The FOMC monetary policy decision has disappointed. Markets seem to be seeing this as a policy mistake. There has been a decisive dovish shift in expectations of future rate hikes for 2019, with perhaps just one priced into Fed funds futures. However the Fed is still guiding for two (albeit down from the previous three). There was also only marginal ticks lower to inflation forecasts where expectations seem to be suggesting otherwise. This was a yield curve flattener, where longer dated yields fell whilst shorter increased. The 2s/10s spread has fallen from over 15bps to just 10bps. Even the dollar could not find any real traction in this Fed decision, as initial dollar gains seem to have faded. Wall Street equity markets fell sharply in response and futures look shaky today. With the Fed continuing to reduce the balance sheet and not going as far dovish on the dots, it has been a disappointment for many. Markets (at least initially) are telling the Fed that they believe there will need to be further cutting back of hiking expectations next year. Admittedly, it was a difficult line that the Fed had to tread this has been a decision that has pleased very few people. The Bank of Japan did little in its monetary policy decision this morning, whilst Australian unemployment ticked higher to 5.1% (and higher than the 5.0% expected).
On Wall Street, a sell-off into the close, with the S&P 500 -1.5% at 2507, whilst futures are a further -0.6% lower today. In Asia, the response has been decisively negative, with the Nikkei -2.8% (an outperforming yen did not help) whilst the Shanghai Composite was -0.6%. European markets are under pressure too today with the FTSE 100 futures -1.8% and DAX futures -1.5%. In forex, the initial dollar gains of the Fed decision have faded and the dollar is weaker across the G4 majors, whilst the commodity majors are struggling though in the risk aversion. In commodities we see gold holding ground, whilst the oil price is once more strongly lower.
The UK is in focus today and is it not Brexit for a change (not least directly anyway), with retail sales and the Bank of England on the economic calendar. The UK Retail Sales are at 0930GMT and are expected to show ex-fuel sales grew by +0.2% on the month in November (-0.4% growth in October) which pulls the year on year number back to +2.3% (from +2.7% last month). The Bank of England monetary policy at 1200GMT will show no change to interest rates at +0.75% again whilst the minutes are expected to show that this decision is unanimous. In US data the Philly Fed Manufacturing index at 1330GMT is expected to improve to 15.6 (from 12.9 last month). US Weekly Jobless Claims are at 1330GMT and are expected to show a mild tick higher to 216,000 (from 206,000 last week).
Chart of the Day – EUR/AUD
The euro is in recovery mode against the commodity majors as risk appetite has suffered in recent weeks. This has manifested in an uptrend building in the past couple of weeks (which comes in today at 1.5840) and a major breakout above resistance at 1.5890 (the previous December high) as the market continues to recover. The decisive closing br