Daily Market Update 19 September 2013 - FOMC sit tight, risk assets take flight
Ensuring that markets will be kept guessing until they next meet on October 29-30, the US Federal Reserve FOMC kept monetary policy steady<http://www.federalreserve.gov/newsevents/press/monetary/20130918a.htm> overnight, leaving the Fed funds rate and bond buying program unchanged at 0-0.25% and $85b per month. The move came as a shock to markets who had been expecting a small, token ‘taper’ from the FOMC, say in the region of $10b p/m, with the committee stating that they were looking for ‘more evidence that (economic growth) will be sustained before adjusting the pace of (their) purchases’. Underlining the reason behind their surprise non-move, downward revisions were made to both their 2014 GDP and inflation forecasts<http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20130918.pdf>, now expected to rise 2.9-3.1% and 1.3-1.8% from 3.0-3.5% and 1.4-2.0% in June, although unemployment, a key component of their forward guidance, is now forecast to fall to 6.4-6.8% next year, down on the 6.5-6.8% projection offered in June. Despite the fact leaving policy unchanged is a bearish sign for the strength of the underlying economy, as has been the case over the past four years, markets rejoiced on the news with stocks, crude, gold and treasuries rallying hard to the detriment of the US Dollar.
A double-dose of bad news on the US home construction<http://www.census.gov/construction/nrc/pdf/newresconst.pdf> front overnight with building permits and housing starts both missing expectations in the year to August. Permits, a lead indicator on future housing starts, fell to an annualised pace of 918k, down -3.8% from July, while housing starts rose by 0.9% to 891k, down on the 917k pace that had been expected.
US mortgage demand surged last week with the MBA mortgage market index rising by 11.2%. The result largely offset the 13.5% decline seen in the previous corresponding week and was the greatest weekly percentage gain since early March this year. As has been the case for much of the past year, refinancing was the chief catalyst for the rise, up 17.9%, while mortgages on new purchases rose by a more-subdued 2.5%. While concerns over higher interest rates in the future no doubt contributed to the reversal, actual lending rates fell during the week with the average 30-year rate declining 5bps to 4.75%.
The Bank of England released the minutes<http://www.bankofengland.co.uk/publications/minutes/Documents/mpc/pdf/2013/mpc1309.pdf> of their September MPC meeting overnight with members voting unanimously to keep the bank rate and asset purchase program steady at 0.5% and £375b respectively. On the topic of their much-maligned forward guidance on rates, something that has attracted plenty of criticism since introduced in August, members agreed that none of the 3 ‘knockout’ conditions had been breached during the month, something that would void the guidance, hence no member saw fit to tighten policy at the conclusion of the two-day meeting. While that was all largely expected, reflecting on improved economic data of recent months, the bank revised up their Q3 GDP forecast with growth of 0.7% expected from 0.5% in August.
The Day Ahead (All times AEST)
Chinese markets will be closed today and Friday for the ‘Mid-Autumn festival’.
In what can only be described as post-FOMC euphoria, the ASX 200 looks set to surge to fresh multi-year highs this morning with SPI futures pointing to a rise of 57pts on the open. Given broad-based gains on Wall Street, all sectors are likely to finish in the black with the best performances likely to come from the gold, energy, materials and financial sectors. While it wouldn’t surprise to see initial gains ease into the close, the higher Aussie Dollar will export-orientated firms, particularly those who derive much of their revenue in US Dollars, with emerging markets likely to surge on the back of a new wave of USD liquidity, any pullback we see from the highs will likely be limited in nature. (Also note that September SPI expiry, a volatility-inducing event, also occurs at Midday today).
Resembling a rocket rather than a currency pair, the AUDUSD surged higher overnight following the release of the FOMC policy statement with the pair touching .9517, the highest level seen since June 19 this year. While there will be a temptation to take advantage of speculative short-term long positioning, with the prospect of near-term tapering evaporating and no major data scheduled, it looks likely that it’ll continue to march higher in thinned, holiday impacted trade today. Support is found at .9507 and below .9450 with resistance kicking in at .9554, .9572 and again above .9650.
The RBA will release their September Quarter Bulletin at 11.30am this morning.
New Zealand Q2 GDP will be released this morning at 8.45am. Elsewhere across the region we’ll receive trade and leading index from Japan while Bank of Japan Governor Kuroda is also scheduled to speak.
Data releases this evening include jobless claims, current account, existing home sales and Philadelphia Fed business index from the States, retail sales and industrial orders in the UK, Swiss trade, Greek unemployment and Canadian wholesale trade. On the policy front, the Swiss National Bank hold their September monetary policy meeting.