News and views
The FOMC voted unanimously to keep the Fed Funds rate between zero and 0.25% for an extended period of time. There were no hawkish rumblings, as some expected, rather an acknowledgment of some economic recovery accompanied by resource slack and little inflation pressure. Further, the agency and MBS debt purchase program was extended by three months, now ending in March 2010. In a volatile session, US 10yr treasuries suffered pre-FOMC jitters by 7bp, but then gained 11bp on the outcome. Post-FOMC, the S&P500 rallied for 5 minutes, making a new 2009 high at 1080, but curiously collapsed after that to close down 1.0% - there was talk of a very large put option on the index being transacted. Inventory levels were attributed to oil’s -4.0% and copper’s -2.6%.
The US dollar is slightly firmer, making a new 2009 low at 75.83, but bouncing with the late US equities decline. Amid some French jawboning, EUR made a high at 1.4484, the late risk sell-off dragging it back to the current 1.4750 level. Norway’s central bank said a hike was contemplated at last night’s meeting. GBP ground higher to 1.6468, falling a cent on the late sell-off. The BoE didn’t increase QE (although left the possibility on the table).
AUD just made a new 2009 high at 0.8789 a few minutes after FOMC, falling back to 0.8694 as we write. An earlier article from the AFR’s Alan Mitchell was interpreted as hawkish by some.
NZD ran out of breath and consolidated between 0.7200 and 0.7380. AUD/NZD paused in the 1.2050 and 1.2100 area.
The FOMC kept its Fed Funds target rate unchanged last night at zero to 0.25% as expected, and said economic conditions would likely warrant keeping the target rate at its low for an extended period of time. The statement indicated that “economic activity has picked up following its severe downturn” and “conditions in financial markets have improved further”, but added “economic activity is likely to remain weak for a time”. There was further caution, saying resource slack would continue to dampen cost pressures, keeping inflation expectations stable. The debt purchase program was extended by three months, with a gradual retreated from end- Q1 2010 outlined.
Euroland industrial orders jump 2.6% in July. This followed June’s 4% jump and provides further confirmation that the European industrial sector, which was hammered by the temporary collapse in global trade from late last year, is now entering a new expansionary phase. That said, orders were down 24.3% on July last year, so the level of activity is still very weak. In related news, the advance PMI surveys for September showed manufacturing rising from 48.2 to 49.0 and services up from 49.9 to 50.6 (back in expansionary territory for the first time since May 2008).
Bank of England September meeting minutes. The decision two weeks ago to leave rates on hold at 0.5% and not to tweak the asset purchase program any further was unanimous. This means that the three, including Governor King, who voted in August for a £75bn expansion to the program (rather than the £50bn that was the majority view then), did not push for the more aggressive expansion this month. However the minutes did show that a case could still be made for a larger stimulus, so it may be back on the agenda at the November meeting when the Bank will review its quarterly forecasts.
On the data front, UK banks issued 38095 new mortgages in Aug, down a touch from 38186 in July.
Outlook
AUD/USD and NZD/USD outlook today: The AUD and NZD rallies since March remain intact, the next targets being 0.8950 and 0.7385, respectively. Buying dips in AUD at 0.8675 and in NZD at 0.7160 is our preferred strategy today. Today’s RBA Financial Stability Review will assess the state of the financial system, and the Q3 NZ consumer sentiment report should have a positive flavour.
