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FOMC minutes confirm patience in further tightening

8:01 AM January 10, 2019


  • Minutes from the FOMC meeting, held on December 18/19, signalled patience among members in pushing ahead with rate hikes

  • Beijing issues a statement concluding three-days long trade talks with the US

  • China’s price growth misses expectations leaving room for authorities to act

Minutes push dollar lower

The US dollar is struggling this morning after having a big slide on Wednesday with the FOMC minutes suggesting that patience is needed in pushing ahead with further rate increases. Officials felt that timing and the extent of future hikes were less clear and even a few members favoured no hike at the meeting last month. In terms of the statement the minutes admitted that “a relatively limited amount of additional tightening would likely be appropriate.” The FOMC also discussed transitioning away from use of forward guidance language in future post-meeting statements. A more cautious approach taken by the Federal Reserve seems to be in accordance with what we saw in December during the Powell’s press conference. The last month meeting sent rate hike expectations tumbling and market even began pricing in rate cuts. Since then, the landscape has changed a bit and this morning there are 12% odds to see a rate hike and 19% to see a rate cut by the year-end. Note that the FOMC expects to deliver two rate increases in 2019 which appears to be a reasonable scenario in our eyes. The account released on Wednesday was seen as rather dovish adding to downward pressure on the US dollar. As a consequence, the US 10Y yield has slid 4bps since then and it is trading subtly below 2.70% this morning. The US stock market was barely changed following the release but it managed to finish Wednesday’s trading with some gains. However, looking ahead it may struggle to push yet higher as the outlook of slowing global economic growth, lingering trade tensions between the world’s two largest economy weigh on.

Despite a 0.9% gain on Wednesday the NASDAQ (US100) has already run into the significant resistance in form of the 50DMA. Note that this line halted bulls at the beginning of December, hence this scenario could repeat itself this time around. Source: xStation5

Some progress made, Chinese price growth slows

According to a statement released by the China’s Commerce Ministry, which summarizes three-day trade negotiations with the US, talks were extensive and established a foundation for the resolution of each others’ concerns. Both sides also agreed to continue to keep in close contact. It needs to be said that the US released its own version claiming that China had pledged to purchase a substantial amount of agricultural, energy, manufactured goods, and other products and services from the United States. Although no meaningful breakthrough was made, it laid the groundwork for further negotiations at a higher than vice-ministerial level. Meanwhile, the inflation data for December published overnight from China showed price growth slowing to 1.9% YoY, down from 2.2% YoY and also a miss compared to an expected rate of 2.1% YoY. Producer inflation rose only 0.9% YoY, down from 2.7% YoY in November and clearly fell short of the median estimate of 1.6% YoY. For the entire year PPI rose 3.5% while CPI was up 2.1% - well below the PBoC’s target of 3%. In our view falling price growth leaves some room for authorities to continue loosening monetary policy so as to revive economic growth. Let us recall that the PBoC chose to slash the reserve requirement rate last week, a move aimed at boosting liquidity in the money market ahead of the Chinese New Year proceedings.

After cracking the resistance at 1.1450 the EURUSD is pushing higher. This move is being precipitated by the dovish minutes, a lack of a breakthrough in US-China negotiations and a rising rate differential. The first more notable leve bulls may be aiming for is placed in the vicinity of 1.18. Source: xStation5

In the other news:

  • Car sales in China fell last year for the first time in over 20 years mirroring the stuttering demand in the world’s second largest economy, according to the China Passenger Car Association

  • Oil prices trade roughly 1% down giving back from their huge gains made in recent days

  • Stocks in China are set to close pretty flat, the SP500 futures trade 0.4% lower


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