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There was a lot on Uncle Sam’s docket for the session, but all eyes and ears were on Fed head Powell’s testimony when he signaled that rates are close to neutral.

Many took this as a clue that the central bank would take things slow when it comes to hiking interest rates, so higher-yielding assets banked on the idea that borrowing costs wouldn’t rise much further from here.

  • U.S. preliminary Q3 GDP unchanged at 3.5% versus estimated 3.6% figure
  • U.S. goods trade deficit widened from $76.3B to $77.2B vs. $76.7B consensus
  • EIA crude oil inventories up by 3.6M barrels vs. projected 0.6M gain
  • U.S. preliminary GDP price index unchanged at 1.7% as expected
  • U.S. preliminary wholesale inventories at 0.7% vs. 0.5% consensus
  • Fed head Powell: Interest rates “just below” neutral range

Major Events/Reports:

Mostly downbeat U.S. data

Economic reports from the U.S. weren’t all that upbeat as the preliminary version of the Q3 GDP report didn’t reflect some upgrades that analysts were expecting.

For one, the growth figure was maintained at 3.5% versus expectations of a slight upgrade to 3.6%. Components of the report indicated that inventories were piling up faster than previously reported at 0.7% from the initial 0.4% figure, signaling slower demand.

There also appear to be signs that the trade war with China did affect business behavior as companies likely front-loaded exports to the country before another batch of tariffs were levied. The steady decline in soybean shipments, which was part of the goods targeted in retaliatory measures, and the sharp increase in imports also support this.

Consumer spending was downgraded from the initially reported 4.0% figure to 3.6% while business spending on equipment saw a huge upgrade from 0.4% to 3.5%.

Powell’s testimony

Could Fed Chairperson Powell be feeling the pressure from the POTUS to cool it with interest rate hikes? In his latest testimony, he mentioned that rates are “just below” neutral, which marked a shift from his remarks last month on how rates are “a long way from neutral.”

In particular, Powell said:

“Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy‑‑that is, neither speeding up nor slowing down growth.”

Powell went on to say that he and his colleagues will continue to take their cues from incoming data, adjusting monetary policy in order to keep the U.S. economy “on track in light of the changing outlook for jobs and inflation.”

The rest of his speech focused  on financial stability while market participants were busy interpreting his “just below” comment in light of not-so-chipper U.S. preliminary GDP data.

BOE Financial Stability Report

The U.K. central bank printed the results of its bank stress tests as part of its bi-annual Financial Stability Report, which looked into the potential worst case Brexit outcomes.

Here’s a graph that summarizes their projected impact to GDP, depending on the resulting economic relationship with the EU after the breakup:

The BOE predicted that a disruptive Brexit could trigger a 3% fall in GDP in the short-term and 15% depreciation for the pound. Being unprepared to shift to WTO rules could spur a 5.5% drop in GDP while a more prepared move could still lead to a 2.5% decline.

A disorderly Brexit, meanwhile, could lead to an 8% fall in GDP and a whopping 25% drop in the pound’s value.

However, even as Guv’nah Carney painted a bleak picture of what could happen, he did emphasize that these are “not what’s most likely to happen.”

The study also revealed that all banks and institutions passed the stress tests as the capital ratio is more than three times above pre-crisis levels. It also assured that there is no need to increase capital buffers for now as U.K. banks can withstand no access to foreign funds for months.

Risk appetite gets a boost

It was another shaky start for riskier assets after coming off a weak run in the earlier trading session. Later on, traders got really hungry for higher-yielding assets as the prospect of keeping a lid on borrowing costs spurred a more positive business outlook.

  • Dow 30 index is up 617.70 points to 25,366.43 (+2.50%)
  • Nasdaq is up 208.89 points to 7,291.59 (+2.95%)
  • S&P 500 index is up 61.61 points to 2,743.78 (+2.30%)

However, crude oil was mostly weaker for the session on account of a larger than expected build in stockpiles as reported by the EIA. Note that this comes after earlier reports that Saudi Arabia had record oil production in November, so worries of a supply glut remained in play. Meanwhile, gold seems to have drawn a lot of support from the dollar’s slide.

Major Market Mover(s):

USD

The Greenback sold off for the day as bears’ ears picked up on Powell’s “just below” remark, especially in light of slightly weaker growth data on account of trade issues.

USD/JPY sank from a session high of 114.03 to a low of 113.45; USD/CHF tumbled from 1.0006 to .9933; EUR/USD bounced from 1.1271 to a high of 1.1387; GBP/USD is up to 1.2845, and AUD/USD surged to .7321.

Watch Out For:

  • 12:00 am GMT: New Zealand ANZ business confidence index (-37.1 previous)
  • 12:30 am GMT: Australian quarterly private capital expenditure (1.1% rebound expected after 2.5% slide)
  • Tentative: Australia’s new home sales (1.1% previous)