Asia waits for the Federal Reserve

Asian markets already have a quiet look about them, as they remain in wait and see mode ahead of the latest FOMC rate decision that is released in the early hours of tomorrow morning. Currency markets continue ranging, with Wall Street content to buy a bit more big-tech stock and not much else.

The FOMC will leave its target Fed Funds range unchanged between 0.00% and 0.25%, with the press conference 30 minutes later really the day’s main event. We expect the Fed to reiterate its lower for longer call on rates, and to do whatever it takes on the liquidity front to support growth and unemployment. We may get some insight into the nuances of their new fuzzy inflation targeting process.

Still, market watchers expecting an indication of exactly how far they would allow inflation to overshoot 2.0%, and for how long, are likely to be disappointed. In all likelihood, the Fed isn’t probably isn’t quite sure itself, and will manage that situation dynamically. Chairman Powell could spark the ire of Washington DC, by insisting that the central government must continue fiscal stimulus and quickly. The Fed has consistently stated this need but will likely not get too aggressive on that point ahead of the US elections on November 3rd. It will not wish to be painted as political to either side.

The net result should refuel the buy everything FOMO trade, and it would not surprise me in the least to see Wall Street have a healthy session this evening. In currency markets, an uber-dovish Fed could modestly re-energise the soft US dollar trade, which has been in a holding pattern for two weeks now.

US Retail Sales is released ahead of the FOMC, earlier in the session. It could provide some short-term volatility, with the market expecting the MoM number for August to retreat slightly to 1.0%. An underperformance will be dismissed by the FOMO gnomes ahead of a dovish – and thus equity supportive – FOMC. An outperformance will probably see them clicking the buy button on their equity platforms aggressively.

Japan’s Balance of Trade was released this morning and strongly outperformed, rising to yen 243 bio vs yen 37.5 bio expected. Like the Indonesian balance of payments data yesterday, the headline number flatters to deceive. Like Indonesia, Japan’s surplus jump was driven by a collapse in imports, and not a nirvana-like rebound in their export sector. Contrasting this with the robust data released by China, yet again, yesterday, it highlights that Asia’s post-Covid-19 recovery will be uneven at best.

It was a good night for China at the World Trade Organisation (WTO). China won its case against the United States over President Trump’s imposition of tariffs. It will be a hollow victory, though; the US is sure to appeal. The WTO’s appellate body is in limbo as the US holds up approval of new judges, so the WTO win by China will quickly disappear into a political black hole.

The data calendar is bare in Asia today, with no data of note until the UK’s inflation dump this afternoon. That will suit Asia and Europe, who will content themselves to mark time until the main events in the US this evening.