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The fed keeps its tone unchanged; clarifies its "Economic Conditions"

Thu, Nov 5 2009, 08:08 GMT
by Saxo Bank Strategy Team

Saxo Bank

Risk has a quick spurt higher put momentum fades in Asia

MAJOR HEADLINES – PREVIOUS SESSION 

• US Weekly MBA Mortgage Applications out at 8.2% vs. -12.3% prior 

• US Oct. Challenger Job Cuts out at -50.7% y/y vs. -30.2% prior 

• US Oct. ADP Employment Change out at -203k vs. -198k expected and revised -227k prior 

• US Oct. ISM Non-manufacturing out at 50.6 vs. 51.5 expected and 50.9 prior 

• NZ Q3 Unemployment Rate out at 6.5% vs. 6.3% expected and 6.0% prior 

• AU Sep. Trade Balance out at –A$1849 mln vs. –A$2150 mln expected and –A$1651 mln prior

THEMES TO WATCH – UPCOMING SESSION 

(All times GMT)

• Swiss SECO Consumer Climate (0645) 

• Swiss CPI (0815) 

• AU RBA Gov Stevens to speak (0855) 

• EU ECB’s Trichet to speak (0905) 

• UK Industrial/Manufacturing Production (0930) 

• EU Euro-zone Retail Sales (1000) 

• UK BOE Rate Announcement (1200) 

• EU ECB Rate Announcement (1245) 

• CA Building Permits (1330) 

• US Non-farm Productivity (1330) 

• US Unit Labour Costs (1330) 

• US Initial Jobless Claims (1330) 

• EU ECB’s Trichet News Conference (1330) 

• CA Ivey PMI (1500) 

Market Comments:

The main event overnight was the FOMC announcement and the Fed kept its central message unchanged ie “economic conditions are likely to warrant exceptionally low rates for an extended period”. There was more clarification as to what these economic conditions are – low rates of resource utilization and subdued inflation trends with stable expectations. There were also plans to cut the mortgage backed securities purchase programme by $25b to $175b but this was seen more due to lack of supply than a policy shift.

With most of the focus in recent weeks being on a possible adjustment to the tone of the rate outlook, exposure to riskier assets had been gradually scaled back but the outcome saw a rebound in appetite. Add to this a lack of express concern about the dollar’s slide and the end effect saw the greenback back down at ten-day lows.

Data played second fiddle to the FOMC but was generally also on the worse side of expectations. Non-manufacturing ISM came in at 50.6 versus 51.5 expected with the employment component of the report at its weakest since May (in direct contrast to the component in the manufacturing report). The ADP Employment Change was also marginally worse than expected and may cast a pall over tonight’s jobless claims and tomorrow’s non-farm payrolls.

GBP had a good day after services PMI surprised to the upside with a strong 56.9 vs. 55.5 expected (recall the manufacturing PMI had been positive, construction negative). Rumoured M&A activity with Kraft supposedly bidding for Cadburys also provided support though with the BOE meeting tonight now in focus expect GBP’s rebound to become a tad more subdued. With the Fed leaving current policy more-or-less unchanged, we expect a similar outcome from the ECB. The BOE on the other hand has a slightly different tune to sing. An extension to the quantitative easing programme looks on the cards, the only uncertainty being whether it is to the extent of an additional £25 bln or £50 bln to the current £175 bln. Certainly the BOE has been more cautious in its economic outlook than headline data would suggest and chatter suggests that the MPC would rather err on the side of “too much” than “too little”. Ex-MPC member Blanchflower exhorted the “feeble six” of the MPC to “shape up and do their jobs before the economy falls off a cliff” with a QE increase of at least £50 bln. Expect a volatile ride for GBP today with a £50 bln increase adding further pressure to the pound.

The Asian session featured the very early “risk-on” reaction to the FOMC but as the day wore on saw a reduction in risk. Equity markets were generally in the red, lacking momentum, and as a result the dollar was in slow recovery mode. Little in the way of data to push direction and again it was equity sentiment that drove.
RBNZ’s Bollard was speaking on the similarities and differences between the Australian and NZ economies. He noted that NZ’s recovery was slower and more vulnerable than its neighbor and commented that financial markets were not fully appreciating this. An obvious attempt to talk the NZD down and boost AUDNZD, which appeared to work, especially given the intensifying risk aversion theme during the session. Another weight on the NZD came from the Q3 employment report which saw the jobless rate hitting a 9 year high of 6.5%, much worse than the 6.3% expected.

Apart from the central bank meetings, Europe sees Swiss consumer climate and CPI, UK industrial/manufacturing production and Euro-zone retail sales. The US session features Canada building permits and Ivey PMI, weekly US jobless claims and non-farm productivity/unit labour costs.

Published on  Thu, Nov 5 2009, 08:17 GMT