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Hawkish FOMC lifts risk appetite

So the FOMC seemed to adopt a hawkish tone at the October meeting, judging from meeting statement. This was all the markets got, as this meeting had no press conference or updates to the economic forecasts. 

US Traders
Source: Bloomberg

Much of the emphasis was placed on the policymakers’ determination to keep the case for a December lift-off alive. Interested parties picked apart the statement, and highlighted the fact that the FOMC has dropped a line from the September statement saying that global economic and financial developments ‘may restrain economic activity somewhat’. Instead they seemed to downplay global developments, saying that they will monitor the international situation.

It is clear from this meeting that the default plan for the Fed is to raise rates by end of the year. While they acknowledged that recent pace of job gains have slowed, they subscribed to the view that slack in labour resources has largely diminished this year, based on labour market indicators.

Even though there are compelling reasons for the Fed to hold off policy tightening this year, it does looks like they are prepared to go through with it. I get the sense that the Fed is not waiting for certain conditions to fall into place but rather there needs to be something drastic to prevent them from moving on rates.

Specifically, the Committee anticipates that it will be appropriate to raise the target range for the federal fund rate when it has seen some further improvement in the labour market and is reasonably confident that inflation will move back to its 2% objective over the medium term.

This means that if the jobs data resumes a strong upward trajectory, overlooking the soft patch in August and September, and inflation numbers trend higher on stable prices in commodities, it will build the case for a December move.

The hawkishness was reflected immediately in the financial markets. The dollar traded higher to an 11-week high, building on the gains after ECB hinted strongly towards more easing. However, the dollar index was unable to breach the barrier at 98.0, where it has tested several times over the past six months. 

US equities jumped. S&P 500 climbed +1.2%, almost recouping the losses incurred after Black Monday. The Dow rallied 1.1%. In contrast, treasuries were sold off, where the front to belly of the curve took most of the brunt. The 2-year and 5-year yields rose over 8 basis points, while the 10-year yields went up by 4.4 basis points, to 2.081%.

 

Asia expected higher

Asia is looking up, as the positive leads from overnight markets filter through. The Nikkei already opened above 19,000, but is still only halfway in its recovery from the 24 August stock rout. An upside surprise in industrial production for September may have also added to the market sentiment. Factory output expanded +1% from the previous month, when the market was expecting a decline of -0.6%. On an annual basis, it shrank -0.9% y/y against forecast of -2.6%. This may support those who are in the ‘no-change’ camp for Friday’s BOJ meeting.

Meanwhile, China may still do its own thing. The Chinese indices are consolidating at the moment, with prices still supported by government measures, including state buying and restrictions on trading. However, increasing volume and rising margin debt may signal improving confidence in the domestic markets, and further increases could potentially carry the indices higher. Nevertheless, there is no catalyst to push higher, especially when the Shanghai Composite is approaching a critical resistance level at 3500.

The Straits Times Index edged down 0.4% yesterday and closed below 3050. With the 3000 support still holding, and renewed risk appetite today will lift the local index. The next target is the recent 10-week high at 3081, ahead of the 3100 mark.

 

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