Noise beat signal overnight, but the FOMC minutes continue to echo in investor ears and risks going forward. The Fed has a number of members that are aiming high like archers seeking the perfect trajectory. The odds of 3 hikes in 2019 to 3% rose after the release to 30%. This has supported the USD, hit risk moods and led to a renewed thinking about bond yields. Of course, the actual arrows being shot by others are still painful and add to the mixed view for today – as UK Brexit headlines show a deadlock but PM May aims high for a deal with perhaps a delay. The Italy and EU budget row didn’t find much comfort despite a Merkel meeting. The Saudi issue with journalist Khashoggi gets worse with the Turkish tapes and the US trade spats with China and the EU are ongoing. The price action in China shares dominated Asia with the near 3% drop adding to tomorrow’s GDP doubts and the drift lower in CNY after the US Treasury didn’t label China a currency manipulator doesn’t look like a coincidence.

On the economic front overnight the data missed the target – the Japan trade data are troubling for the notable drop in exports – worst in 2 years – while the Australian jobs were strong enough to keep unemployment at 6-year lows but with no real inflation and with lower participation. The UK retail sales missed the mark and highlight the role of discounting at brick and mortar stores over the internet. Everyone loves a bargain. Investors do as well and so the buying of the dip mentality won’t go away even with some of the Fed aiming high on rates. The risk barometer for today rest with the USD as it’s the stuff holding back 3Q earnings from even better profits if you listen to the calls. USD 95-96 trading is a dangerous flag with risk of 96 breakouts for 97 should US rates go even higher.

Question for the Day:Where is US rate policy restrictive? If we can’t know what neutral is, then surely we won’t know what is restrictive until we get a recession. The common wisdom from the Fed Dot Plots is 3% but the risk of overshoot has returned thanks to the FOMC minutes – with this being the hawkish tilt – “A few participants expected that policy would need to become modestly restrictive for a time and a number judged that it would be necessary to temporarily raise the federal funds rate above their assessments of its longer-run level in order to reduce the risk of a sustained overshooting of the Committee’s 2 percent inflation objective or the risk posed by significant financial imbalances. A couple of participants indicated that they would not favor adopting a restrictive policy stance in the absence of clear signs of an overheating economy and rising inflation.”

What Happened?

  • Japan September trade surplus Y139.6bn after Y438.4bn deficit – better than Y50bn deficit expected. Exports fell 1.2% y/y  – worse than +2% y/y expected and first y/y drop since Dec 2016, but imports rose 7% y/y – less than 13.5% y/y expected and again dominated by higher energy prices. By nation, exports to China fell 1.7% y/y and Korea fell 4.6% y/y but India up 26.9%, Thailand up 11% and Indonesia up 13.9%. Exports to the US were -0.2% y/y while Canada fell 19.2%.  Trade with Europe fell 9.4% y/y. 
  • BOJ Kuroda: Still upbeat on economy and price outlook. Japan’s economy is expanding moderately, with a virtuous cycle in operation from income to spending. Japan’s economy is likely to continue its “moderate” expansion. CPI is is likely to continue on an uptrend and increase toward 2%, due mainly to an improvement in the output gap and a rise in medium-to-long term inflation expectations.
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