Dollar strengthens post Fed, Chinese inflation holds steady

Summary:

• Federal Reserve points to further gradual rate hikes

• Dollar higher across the board, weaker yuan weighs on stocks fuelling fears again

• China’s producer and consumer price growth held steady last month

In line with expectations the Federal Reserve left interest rates unchanged during its November meeting and pointed to a need to further gradual moves in the future. The statement was barely changed offering no new clues in terms of the macroeconomic outlook. Given the fact that a rate hike in December seems to be a done deal, it could be a bit odd why the Fed Fund Futures price in this rise only in roughly 75%. The US dollar response to the statement could have been a surprise as well as it climbed immediately and quite meaningfully when the decision was announced. As a consequence, the greenback came back from above 1.14 to below 1.1350 in the morning hours trading in Europe. At the same time, the US 10Y yield moved 2 basis points after the decision but this move has been erased until now - the 10Y yield is currently hovering around 3.225%. One of the reasons why the US dollar strengthened following the Fed meeting could have been some doubts regarding possible cooling the language on rates as we are slowly entering the new year. Recall that the Fed forecasts three hikes in 2019 and the one final (as for now) move in 2020. However, these forecasts seem to be burdened with downside risks. First of all, the Fed tends to overshoot its projections. Secondly, US fiscal policy will be no longer so loose lessening the need to a more hawkish response from monetary policy. All in all, we do not see any more significant reasons too the Fed tightening at a quicker pace.

The EURUSD is falling back again and 1.13 could be a target for bears this time round as well. Source: xStation5

Along with the stronger dollar the Chinese yuan is weakening and weighing on Asian stocks. The PBoC set the reference rate for the USDCNY at 6.9329 compared to 6.9163 on Thursday. The corresponding move has been also seen in the offshore yuan being traded at the lowest since November 1. The equity market in Japan already closed with a loss of 1%. In turn, stocks in Shanghai and Hong Kong are still changing hands. The former is falling 1.3% whereas the latter is declining as much as 2.5%. Note that during the entire week the PBoC neither injected nor drained liquidity. During the Asian session we knew the inflation data from China for October which matched expectations. Consumer price index climbed 2.5% while producer price index climbed 3.3% in annual terms. The lack of acceleration in producer prices suggests that demand remained sluggish during the month despite easing both monetary and fiscal policies. Notice that there were concerns some time ago that an outbreak of African swine fever could push food prices higher but we it seems to have abated as food prices slowed down for the first time since May.

On top of that, we also knew the quarterly monetary policy statement from the Reserve Bank of Australia. It reiterated that there is no strong case for a near term change in rates. Unemployment forecasts were slightly trimmed while GDP and CPI projections were marginally lifted. In addition, the central bank mentioned some risks to growth as usual including a high level of indebtedness among households and falling house prices - a danger mixture which could lead to a slowdown in spending going forward. The interest rate market does not see larger chances for a rate hike at least until September 2019 (here the likelihood exceeds 50%) but even this date seems to be unattainable.

Yesterday we wrote about a possible reversal in the Hang Seng (CHNComp) as the index ran into its crucial resistance supported by the 100MA. As it turns out we were right. The index has fallen since then and it appears that bears could take a stab at driving the price back to 10000 points. Source: xStation5

In the other news:

• ECB’s Nowotny said that Italy is as close as it gets being “too big to fail”, the European Commission showed in its forecast that the Italian general government deficit is likely to breach 3% in 2020

• Canadian Keystone pipeline has been blocked by the Federal Court, it said that the Trump administration’s justification for approving it last year was incomplete