Fed's Minutes Roil Markets

<div><a href="https://blogger.googleusercontent.com/img/a/AVvXsEgzvLkE3HvpnT6qTjF_Yh69Rj_Z_-Nl_5LBEbgo7ZnqFHtknz4QO2KSrwVPU7w1ZDA3JHt3C9fJuxwTUkBsdWS29v59eBefPxGYVeK2tPEiQboYQOFvE2r4lkDKWw6pw1Np1Ug2MMTEXUmtBjni8kWvm2hicKGPH03ZSE9fBHzKCdP_VtkrOw9oaoTCAQ=s826"><img alt="" border="0" data-original-height="648" data-original-width="826" src="https://blogger.googleusercontent.com/img/a/AVvXsEgzvLkE3HvpnT6qTjF_Yh69Rj_Z_-Nl_5LBEbgo7ZnqFHtknz4QO2KSrwVPU7w1ZDA3JHt3C9fJuxwTUkBsdWS29v59eBefPxGYVeK2tPEiQboYQOFvE2r4lkDKWw6pw1Np1Ug2MMTEXUmtBjni8kWvm2hicKGPH03ZSE9fBHzKCdP_VtkrOw9oaoTCAQ=s400" width="400" /></a></div><p><b><span>Overview:&nbsp;&nbsp;</span></b><span>The minutes from last month's FOMC meeting seemed to imply a more aggressive Federal Reserve that rippled through the capital markets, spurring a sell-off in stocks and bonds and helping to lift the US dollar.&nbsp; The dramatic slide in US equities has carried over to today's activity.&nbsp; In the Asia Pacific region, Japan and Australia led the move, each benchmark lost more than 2%, while China's CSI 300 and South Korea's Kospi dropped more than 1%.&nbsp; Hong Kong and Singapore escaped the carnage with modest gains.&nbsp;<b>&nbsp;</b>Europe’s Stoxx 600 gapped lower to snap a three-day advance and leave a bearish two-day island top in its wake.&nbsp; It is off more around 1.0% near midday.&nbsp; The sell-off is led by information technology and consumer discretionary.&nbsp; US futures are narrowly mixed.&nbsp; Asia-Pacific bonds played catch-up after the jump in US yields.&nbsp; The 10-year benchmark yield rose 8 bp in Australia, 6 in New Zealand, and nearly 13 in South Korea, where the central bank may hike rates next week.&nbsp; European yields are 3-5 bp higher with the core-periphery widening out a bit.&nbsp; The 10-year US Treasury yield is around 1.73%.&nbsp; The greenback is firm, with the Antipodeans hit the hardest (~0.5%-0.7%).&nbsp; The yen is bucking the trend despite the higher Treasury yields. This appears to reflect some position unwinding, like long Australian dollar/short yen.&nbsp; Emerging market currencies are mostly lower.&nbsp; Here, the South African rand and central European currencies are bucking the move. The Hungarian forint is firmer though the central bank held the one-week deposit rate at 4% after raising it consistently over the past seven weeks.&nbsp; &nbsp;Gold is breaking down in the face of higher yields.&nbsp; It was turned back from approaching $1830 yesterday and it is hovering around $1800 afer having fallen to around $1794. The next target is around $1783.&nbsp; A freeze in Canada and the northern US, coupled with a draw down in stocks has kept oil firm.&nbsp; February WTI is around $79, though US natural gas is off slightly paring yesterday’s 4.4% gain.&nbsp; European natgas is little changed after initially extending yesterday's nearly 9% rally.&nbsp; Iron ore has extended its gains, while copper is lower for the third session.&nbsp;&nbsp;<o:p></o:p></span></p><p><b><span>Asia Pacific</span></b><span><o:p></o:p></span></p><p><b><span>China's services and composite Caixin PMI, like the manufacturing PMI were better than expected.&nbsp;&nbsp;</span></b><span>The market had expected the service PMI to slip from 52.1 in November, but instead it increased to 53.1. The composite stands at 53, up from 51.2.&nbsp; China's Lunar New Year week-long holiday celebration begins on January 31. A move to ease financial conditions, perhaps a cut in reserve requirements, may be delivered before the holiday.&nbsp;&nbsp;<o:p></o:p></span></p><p><b><span>Japan's final PMI reading was also revised higher, which in effect pared the decline.&nbsp;</span></b><span>&nbsp;The services PMI was at 53.0 in November, and initially was seen falling to 51.1, but in the revision, it stands at 52.1.&nbsp; Similarly, the composite fell to 51.8 from 53.3 in the flash reading but was revised to 52.5 in the final report.&nbsp; The BOJ meets on January 18.&nbsp; It may downgrade its near-term growth forecast, while upgrading inflation.&nbsp;&nbsp;<o:p></o:p></span></p><p><b><span>Australia's final PMI reading was unchanged from the flash report.&nbsp;</span></b><span>&nbsp;This means that the service PMI slipped to 55.1 from 55.7. The composite eased to 54.9 from 55.7.&nbsp; The Reserve Bank of Australia does not meet until the end of the month.&nbsp; It has pushed against market expectations of an early rate hike, but its 2 and 10-year yields have nearly kept pace with the surge in the US.&nbsp; The swaps market has a 25 bp hike fully discounted by early H2.&nbsp;&nbsp;<o:p></o:p></span></p><p><b><span>The dollar's advance against the yen has stalled.</span></b><span>&nbsp; It remains within the range set Tuesday (~JPY115.30-JPY116.35).&nbsp; We suggested that previous resistance around JPY115.50 now serves as support.&nbsp; The yen's downside breakout was partly fueled by selling on the crosses, like against the Australian dollar.&nbsp; The yen's firmer tone today seems like position-adjusting.&nbsp; It is also possible that the dramatic sell-off in equities spurs some leveraged accounts to cover short-yen exposure.&nbsp;<b>&nbsp;The Australian dollar reversed lower yesterday and settled on its lows.</b>&nbsp; Follow-through selling today has pushed the Aussie through the uptrend from early December (~0.7185).&nbsp; The $0.7135 area, which it has approached, marks the halfway point of the rally from the December low slightly below $0.7000.&nbsp; Below there the next retracement (61.8%) is near $0.7100.&nbsp;&nbsp;<b>The PBOC seemed to renew its warning of downside risk to the yuan yesterday and the greenback is trading at its best level in nearly 2.5 weeks against the yuan (~CNY6.3780).&nbsp;</b>The dollar's reference rate was at CNY6.3728,while the market (Bloomberg survey) projected CNY6.3721. Last month's high was recorded near CNY6.3835.&nbsp; Above there is resistance around CNY6.40.&nbsp;&nbsp;<o:p></o:p></span></p><p><b><span>Europe</span></b><span><o:p></o:p></span></p><p><b><span>The UK's final services and composite PMI were revised higher, which pared the losses seen in the flash estimate.&nbsp;</span></b><span>The service PMI stands at 53.6 not 53.2, but still well-off November's 58.5.&nbsp; The composite is at 53.6, better than the 53.2 preliminary estimate, but down from 57.6 previously.&nbsp; It is the lowest reading since February.&nbsp; Separately, reports suggest a dispute in the upper echelons of the UK government.&nbsp; Rees-Mogg sought to scrap the GBP12 bln (1.25%) increase planned for April for the national insurance while Chancellor Sunak argued against.&nbsp;&nbsp;<o:p></o:p></span></p><p><b><span>Germany reported stronger than expected November factory orders, but the data is seen dated by the outbreak of first Delta and now Omicron</span></b><span>.&nbsp; Still, October's 6.9% decline was revised to -5.8% and the November gain was 3.7% (vs. Bloomberg median of 2.3%).&nbsp; The focus is on inflation and the states that have reported warn of upside risk to the harmonized reading due shortly.&nbsp; Economists (Bloomberg survey) expect the HICP measure to have risen by 0.2% for a year-over-year of 5.6% (down from 6.0% in November).&nbsp; The aggregate estimate for the eurozone is due tomorrow.&nbsp; The headline is projected to tick down to 4.8% from 4.9% and the core to 2.5% from 2.6%.&nbsp;<o:p></o:p></span></p><p><b><span>Kazakhstan devolved into chaos yesterday and invited Russia to help quell the violent anti-government demonstrations.&nbsp;</span></b><span>&nbsp;Kazakhstan produces an estimated 40% of the world's uranium.&nbsp; Amid concerns over supply, the price of uranium jumped around 8%.&nbsp; &nbsp;That said, the real geopolitical focus is on next week's talks over Ukraine.&nbsp; Despite the two discussions between Biden and Putin last month, the risk that Russia invades Ukraine is still understood to be quite elevated.&nbsp;<o:p></o:p></span></p><p><b><span>The euro remains fairly resilient.</span></b><span>&nbsp; With the US 2-year premium over Germany widening to around 147 bp, its highest level since March 2020, the euro continues to remain in the range seen in the last week of 2021(~$1.1275-$1.1385).&nbsp; The euro has slipped to $1.1285 in late Asian turnover but was bid in early Europe to the session high slightly above $1.1325.&nbsp; Yesterday, it stalled near $1.1345.&nbsp; There are two large options that expire today (1.43 bln euros at $1.13 and 1.31 bln euros at $1.1275), which seem less relevant now. In the bigger picture, the euro has been in a $1.12-$1.14 trading range, with a brief exception in late November, for nearly two months.&nbsp;<b>Sterling stalled near $1.36 yesterday, where a GBP345 mln option expires today.</b>&nbsp; It was sold a little through $1.35 in late Asian activity and rebounded in the European morning.&nbsp; Initial resistance is seen in the $1.3540-$1.3560 area.&nbsp; Note that the UK economic calendar is light next week.&nbsp;&nbsp;<o:p></o:p></span></p><p><b><span>America</span></b><span><o:p></o:p></span></p><p><b><span>We have suggested that there are three moving parts of the outlook for Fed policy and the FOMC minutes touched on each.&nbsp;&nbsp;</span></b><span>First, the market could bring forward the first hike to March, and indeed the odds of a March move increased to a more than 75% chance from about 66%.&nbsp; Second, the market could price in a fourth hike, though the Fed's dot plot showed a median official expectation for three hikes.&nbsp; The December 2022 Fed funds futures contract was nearly fully pricing in three hikes earlier this week and now is discounting about a one-in-three chance of a fourth hike.&nbsp; The third moving part is the Fed's balance sheet.&nbsp; It is more difficult to quantify the shift in opinion, and there does not seem to be a consensus at the Fed yet.&nbsp; Still, the takeaway is that the run-off will most likely begin considerably sooner than it did last time (two years), and it is possible that the balance sheet begins shrinking around midyear.&nbsp;<o:p></o:p></span></p><p><b><span>&nbsp;At the same time, the hawkish minutes covered a meeting in which the Fed announced it would accelerate the tapering and the Summary of Economic Projections went from a Fed that was split on even one hike this year (in September) to three hikes.&nbsp;</span></b><span>&nbsp;The rhetoric matched this swing.&nbsp; At the same time, the ADP private sector job estimate was much stronger than expected at 807k.&nbsp; It was the largest increase since May.&nbsp; Today's data stream includes weekly initial jobless claims, ISM services, and November factory orders.&nbsp; The US also reports the November trade balance.&nbsp; The advanced goods balance report showed a record deficit.&nbsp; Although the twin-deficit challenge is not the chief focus, we suspect that it may become more salient in the second half of the year.&nbsp; &nbsp;<o:p></o:p></span></p><p><b><span>Canada reports its November goods trade balance today.</span></b><span>&nbsp; Canada has experienced a favorable terms of trade shock.&nbsp; Through October the average monthly trade balance was in surplus by C$820 mln.&nbsp; In the same period last year, Canada reported an average deficit of C$3.2 bln.&nbsp; In the first 10 months of 2019, the average monthly trade deficit was C$1.76 bln.&nbsp; Mexico publishes the minutes of last month’s central bank meeting, which resulted in a 50 bp hike after four 25 bp moves.&nbsp; The minutes may give a glimpse into the thinking but remember Banixco has a new governor starting this week.&nbsp;&nbsp;<o:p></o:p></span></p><p><b><span>The US dollar climbed to nearly CAD1.2815 in late Asia before meeting strong sellers that pushed it back to CAD1.2755 in the European morning.</span></b><span>&nbsp; This area offers support and may offer early North American participants a lower risk opportunity to buy US dollars. The intraday momentum indicators were overstretched and another run at the highs is possible ahead of tomorrow's employment reports.&nbsp;&nbsp;<b>The greenback's price action against the Mexican peso was similar.</b>&nbsp; A strong close yesterday and follow-through buying in Asia (lifting the US dollar to MXN20.76, is its best level since December 22) and came off in early European activity.&nbsp; Initial support in front of MXN20.50 held. Here too the US dollar setback has stretched the intraday momentum indicators, setting the stage for a recovery in North America.&nbsp;&nbsp;<o:p></o:p></span></p><p> </p><p><o:p>&nbsp;</o:p></p><p>&nbsp;</p><p><br /></p><p><br /></p><p><span>Disclaimer</span></p><div>
<a href="http://feeds.feedburner.com/~ff/MarcToMarket?a=57akTxx_-5c:rqsN2pcz3to:yIl2AUoC8zA"><img src="http://feeds.feedburner.com/~ff/MarcToMarket?d=yIl2AUoC8zA" border="0"></img></a> <a href="http://feeds.feedburner.com/~ff/MarcToMarket?a=57akTxx_-5c:rqsN2pcz3to:qj6IDK7rITs"><img src="http://feeds.feedburner.com/~ff/MarcToMarket?d=qj6IDK7rITs" border="0"></img></a> <a href="http://feeds.feedburner.com/~ff/MarcToMarket?a=57akTxx_-5c:rqsN2pcz3to:V_sGLiPBpWU"><img src="http://feeds.feedburner.com/~ff/MarcToMarket?i=57akTxx_-5c:rqsN2pcz3to:V_sGLiPBpWU" border="0"></img></a> <a href="http://feeds.feedburner.com/~ff/MarcToMarket?a=57akTxx_-5c:rqsN2pcz3to:gIN9vFwOqvQ"><img src="http://feeds.feedburner.com/~ff/MarcToMarket?i=57akTxx_-5c:rqsN2pcz3to:gIN9vFwOqvQ" border="0"></img></a> <a href="http://feeds.feedburner.com/~ff/MarcToMarket?a=57akTxx_-5c:rqsN2pcz3to:63t7Ie-LG7Y"><img src="http://feeds.feedburner.com/~ff/MarcToMarket?d=63t7Ie-LG7Y" border="0"></img></a> <a href="http://feeds.feedburner.com/~ff/MarcToMarket?a=57akTxx_-5c:rqsN2pcz3to:F7zBnMyn0Lo"><img src="http://feeds.feedburner.com/~ff/MarcToMarket?i=57akTxx_-5c:rqsN2pcz3to:F7zBnMyn0Lo" border="0"></img></a> <a href="http://feeds.feedburner.com/~ff/MarcToMarket?a=57akTxx_-5c:rqsN2pcz3to:7Q72WNTAKBA"><img src="http://feeds.feedburner.com/~ff/MarcToMarket?d=7Q72WNTAKBA" border="0"></img></a>
</div>