Markets Await the FOMC meeting With Focus on 2023 Dot-Plot For Rates

Very good morning. It is Wednesday, 17th of March. Hope you're doing well. Welcome to FOMC day. And ahead of that, things as you would anticipate, relatively quiet. A couple of things to update you on in terms of the close on Wall Street, uh, auction we had in the US last night, then the Asia-Pac session. Then in terms of the news flow today, Talking a little bit of an update on the Astra vaccine situation. We'll have a look at France in particular and then looking ahead to the FOMC. And so starting off with the charts and how things reside this morning, we did close slightly mixed on Wall Street, minor losses in the S&P and the Dow. The S&P down 0.2%, the Dow down 0.4%. So the S&P snapping those 3 consecutive record-breaking kind of sessions in a row. Energy and industrial sectors were a touch weaker, but Apple, Microsoft, Facebook, the big mega-cap tech names helping lift the tech-oriented NASDAQ 100 to finish positive. So a little bit of divergence there, as we're used to seeing on those day-to-day closes. So the Dow off its record high as well, but the NASDAQ finishing up around 0.5%. Overnight in Asia, relatively mixed, nothing to really give us much of a of a head start here in the European Open. So the DAX down but fractionally, just below its pivot in the futures here. You can see in the center left, down just 18, so fairly marginal overall. Um, currency markets have been pretty quiet. Um, dollar index was basically unchanged, um, just while going into this recording. And that's quite normal ahead of the Fed, where you get kind of uncommitted traders, people kind of sit on their hands waiting to see what the what Powell and his colleagues come out with. But just having a quick look at these major currency charts, looking at EURUSD here firstly, a significant level near term here going back to the 9th of the month where this has been a, a good marker of price activity on both below and above this price level at 1.1933.5 in the futures. Today as well you've got the pivot level pretty much sat at the same level about 1 or 2 pips just above that, that particular zone. So here, near term, this would be a key area to look at, and perhaps we get a bit of consolidation here just awaiting the, the announcement later on this evening. Don't forget as well, if you're based in, in London, given the clock change, the FOMC statement being at 6, the press conference at 6:30 PM, so an hour earlier than normal. I'll be covering that with the team, of course, live. We'll do extended live streaming, uh, through the Discord channel for Amplifier Live. But having a look then elsewhere at cable, cable just had a momentary breakout of just the Asia-Pac range here. You can see that we tested yesterday afternoon's high, the Asia-Pac high, just had a bit of a breakout. No fundamental headline that came out, more just technical down, a little bit of a run to the upside. So up marginally, minor cable outperformance against the euro at the moment. Few people yesterday were observing that trend, um, sterling outperforming against the euro in kind of relative terms. And yeah, you, you could take a look at the whole, uh, European handling over the AstraZeneca drug, although the composition of their, their drug basket, if you like, for the overall EU rollout, uh, isn't as heavily geared to AstraZeneca as, say, it is in the UK. It's still obviously an important component to a more, more effective and speedy rollout of vaccines. And the disruptions that we continuously have been seeing with Europe on many different fronts perhaps amplifies that divergence a little bit about where the UK/US is at the moment comparative to where much of the mainland Europe is at this present point in time. We'll have a look at that in a moment because, you know, the other thing here is case rates are definitely picking up in mainland Europe now. Much more evident than they have been in recent weeks. And perhaps that's room for a little bit of reasoning, rationale behind some of that recent divergence. Otherwise, elsewhere, just having a look at the S&P here, we've— after breaking out yesterday— or not yesterday, day before evening— we've kind of used that breakout point as a bit of a platform now for price. We did momentarily break through there just after Europe exited the market yesterday as we kind of collapsed off all-time highs and a bit of short-term profit taking given the squeeze up that we had. So be looking for that to hold probably now just going into the Fed meeting later. Pretty similar price pattern developing in the NASDAQ. And then in terms of the US 10-year, a little bit of a breakdown in the kind of cleanness of the correlation of yield being a decent front indicator, if you like, of subsequent movement in other asset classes. Yesterday we saw again a 10-year knocking on the ceiling of that, that key area around 1.3203, and an about-turn. Then we've just drifted here as yields have just picked up a little bit, and we'll talk about the Fed in a moment. But there is a few people, chiefly led by a view coming out of the chief economist at Goldman Sachs, looking for the median dot plots for the rate view of the FOMC projections to be indicative of a rate hike in 2023. Or be it, I'd say that's not what the base case scenario is, which is for it to remain the same as it was effectively, that the median hasn't had enough members shift to, to make a hike in 2023, but rather through after 2023. We'll talk about this more in a moment, but that 10-year level still very key, of course, and definitely it's is going to potentially be something to watch later on this evening. And again, on the daily chart, the rationale being this has been holding us up at these levels, which has been very key because it does open up almost a trapdoor to a deeper move and a further acceleration perhaps of another pop on yields to the upside if we were to break through under the right circumstances today. And the catalyst of course could well be Powell and the Fed. So let's talk about, uh, the Astra news. Firstly, we have had France and Italy considering basically a U-turn on the Astra vaccine following comments that we had yesterday from European Medicines Agency, the EMA. They're due to kind of give a more formalized response to this ongoing blood clot rationale that's led to many European nations suspending the Astra drug. But France and Italy have come out, basically said that despite the EMA not issuing a definitive assessment, they've repeatedly said the benefits of the shot outweigh the risks. And so therefore, these two countries have said they're willing to go with the medical advice and look to resume then the AstraZeneca drug. And the reason why this is quite important is because if you look at the COVID situation, this is daily new confirmed COVID-19 cases per million on the rolling 7-day average. And if I hover over these countries here, this is France at the moment. And as you can see, we've just popped up yesterday to the highest we've been year to date. And definitely over the course of the last couple of weeks, or really going back to the last quarter, really from the beginning of the year, this number has been heading in the wrong direction. It's been steadily creeping higher. And what that's led to is France now is weighing implementing a weekend lockdown for Paris. The French capital has been under a nightly curfew since mid-January, with cafes, restaurants, bars, and theaters all closed. But as, as you've just seen, infection rates have been climbing. Intensive care units in and around the capital are nearly full, in a similar vein to what we were like in London and in the UK just a few months ago. The other country here, and of course the one that's commented about the U-turn on the Astra drug, is seeing an equally challenging COVID situation as well at this present point in time, which also has led to several regions having more stringent lockdowns put in place by the new kind of caretaker government under Mario Draghi. So you can see here Italy and France definitely being much more conscious of turning the decision on the vaccines and probably due to the circumstance that we're seeing here with COVID-19. The other country, of course, Germany. And if you look at Germany, it's much lower level, but that as well has been picking up. So, um, more so than what we're seeing definitely in the US, which is kind of plateaued now after a very sharp deceleration in new cases. And the UK, same case as well. So perhaps that, as I said, explains a little bit about that euro and sterling divergence. Um, the other thing we had overnight, uh, just to move away from this, was we did have another, uh, successful bond auction. In fact, pretty decent one. This was $24 billion auction of 20-year bonds, which saw strong demand. And of course, this came after people were a little bit apprehensive given a really bad 7-year auction that we had back in February, the $120 billion, um, dollars worth of auctions, 3 that we had last week went through okay. That was a relief. This auction was actually pretty decent. So on that front, I think, um, those concerns have been alleviated in fixed income auctions. I did specifically do an auction, um, lecture video, uh, that I've put on the Amplify Live portal because I had a lot of questions about, you know, what is a when issue and a bid to cover, what does indirect primary dealers and these types of words. What do they actually reflect? What does it mean? How do you interpret this information? So do check that out. If you have any questions of where to find it, just reach me in a Discord chat. All right, well, let's talk about the Fed. And yeah, good article in the FT just kind of summarizing things. I will be on live later on tonight to go through this with everyone in full. on Amplify Live. But the main things we're looking at here, just to summarize, are a few. For one, better growth, but how much better? I guess that's a good question. Um, and that's because this isn't about a policy change as far as rates and QE are concerned. So rates will be on hold. The QE program, $120 billion worth of purchases per month, $80 billion Treasuries, $40 billion MBS, will remain as it is. We are gonna see the summary of economic projections. And these come out every alternate meeting. So typically March, then June, Sep, Dec. And obviously this being the March meeting, we haven't seen these projections since December. So it's a good way for the market to see how much the Fed's view has altered since where we were in December to where we are now. And if you think about where we are now, we've had a new stimulus gone through, uh, the $1.9 trillion for Biden just recently. We've also had a drop in COVID cases. Further reopening the US, a faster pace with the vaccination rollouts. These are all positive things. So we are looking for a slightly more optimistic then view about where we are now to where we were then. So subsequently, in terms of things like unemployment, likely to be revised then lower, so more positive situation. Growth and inflation both higher, explaining then tied to this idea and view of more firmer growth sooner. So those things I don't think are going to be particularly shocking, uh, neither do I think they're going to be particularly market moving. The one the market probably will latch on to, of course, is the idea of what is the median dot plot for rates. And kind of triggered a little bit by a comment I saw from Yen Hasias, who's the Goldman's chief economist, yesterday. He was talking about the idea that he sees a couple of these Fed members shifting to bringing forward a rate hike into 2023, enough of them shifting in order to move the median dot plot to rate hikes then from the Fed official communication from beyond 2023 to in 2023 for one rate hike. If that was to materialize, that would probably be seen as hawkish in terms of how markets are priced at the moment. I'd say most people, me, myself included, are not expecting that actually to materialize. The Fed will stick, or there won't be enough of the Fed members switching to move the median dot plot. But probably if there's one thing you're looking out for at the point of release, it's going to be that one comment: where is the median dot plot for the first rate hike from the Fed in 2023, after 2023? I think if you get after 2023 a reiteration of what their current guidance is, you might see a little bit of a relief, kind of dovish response in that sense, because there's a little bit of pricing for something a little bit more, more hawkish than that. So what would that look like? Well, maybe a bit of a dollar softness lifting the major pairs, might probably equity positive in that sense, and then yields would, would move lower. Consequently, then the T-note might move up again. Under those conditions. What else is there beyond that point then? What will the dots say? Well, this is what we've just discussed. Have Treasury yields risen too far, too, too far, too fast? Again, this is that whole idea about what we've been seeing that's been destabilizing markets to a certain extent over recent weeks. Is he going to comment on this I really don't think he will. I think he'll just kind of reiterate what he said before, which I've got it written down, the exact comment and phrase that he said. But he's basically going to say that they're still a long way off getting to their targets in terms of on the employment and the inflation situation. And so therefore, it's kind of indirectly pushing back against this idea that the Fed feels threatened by this recent rise in yields. Something we talked about many times before, and I think the market's moved on a little bit from having this kind of clear expectation of him saying something. But in the press conference in itself, I'm sure people are going to be pressing him on this particular point. So as this FT article suggests, investors will be watching for any signals from the Fed about its plans to manage a rise in borrowing costs. Especially if it begins to jeopardize the economic recovery that's begun to take hold. So yeah, the kind of key summary here is tolerance for higher yields, um, is what we're, we're kind of looking for. Any, any kind of thresholds, parameters around that, but again, details are probably going to be lacking at this point. He's not going to be wanting to pre-commit. Um, are COVID-era capital concessions here to stay? So back in April of last year, so basically a year ago, US regulators allowed lenders to exclude treasuries and cash reserves when calculating how additional capital they need to hold in order to encourage banks to extend credit to struggling, struggling businesses and consumers. So as the market conditions and economy starts to pick up and normalize, then a lot of these kind of emergency facilities are no longer required. And definitely you don't want to just keep them in the system you want to kind of get back to normal. So if anything, if there is a disruptive event, then you can redeploy these things. And so is this that point where we start to see some of these tightened up a little bit? And then the other thing is, will the Fed make technical adjustments? This is where basically the Fed may want to tweak slightly some interest rates to ensure its main policy rate stays within the middle of its target, the federal funds. Band of 0 to 0.25%. Um, so yeah, that's, that's pretty much it overall. Um, definitely I think it will be a tradable event. Um, I think there, there are some key things to look out for here, particularly on the placement of where the dot plots would show the first rate hike coming from the Federal Reserve. I think Powell will manage the press conference absolutely fine and not cause too much of a disruptive event beyond that. And overall, I definitely think that it's going to be the period that we're going into, not so much this meeting, that's going to be really crucial then and a crucial test for the Fed and its tolerance for yields and its perception about inflation and how in control of that they can be. And then ultimately, how quickly does the economy start to grow again as we start to reopen more aggressively in the US? And what does that mean then for them to start to eventually comment more about the nod to tapering in the future. Time-wise for that then, I think the June meeting, which is the next update for projections, is way more kind of interesting at that particular juncture. At that point, we should have had most, if not all, of the people in the US inoculated. At that point, the economy would have moved on in a positive fashion, all things being equal, and then it's going to be a little bit more testing then for Fed to give us a little bit more clarity about what the future holds. And again, they're going to hint towards these type of ideas of tapering before it might start to commence towards the back end of the year, perhaps in small increments, winding that kind of up as the, as the, um, the program kind of slows before then the eventual rate rise coming in 2023, perhaps. Uh, so yeah, that, that's to give it a bit of context from the top level. Uh, but I'll leave it at that, let you guys get on with the day. Um, again, I think just to be kind of, um, rational about what the morning might offer you from a trade opportunity, a lot of people will be awaiting that Fed event. Of course, that's not until 6 PM later on today. Okay, take care guys and good luck.