The Fed offered up a surprising holiday season dovish delight for the market. The flattening of the UST 5s30s curve all week indicated some weight was shifting to 2020 dots, showing a bias for a rate hike after the strong jobs report last Friday.
However, the FOMC ultimately faded the optimism in the NFP data and now the dot plots unambiguously suggest a Fed policy where the bar to cutting rates is high. Still, the bar for hiking is even higher.
On the dots for 2020, four members expect a rate hike with 13 expecting rates to remain on hold. For 2021 and beyond, the number expecting hikes increases – no members expect any cuts from here. So now the Fed's mantra is pivoting from "lower for longer" to "lower forever."
In the rates market, with a lot of data optimism built into the US yield curve on the back of the ebullient US jobs report, naturally, some of this should retrace. Ultimately, however, the Fed's message is still one of staying on hold so there isn't a shift here, leaving US-China catalysts (and potentially UK elections) as the driver for rates.
On FX markets, the less hawkish than expected Fed offered up a mild disappointment for the dollar bulls. However, there were no moon shots as the markets had been reducing "long" dollar risk into year-end on the back of improving global economic data, mainly vs. the Euro.
Also cushioning the USD weakness, traders were already baking in the seasonality effect that points to USD weakness in the last week of December and the first two weeks of January. Still, USD weakness is healthy for risk sentiment, especially at this late stage of the cycle.
US equities strengthened as US 10-year treasury yields slipped lower, down 5bps to 1.79% and providing a fillip to gold prices. But until we ultimately clear the Brexit and US-China risk, the market could struggle to trade directionally.
Crude stocks rose 0.8Mb, bearish vs. consensus for a 2.8Mb draw, and the five-year average of -2.2Mb. It was a smaller build than the +1.4Mb reported by the API. An increase in imports was the main driver of the rise, although refinery inputs also declined.
After weathering a pretty significant position meltdown on the back of an unexpected inventory builds there was a massive jump in gasoline supplies and unfinished business on the December tariff deferral front. The fact that we’re still hovering near WTI $59.00 per barrel is a testament to the positive impact the new OPEC+ agreement is having on oil markets.
But in the near-term US-China trade remains the primary catalyst and the 500-pound gorilla in the room.
While US senior trade advisor Peter Navarro downplayed the idea that December tariffs will be delayed allowing more time for negotiations, there seems to be enough evidence in the headlines to suggest both sides want to find a mutual understanding and work towards a Phase One deal.
Gold got a lift from the move lower in US yields and with the Fed on a “hold forever” narrative, making it difficult for yields to rise, gold should remain supported on dips. Given the current tariff could eventually take its toll on H1 growth, there could be even more downside pressure on yields and they could subsequently decline materially, despite a positive outcome to the trade talks.
And with the Fed possibly expanding the balance sheet again in 2020, amid a plethora of macro uncertainties, it reinforces the notion that gold should be a regular feature in one's asset allocation during periods of market uncertainty, especially when interest rates are low.
The recent history of gold seasonally doing well in January (+5.22% for 5yr trailing average) strengthens the case for gold to push higher in early 2020, not to mention US election political risk, and beckons a gold revival.
Ultimately with US rates on hold indefinitely, it should cushion gold’s fall on a knee-jerk sell-off on a decisive Phase One outcome. Also, the Fed’s “hold forever” narrative should tarnish US dollar demand but support gold’s glittering appeal.
In the meantime, it's back to December 15 watch.
Two things that should stand out on the less hawkish Fed are treasuries and carry trades. But on the currency side, the EM Asia FX carry appeal is getting held in check by the Phase One overhang.
The policy statement from the China Central Economic Work Conference release is a risk event to watch as it will set the economic policy theme for 2020. The expectation of a massive fiscal investment is the market's baseline view going into the conference, but the scale needs to be defined. So, there should be much focus on commodity exporters like the NZD and AUD, as well as the basket of ASEAN currencies as China infrastructure spending announcements will most likely impact them.
The Ringgit has opened on a favorable tone on the back of the less hawkish Fed, and firm oil prices supported by the latest OPEC+ agreement.
However, further gains below 4.15 will be hard-pressed unless we get some definitive movement on a delay on the December 15 tariffs for President Trump. And therein lies the inherent problem: President Trump is impossible to predict. So, unless you have some idea of the content of the Trump Twitter feed in advance I suspect most local traders will opt to play it safe, not wanting to test the bullish water below 4.15.
Yesterday I suggested that the Aussie was trading oddly low considering the liftoffs in copper, iron ore and palladium. Over the past 24 hours the sleeper has awoken. The AUDUSD is alive and well on the back of the enormous rallies in copper, BHP, FCX lend support and the market turned a bit more bullish on global growth. Of course, a less hawkish Fed was a pleasant surprise.
While the initial intention was to position for little more than a chip shot to test the 200 DMA (0.6910), the Fed’s dovish delight suggests a possible moon shoot in the making – even more so if the market decides that "Global Growth Recovery" is the big theme going into 2020. Sure, the recent run of domestic data looks dreadful, but forward-looking global growth optimism will always trump backward-looking local data any day of the week in currency land.
The mighty pound trades resoundingly well as the market is taking the view that "a majority is still a majority," whether it's 28 or 68 seats. I would have thought that the lead shrinking below the margin of error would make the market more nervous as a hung parliament no longer looks like a zero delta.
But the market might not be anywhere near as long as I thought, and with virtually every good FX trader I've talked to retaining a very confident and robust bullish lean into the election tomorrow, they're probably right.
If this is a risk-on USD move, EURJPY could look attractive even more so after EURUSD remained bid after the US payroll inspired "long "position washout, which should keep traders' interest in the bullish camp.
Read more articles from Stephen Innes: https://www.axitrader.com/int/market-news-blog/stephen-innes.
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Two-year yields have covered their prior six-month range in the last week alone – and whether or not this move is sustainable matters a lot