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Thu, 22nd June 2017

Anirudh Sethi Report

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Overnight US Market :Indices have volatile afternoon, but recover into the clo

Ups and downs.  S&P and Nasdaq down. Dow up and sets another record close.

I guess you can say, the market is still nervous about the tech heavy Nasdaq-like stocks and are more comfortable with putting money to work in the Dow (or perhaps even bonds).  As a result, the Dow is the winning index after all the volatile dust settled (it closed at a record level), and the Nasdaq is the loser. The S&P ended down but is hanging closer to the Dow.
More specifically:
  • The Nasdaq fell -25.47 points to 6194.89, but was down as much as -66 point at the lows (to 6153.54).
  • The S&P index fell -2.43 points to 2437.92. It traded as low as 2428.34
  • The Dow was up +46.09 points to 21374.56. The low reached 21294.09. The high 21391.97
The note and bonds yields are lower but the 2 year yield recovered much of the earlier declines (yield curve flatter):
  • 2 year 1.335%, down -2.8 bps. The low yield reached 1.2823%. The high was 1.3633%
  • 5 year 1.7186%, down -6.2 bps. The low yield moved to 1.6708%. The high was up at 1.7813%
  • 10 year 2.1290%, down -8.1 bps. The low yield reached 2.101%, but the high was up at 2.2092%
  • 30 year 2.773%, down -9.18%, The low yield fell to 2.759%, and high was up at 2.864%.

Highlights of the updated FOMC forecasts – higher 2017 growth

The latest FOMC forecasts compared to March

2017

  • Sees 2017 GDP growth at 2.2% compared to 2.1%
  • Sees unemployment rate at 4.2% compared to 4.5% prior
  • Still sees core inflation at 2.0%

2018

  • GDP growth unchanged at 2.1%
  • Inflation unchanged at 2.0%
  • Unemployment 4.2% vs 4.5% prior

2019

  • GDP 1.9% vs 1.9% prior
  • Unemployment 4.2% vs 4.5% prior
  • Core inflation 2.0% vs 2.0% prior

Here’s the full list from March:

The FOMC statement for June meeting -Full Statement

June FOMC Statement

Information received since the Federal Open Market Committee met in May indicates that the labor market has continued to strengthen and that economic activity has been rising moderately so far this year. Job gains have moderated but have been solid, on average, since the beginning of the year, and the unemployment rate has declined. Household spending has picked up in recent months, and business fixed investment has continued to expand. On a 12-month basis, inflation has declined recently and, like the measure excluding food and energy prices, is running somewhat below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, and labor market conditions will strengthen somewhat further. Inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee’s 2 percent objective over the medium term. Near term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.

In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1 to 1-1/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.

Previews and views from 15 banks ahead of the FOMC decision

Previews of the Federal Reserve interest rate decision from 15 firms

Overall, the consensus seems to expect the Fed to deliver a dovish hike with few see a hawkish hike and only one (Danske Research) sees the Fed skipping hiking at today’s meeting.

TD Research: We think the market is underestimating a hawkish hike from the Fed. This is because the median dot-plot should remain unchanged to confirm 3 total hikes this year and another 3 next, which is well above current pricing. Further, we think the risk of an acute discussion of balance sheet normalization could surface this week. The combination of both should compel a hawkish re-pricing in the Fed outlook.

Credit Suisse Research: With the market 90% priced for a 25bp rate hike, we do not expect much USD upside from such an outcome alone. Rather, we would need to see a statement, forecast changes or a Q&A with Fed chief Yellen that allows room for the market to fully price in another hike for 2017 H2.

Credit Agricole Research: We expect the FOMC to raise the fed funds rate by 25bp: the hike is fully priced in and doing otherwise would trigger market volatility that the Fed would be keen to avoid…There should not be any formal announcements with respect to the balance sheet policy but that could come as soon as the September meeting. Indeed, the risk is that the Fed could hint at an earlier balance sheet exit than the market is currently expecting. Coupled with an unchanged dot plot this could be enough for the US yields and the USD to move higher after the Fed.

European Indices end the session mixed

Dax trades at record levels, but backs off

The European stocks are ending the day mixed.
  • German Dax up 0.48%
  • France Cac down -0.17%
  • UK FTSE down -0.11%
  • Spain’s Ibex down -1.15%
  • Italy down -0.61%
  • Portugal PS120 up +0.23%
In the 10 year debt marke, yield are lower across the board:
  • German 0.226% -4 bp
  • France 0.581%, -2.7 bp
  • Italy 1.938%, -4.2 bp
  • UK 0.933%, -10.1 bp
  • Spain 1.379%, -5.7 bp
  • Portugal 2.847%, -10 bp
  • Greece 5.799%, -3.8 bp

View

 

USDJPY falls below 109.00

Lowest level since April.

The USDJPY has moved below the June lows at 109.11 and traded down to 108.94.
US yields are tumbling lower after the weaker retail sales and CPI data today and that certainly is contributing to the selling in the pair/ the selling of the dollar.
The 2 year is down 6 bp to 1.302%. The 10 year is down 8.7 bp to 2.1221%. That is now below the 38.2% of the move up from the July 2016 low (at 2.1346%).  The low yield is the lowest since November 2016 (US elections).  Does the yield make a run at the 2.00% level?