, exiting out the slight dip that we had more recently. Another area that could be watched as well quite closely is about the FOMC could tweak its rationale for the purchase of Treasury and mortgage-backed securities to say the program is intended to stimulate the economy, not just smoothing market functioning. So you're kind of very subtle referencing whereby you're going from it's a mechanism used to control and impart stability into the market as what they've done with the new adoption of QE, of course, since the initial pandemic hit back in kind of March, April. But moving away from that, talking about it being more of a stimulative tool with intention to do so rather than just a smoothing out of markets. While an increase in buying or a shift to explicit cap yields isn't expected, some of course are looking for a little bit more. And the other thing is, is that with the Fed ramping, or generally with the US ramping up its fiscal spending, that's led to more debt issuance out of the US Treasury. And that typically has been quite short-dated by nature, meaning then that the net kind of bond holdings that the Fed have are quite short. But as the bond issuance of the Treasuries come out, excuse me, it's been more longer-dated then it's a little bit out of kilter from the Fed's holdings of being more short-dated. So do the Fed ultimately need to start buying more longer-dated bonds? Uh, in that instance, uh, could be another thing to look out for as well as they try to control the kind of yield curve further out to facilitate then the economic recovery. So again, a lot of this I'll go over in way more detail later, but hopefully that's just a bit of an overview. Just remember a market's point of view for this morning, it could well be relatively quiet, as is normally the case ahead of the event, as participants sit on their hands and just wait. Often the most optimal strategy given the fact that, you know, something big could happen, albeit I think it would be a relatively controlled event later on this evening. But as I said, risk for potential disappointment for, for markets given how just generally, um, expectful they are of continuation of Fed kind of guidance through their, their policy communication. Okay, some other things I want to talk about is the Japanese yen. So, um, Suga was voted Prime Minister by Parliament's lower house overnight and has vowed to stay true to Abenomics. Monetary and policy— well, monetary policy and fiscal spending is to remain largely unchanged. However, some of these articles this morning on Bloomberg suggesting attention— he will focus on the third arrow, which is more about structural reform. The reason really I wanted to bring up the Japanese kind of headlines was because technically the Japanese yen is a fairly interesting place. You can see here that the Japanese yen has been strengthening through yesterday's session. You can see technically quite a nice break here in yesterday's the technical levels being a breakthrough of where we were trading back on the 9th. On the breakthrough of that, it went through with some speed and then came back up to around a relatively same point of where those candles closed, and with the daily pivot yesterday before resuming then the downward trend. One of the things here I was looking at was a chart that was being flagged on Bloomberg, which was this. This is looking out now on a daily continuation chart for the Japanese yen. And there's obviously quite an interesting area that we're within touching distance of now, which is really around— if I just make this a bit bigger— around here, which is around the 105 handle. Uh, now the 105 handle of course brings in this trend line which dates back to the depths of where we were trading back in the height of the global kind of sell-off during the initial pandemic, but also starts to encapsulate some of the upside areas of a trend line that's been in place since June, retested and held all the way through really the month of September so far. But layer that in with the 105 handle, also with that low that we printed back in mid-August and late August, and you can see there's quite a lot of relevance here on that, that, that level. So one to watch. We're within like 20 pips or so of that at the moment, so definitely is within distance of being reached in the near term. And then if we look on a weekly, obviously if we start breaking down through those levels around 105, well then 104 is that on our weekly continuation chart, a very important area which we were discussing, which remember got tested when we had that unexpected resignation of Shinzo Abe due to health reasons, and then this fear of the unwinding of Abenomics to some degree, um, creating then bit of restrengthening in the Japanese yen. So yeah, technically I think just keep an eye on the dailies. We're right there at the moment on that 105, which I think could be quite interesting for near-term price action. Then anything deeper, should we break through, um, then we'll be looking at 104 with great interest as well for the Japanese yen. Okay, um, elsewhere, Apple. Well, as I said, we've had a pretty flat finish, um, overall in the Asia Pacific session. Little changes seen as the market really waits then the latest FOMC announcement. The S&P 500, although gains yesterday were fairly moderate, it did mark the third consecutive session of a higher close. Gains were seen in technology offset a bit of a late slide in financials. One thing to be aware of by going to Apple is that Trump did say that a vaccine shot would be ready within 4 weeks. But again, context is always super important when you're trying to pick through the noise of what the president is saying. He was speaking at a town hall hosted by ABC News, so very much the moment creating the type of rhetoric that you would imagine in that respect. Um, do note that AstraZeneca's COVID-19 vaccine study remains still paused in the US pending a regulatory review. We remember heard at the beginning of the week that was due to be lifted around midweek, and that hasn't happened as yet, but still early days yet. I don't think the market will get too spooked by that. Um, so Apple, what do they do? Um, obviously needs to have a quick review given it's one of the world's largest companies and obviously such a significant component of what generally drives equity direction day to day. Um, and the normal kind of price action ensued really as soon as the event begun. They started unveiling their various different parts of what they're announcing, and the share price generally started to fall. It's quite, quite common really. There's obviously one big exemption of what didn't get announced last night, which was the eagerly anticipated and kind of 5G-related iPhone. That's not expected to be announced until next month after executives said its launch has basically been delayed by several weeks because of the pandemic. Related disruptions have been seen. So here it is then, here's a few things that did come out. You can see this, this, this picture here. I've caught a bit of a freeze frame from an Apple highlight video and it looks awfully Peloton-ish, which you, you'd probably recognize. So basically they've rolled out a new fitness service and a bundle of all its subscriptions And the latter has been quite aggressive. Their pricing in what's called the Apple One bundle, which is TV, music, and games, is actually quite aggressive in terms of the price point comparative to other competition. Spotify came out and started making complaints yesterday immediately after the announcement about competition practices being breached, given that they're trying to then use their branding to upsell unfairly that of Apple Music, which obviously is in big competition to something like Spotify. And then, yeah, Peloton, um, obviously would be watching out for the fact that Apple are pretty much just copying their service, which has been incredibly successful for them. Other things included quite a lot of focus on the new Apple Watch Series 6 that monitors blood oxygen. It doesn't require either pairing for the first time to an actual iPhone device and there was refreshes for the iPad and a few other tweaks to chips and so on used in a number of products. But yeah, overall a fairly unexciting event, I would say. The share price, as I said, kind of drifted south and then came back up to finish broadly kind of flat to minor positive. So all in all, the event kind of came and went. I wouldn't say it created a great deal of fireworks, in all honesty. Okay, we've talked about Trump and the vaccine, so let's move on to oil. Uh, here are the actual numbers from the API for trees from last night. Crude was a draw of 9.517 million. Analysts were expecting actually a build of around 1.27, hence the reason why you've had quite a bullish reaction seen, um, not just at the time of release but in the overnight Asia-Pacific session. Even as Europe has come in this morning, oil's caught another bit of a bid tone. And that's because of the, the surprise miss, uh, the deviation away from what was expected. Cushing, a draw of around 800,000. Gasoline, there was a build of 3.762 million. Distillates, a draw of 1.123 million. Um, otherwise, quick look at the calendar for today. What have we got in store before the FOMC? Well, we've already had the UK data, so now as far as the morning is concerned, it's pretty quiet. The major US data to look out for prior to, to the Fed is going to be US retail sales at 1:30 London, so 8:30 New York, where retail sales expected at 1%, not too much different from the prior 1.2. What would that look like? Well, we'll see a bit of stabilization after the big variance in data that we had during the full national lockdown And then the kind of pent-up demand and reopening back from being completely shut to then partially reopened, and that kind of has faded over time. So looking for stabilization, it's a slight positive, uh, figure of around 1%, but there is a range of 0.1 to 4.6. Um, how much reaction is that going to have? I think definitely needs to be watched and obviously put into context of where the charts are looking, uh, set up technically at the point of release. But, um, with the FOMC then looming just a couple of hours later, unless it's something spectacular in either direction, it could be not too much in the way of any sustainable type of movement on the back of that. Uh, for any CAD traders in the FX market, you've got the CPI numbers coming out for Canada as well at the same time. And as we go further on to the afternoon, we obviously get the oil, uh, energy inventory numbers coming out from the DOE following on from the APIs last night. Quite a lot of expectation of course of course now built into the price as we've continued to move higher from yesterday. I mean, if you go from yesterday to where we are at the moment, we're, we're up nearly $1.50 already, nearly $2. So, uh, quite a lot built in now to price, particularly with the last little bump up we've had with the API sizable draw last night. So be interested to see whether or not the DOE can sustain that move or not. Now the bar's been risen for quite a large draw. Yeah, and then the Fed later, um, speaker-wise. Then you've got, um, EU Commission President, State of Union address, charting the course for the year ahead. Yeah, the EU Commission President doesn't really carry, I'd say, anywhere near as much clout to move market price as in European-denominated assets, as you say, an ECB member. So worth keeping half an ear out on that speech, but yeah, not looking for too much. And then Fed's Powell, of course, delivering the press conference at 7:30 after initial statement release at 7. Auction-wise, you've got a gilt auction, uh, 2030 duration, and 2048 auction coming out of German Treasury as well later on. Okay, that is it. So any questions, of course, let me know. Don't forget to obviously subscribe to the channel if you want to join us later on for The FOMC live. Otherwise, any questions, just, just let me know on the video. Happy to help as usual. Thanks very much, guys.