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[PODCAST] EU Open Rundown 14.06.18

  • FOMC lifted the Fed Funds Rate to 1.75%-2.00% as expected. FOMC median view sees 4 hikes in 2018. Dropped reference that it expected rates to be below neutral for ‘some time’.
  • House of Commons voted to reject House of Lords amendments to the EU Withdrawal Bill which would have required the Government to seek to negotiate a customs union as part of the framework for a future UK-EU relationship
  • Looking ahead, highlights include German CPI (F), Swedish CPI, UK retail sales, ECB rate decision conference and press conference, US weekly jobs, retail sales

FOMC

FOMC lifted the Fed Funds Rate to 1.75%-2.00% as expected. FOMC median view sees 4 hikes in 2018 (Prev. estimated 3 hikes).
FOMC dropped reference from previous statements that it expected rates to be below neutral for ‘some time’.

FOMC Projections:
Fed maintained its forecasts for rates in the long run at 2.9%.
Fed raised 2018 GDP forecast, lowered unemployment rate forecast and raised PCE forecast.

Fed Chair Powell said the Fed is to hold a press conference after every meeting beginning in January. Powell added the Fed will keep an open mind and is monitoring incoming data.

ASIA

Asia stocks traded softer as the region reacted to the FOMC which hiked rates by 25bps to 1.75%-2.00% as expected and forecast a total of 4 hikes this year vs. Prev. forecast of just 3 increases, while the statement also contained a more hawkish undertone regarding growth and rates. As such, ASX 200 (-0.2%) and Nikkei 225 (-0.5%) opened lower although were off lows with strength in telecoms helping Australia to briefly return flat, while KOSPI (-1.3%) was the worst performer as it also took into account the weakness during the prior day’s market closure. Elsewhere, Hang Seng (-0.8%) was downbeat after the HKMA hiked rates in lockstep with the Fed and the Shanghai Comp. (-0.3%) traded choppy with early support seen after the PBoC refrained from increasing its repo rates. However, upside in the mainland was later pared amid prospects of looming US tariffs on China and following disappointing Industrial Production and Retail Sales data, in which the latter grew at its slowest pace since 2003. Finally, 10yr JGBs saw mild gains amid the risk averse tone although upside was contained following the BoJ Rinban announcement in which the central bank reduced its purchase amounts in the belly.

PBoC injected CNY 70bln via 7-day reverse repos, CNY 50bln via 14-day reverse repos and CNY 30bln via 28-day reverse repos, for a net daily injection of CNY 70bln, while the PBoC kept its reverse repo rates unchanged despite the Fed hike. (Newswires)
PBoC set CNY mid-point at 6.3962 (Prev. 6.4156)

Hong Kong Monetary Authority raised rates by 25bps to 2.25% in lockstep with the Fed, while there were also comments from HKMA Chief Chan who stated HKD rates will follow US rate normalization and that it is only a matter of time before Hong Kong banks increase prime rates. (Newswires)

Chinese Industrial Production (May) Y/Y 6.8% vs. Exp. 7.0% (Prev. 7.0%). (Newswires)
Chinese Industrial Production YTD (May) Y/Y 6.9% vs. Exp. 6.9% (Prev. 6.9%)
Chinese Retail Sales (May) Y/Y 8.5% vs. Exp. 9.6% (Prev. 9.4%)
Chinese Retail Sales YTD (May) Y/Y 9.5% vs. Exp. 9.7% (Prev. 9.7%)
Chinese Fixed Assets Ex. Rural YTD (May) Y/Y (May) 6.1% vs. Exp. 7.0% (Prev. 7.0%)

UK/EU

House of Commons voted to reject House of Lords amendments to the EU Withdrawal Bill which would have required the Government to seek to negotiate a customs union as part of the framework for a future UK-EU relationship and which would have made the UK's full access to the EU internal market a negotiating objective of the Government. (Newswires) Six Labour MPs have resigned from frontbench positions in order to vote against their party in a setback for Jeremy Corbyn. (Telegraph)

UK RICS Housing Survey (May) -3 vs. Exp. -5 (Prev. -8). (Newswires)

Greece are reportedly to receive a EUR 15bln buffer when bailout program finishes. (Newswires)

FX

In FX markets, the USD fluctuated in the wake of the FOMC with strength initially seen after the more hawkish tone from the Fed and expectations of an additional 2 hikes this year. However, the greenback then pared its gains as attention turned to ongoing trade concerns with the US reportedly preparing to proceed on imposing tariffs on Chinese goods, which helped EUR/USD and GBP/USD recover from the Fed-triggered pressure. Elsewhere, USD/JPY and JPY-crosses were subdued on safe-haven flows into the JPY, while AUD saw a bout of pressure on disappointing Australian jobs numbers and miss on Chinese data.

Australian Employment Change (May) 12.0k vs. Exp. 19.0k (Prev. 22.6k, Rev. 18.4k). (Newswires)
Australian Unemployment Rate (May) 5.4% vs. Exp. 5.5% (Prev. 5.6%)
Australian Participation Rate (May) 65.5% vs. Exp. 65.6% (Prev. 65.6%)
Australian Full Time Employment (May) -20.6k (Prev. 32.7k, Rev. 28.0k)


COMMODITIES

Commodities were uneventful with WTI crude futures little changed overnight to hold on to the gains during US trade, where prices were underpinned on the back of a larger than expected draw in DoE crude stockpiles. Elsewhere, gold fluctuated in tandem with the USD-price action in the wake of the FOMC but then consolidated throughout Asia trade, and copper was pressured alongside the dampened risk appetite and weak Chinese Industrial Production data.

GEOPOLITICAL

US Secretary of State Pompeo said there will only be sanctions relief for North Korea once we receive complete denuclearization, while there were also reports that the US is expected to formally suspend military exercises with South Korea in August. (Newswires)

US

Treasuries were very much rangebound for most of the session heading into the FOMC rate decision, with thin volume seen across the complex. Post-Fed, however, there was knee-jerk selling with the rate decision and guidance perceived as hawkish, and Treasuries sold-off falling from 119-13+ to 119-03; the 10yr yield rose back above 3% hitting a three-week high, and the 2yr yields extended gains above peaks seen in August 2008 given its sensitivity the Fed.  The yield curve bear flattened (Fed Chair Powell said the yield curve is flattening because Fed is lifting the federal funds rate), with 2yr and 5yr higher by c.4bps and 30y higher by c.1bps. 5s30s spread narrowed to beneath 25bps for the first time since 2007. US 10YR T-notes futures (Sep 2018) settled 7 ticks lower at 119-06.

US is preparing to proceed on imposing tariffs on Chinese goods with the decision awaiting US President Trump’s final approval, while reports also noted the US is preparing a focused list of goods which will be subject to tariffs as soon as Friday. (WSJ) In related news, US President Trump will meet with top trade advisers on Thursday regarding decision whether to proceed with China tariffs. (Newswires)

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