As expected, the Fed kept interest rates on hold during their January meeting but made some notable changes in their official statement, enough to keep bulls hoping for more hikes later in the year.
The committee highlighted the positive developments in the U.S. economy and shared a slightly more upbeat outlook on inflation, allowing the Greenback to regain some ground against most of its peers.
- ADP non-farm employment change down from 242K to 243K
- Canadian economy expanded by 0.4% in Nov as expected
- Canada’s raw material price index down by 0.4% vs. estimated 2.2% drop
- Canada’s industrial product price index posted 0.1% dip vs. -0.2% consensus
- U.S. employment cost index up 0.6% as expected in Q4 2017
- Chicago PMI down from 67.6 to 65.7 vs. 64.2 forecast
- U.S. pending home sales up by 0.5% as expected, 0.3% previous
- FOMC kept rates on hold at <1.50% as expected
- U.S. EIA crude oil inventories rose by 6.8M barrels vs. 0.1M forecast
- Australia’s AIG manufacturing index up from 56.2 to 58.7
FOMC policy statement
Fed Chairperson Yellen capped off her stint as the head of the U.S. central bank with a relatively uneventful announcement of keeping interest rates on hold as expected.
But before handing over the baton to incoming head Jerome Powell, she shared a slightly more upbeat outlook on inflation, citing:
“Inflation on a 12‑month basis is expected to move up this year and to stabilize around the Committee’s 2 percent objective over the medium term.”
The official statement went on to indicate that risks remain roughly balanced and that policy will remain accommodative, supporting ” strong labor market conditions and a sustained return to 2 percent inflation.”
The rest of the announcement was more or less a rehash of their previous ones, although market watchers took note of the fact that policymakers aadded the word “further” to that bit on supporting additional tightening. It said:
“The Committee expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate.”
This boosted March tightening expectations from 90% earlier in the week to 99%, with the next hike being priced in sometime around August to September.
Mostly upbeat U.S. data
It also helped the Greenback’s cause that most of the numbers released in the latest New York session came in the green, supporting Fed tightening expectations.
The ADP non-farm employment figure clocked in at 234K, higher than the estimated 186K gain, but the previous reading was downgraded from 250K to 242K. This spurred positive expectations for Friday’s NFP, although dollar traders seem wary of similar revisions to earlier data.
Meanwhile, the employment cost index for the previous quarter showed a 0.6% gain as expected, a notch lower than the earlier 0.7% increase but a gain nonetheless.
Pending home sales also came in line with consensus of a 0.5% increase for December, which is an improvement over the earlier 0.3% gain. This marks its third consecutive monthly increase, reflecting positive momentum for the start of the year on stronger financial confidence. However, an analyst warned that this trend might moderate in the coming months due to tax adjustments.
Lastly, the Chicago PMI declined from 67.6 to 65.7 to indicate a weaker pace of expansion in the industry but a better read compared to the estimated fall to 64.2.
U.S. equity indices licked their wounds from the previous day in the red to chalk up small gains:
- Dow 30 index is up 72.50 points to 26,149.39 (+0.28%)
- S&P 500 index is up 1.38 points to 2,823.81 (+0.05%)
- Nasdaq is up 9.00 points to 7,411.48 (+0.12%)
Rising crude oil output
The Energy Information Administration reported a much larger than expected build of 6.8 million barrels instead of the estimated gain of 0.1 million barrels. This marks back-to-back weekly gains in stockpiles, which was also reflected by the earlier API figures.
The agency also noted that U.S. oil production for November surpassed the 10 million barrel mark for the first time since the same month in 1970. In particular, output rose by 384,000 barrels per day to 10.038 million barrels per day from the previous month.
According to the EIA, this was mostly a result of increasing production from shale basins in North Dakota and Texas, and the Gulf of Mexico. On the flip side, U.S. gasoline demand fell in the same month.
Still, crude oil managed to hold its ground after the OPEC showed strong compliance among their member nations to the output deal. A survey by Reuters revealed that the cartel was able to achieve a 138% supply cut, mostly driven by the economic crisis in Venezuela.
Major Market Mover(s):
The Greenback popped higher around the FOMC announcement as inflation expectations were revived.
EUR/USD dipped from 1.2474 to a low of 1.2386, GBP/USD slid to a low of 1.4175, USD/JPY was mostly moving sideways before reaching a high of 109.38, and USD/CHF edged slowly down to a low of .9293.
AUD & NZD
The Aussie and Kiwi were already among the biggest movers from the earlier sessions and took the biggest hits to the dollar and the euro.
AUD/USD is down to the .8050 handle, NZD/USD slipped to a low of .7364, EUR/AUD is up from 1.5338 to a high of 1.5420, and EUR/NZD recovered to 1.6876.
Watch Out For:
- 12:30 am GMT: Australia’s building approvals
- 12:30 am GMT: Australian import prices q/q (+1.5% expected, -1.6% previous)
- 1:45 am GMT: Chinese Caixin manufacturing PMI (no change from 51.5 expected)
- 5:30 am GMT: Australia’s commodity prices y/y (-5.9% previous)