While most analysts feel the minutes were a slight downgrade from the moderately hawkish statement immediately after the meeting, it seems investors feel the Fed is continuing to pave the path towards tightening. Given we’ve had significant Fedspeak and economic data since the last meeting, perhaps the ‘dovish’ take on the minutes was a little overdone. Bottom line, the Fed is now in ‘data dependant’ mode and it is a matter of time before the timeline reference is dropped.
This could happen as early as December and rates lift-off around mid-next year still looks likely. Some of the key points suggested Fed members aren’t hugely concerned about the impact of the global slowdown. In fact, the Fed left out reference to overseas developments as it would have suggested greater concern. There was some debate around the considerable time reference but only some wanted it removed. This issue is likely to be back on the table at the December meeting when the Fed’s latest projections are also released. The only real concern is inflation but if the economy continues to generate jobs then ultimately wages will grow and help spur demand. A key risk for inflation is the decline in energy prices but as wealth is transferred from oil producers to consumers, then ultimately this will see inflation return to the Fed’s target. As far as price action is concerned, the US dollar remained resilient while treasury yields rose.
China PMI falls short
The main development in Asian trade is the HSBC manufacturing PMI print which came in at 50, below expectations of 50.2. This saw it hit a six month low and shows just how choppy China’s economy is at the moment. However, this hasn’t had much of an impact on risk and AUD/USD has managed to hold on to $0.8600 - only just. Iron ore futures managed to bounce today and that has seen some of the local pure plays come off their lows. FMG, for example, traded at its lowest since 2009 and is off its lows, while AGO is actually up for the day. However, I remain sceptical trying to pick a bottom in the miners. Investors will have to exercise extreme caution and patience with these stocks. Waiting for a sustained recovery before buying stocks is always a better strategy than buying before knowing just how low they will trade.
Euro remains resilient
Ahead of European trade, we are calling the major bourses relatively flat yet again after a fairly mixed performance yesterday. Focus will switch to a raft of PMI releases today with manufacturing and services PMIs for Germany, France and the region. These readings are likely to set the tone for equities and the euro. EUR/USD has actually been quite resilient this week and encountered some resistance at $1.2600 after having squeezed higher yesterday. Any disappointing data is likely to lead to renewed weakness for the single currency. There has been a bit of ECB-speak this week and Mario Draghi will have the last say at the 24th European Banking Congress tomorrow when he speaks on Reshaping Europe. In the US, we have CPI data along with unemployment claims, flash manufacturing PMI and the Philly Fed manufacturing index. As a result it’ll be a fairly busy session on the calendar and volatility is likely.