Australian dollar slammed as Fed hawks-up

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DXY was up firmly last night. EUR was down. CNY is on the verge of breaking lower:

AUD was mixed against DMs:

Down against EMs:

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Gold is trying and failing:

Oil is fading:

And base metals:

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Big miners were mixed:

EM stocks got flushed:

Junk fell:

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As Treasury yields took off:

But Bunds were bought:

Italy got worse:

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Stocks were steady:

Westpac has the wrap:

Market Wrap

Global market sentiment: The US dollar rose amid mixed risk sentiment (S&P500 currently down 0.2%) and elevated bond yields. The FOMC minutes noted that some favoured tightening beyond neutral.

Interest rates: The US 10yr treasury yield initially fell from 3.17% to 3.15% before rebounding to 3.18%, partly helped by the FOMC minutes. The 2yr yield nudged higher from 2.86% to 2.88%. Fed fund futures yields continued to price the chance of another rate hike in December at 80%.

FX: The US dollar index is up 0.5% on the day. EUR fell from 1.1580 to 1.1510. USD/JPY rose from 112.00 to 112.46. AUD fell from 0.7160 (a two-week high) to 0.7111. NZD fell from 0.6602 (also a two-week high) to 0.6557. AUD/NZD ranged sideways between 1.0820 and 1.0860.

Economic Wrap

An obvious takeaway from the FOMC minutes is the groundswell forming in favour of running policy on the tight side of neutral (Brainard & Rosengren are two of the more vocal commentators on this front): “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”. All participants supported a gradual approach to tightening, as has been well documented already.

US housing starts fell 5.3% in September after increasingly a downwardly revised 7.1% in the prior month. Disruptions from Hurricane Florence accounted for the bulk of the weakness and should unwind next month, though the underlying trend in starts is weakening as higher mortgage rates and last year’s tax reforms limiting deductions for borrowers and local property taxes start to bite.

UK CPI surprised with a pullback to its early summer lows. Headline CPI dipped to 2.4%y/y (exp. 2.6%y/y, prior 2.7%y/y) and core CPI fell below the expected 2.0%y/y to 1.9%y/y (prior 2.1%). Rising energy costs were more than offset by slippage in food & drink as well as transport, recreation and culture (which had lifted in the summer) and clothing.

Event Risk

Australia: Sep employment is expected to rise by 15k and see the unemployment rate hold at 5.3%. Leading indicators suggest employment momentum can hold to year-end with robust participation limiting the fall in the unemployment rate. Q3 NAB business survey will provide additional detail compared to the monthly measure.

UK: Sep retail sales are anticipated to reverse last month’s 0.3% gain as summer’s pick-up looks to be fading.

Euro Area: the EU Summit will focus on migration and external security. Brexit will also be discussed but negotiations with the UK still appear to be at an impasse.

US: Oct Phily Fed index is anticipated to remain at a positive level. Fedspeak involves Quarles in NY on the economic outlook and Bullard in Memphis.

Here’s the Fed:

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In their consideration of monetary policy at this meeting, participants generally judged that the economy was evolving about as anticipated, with real economic activity rising at a strong rate, labor market conditions continuing to strengthen, and inflation near the Committee’s objective. Based on their current assessments, all participants expressed the view that it would be appropriate for the Committee to continue its gradual approach to policy firming by raising the target range for the federal funds rate 25 basis points at this meeting. Almost all considered that it was also appropriate to revise the Committee’s postmeeting statement in order to remove the language stating that “the stance of monetary policy remains accommodative.” Participants discussed a number of reasons for removing the language at this time, noting that the Committee would not be signaling a change in the expected path for policy, particularly as the target range for the federal funds rate announced after the Committee’s meeting would still be below all of the estimates of its longer-run level submitted in the September SEP. In addition, waiting until the target range for the federal funds rate had been increased further to remove the characterization of the policy stance as “accommodative” could convey a false sense of precision in light of the considerable uncertainty surrounding all estimates of the neutral federal funds rate.

With regard to the outlook for monetary policy beyond this meeting, participants generally anticipated that further gradual increases in the target range for the federal funds rate would most likely be consistent with a sustained economic expansion, strong labor market conditions, and inflation near 2 percent over the medium term. This gradual approach would balance the risk of tightening monetary policy too quickly, which could lead to an abrupt slowing in the economy and inflation moving below the Committee’s objective, against the risk of moving too slowly, which could engender inflation persistently above the objective and possibly contribute to a buildup of financial imbalances.

Participants offered their views about how much additional policy firming would likely be required for the Committee to sustainably achieve its objectives of maximum employment and 2 percent inflation. 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.

Onwards and upwards for rates in other words.

With CNY in trouble as Chinese credit sputters, Europe slipping inexorably back into the doldrums and the stronger for longer US decoupling the USD is going to rise further.

As Australian house prices go bust, the only way for AUD remains down.


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David Llewellyn-Smith is chief strategist at the MB Fund and MB Super which is long US equities that will benefit from a falling Australian dollar so he is definitely talking his book. Below is the performance of the MB Fund since inception:

 

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.