Market participants may be sitting on the edge of their seats today, in anticipation of the outcome of the FOMC gathering. Expectations are for the Committee to begin tapering its QE purchases, and for the pace to be USD 20bn per month. Thus, if this the case, all the attention is likely to fall to the statement accompanying the decision and Chair Powell’s press conference for any comments on inflation and any hints with regards to interest rates.
The Fed is Expected to Taper, but What About Rates?
The US dollar traded higher against all the other major currencies on Tuesday and during the Asian session Wednesday, gaining the most versus NZD, AUD, and CHF. The currency that lost the least ground was JPY.
The broader strength of the US dollar and the good performance of the yen, combined with the fact that the Kiwi and the Aussie were the main losers, suggests that markets may have turned to risk off at some point yesterday or today in Asia. Indeed, this happened during the Asian session today. European shares were mixed yesterday, while Wall Street hit fresh record highs once again. Today, in Asia, besides Japan’s Nikkei, which stayed closed, all the other indices under our radar slid, and this may have been due to investors turning cautious ahead of the FOMC decision later in the day. That said, let’s not forget the uncertainty surrounding China’s economic outlook and the nation’s property sector, due to which Asian equities have been underperforming their EU and US counterparts recently.
Today, all the market attention is likely to fall on the FOMC decision, scheduled for later in the afternoon. When they last met, US policymakers kept their policy untouched, but in the statement accompanying the decision, it was noted that "If progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted." What’s more, the new “dot plot” pointed to 9 members in favor of rate increases to start next year, and 17 supporting higher rates in 2023. Remember that back in June, the respective numbers were 7 and 13.
Since the latest gathering, several policymakers have been adding fuel to expectations over a November tapering start, while the better-than-expected earnings results suggested that the US economy was not affected by the latest bottlenecks as many may have believed. This, combined with the fact that inflation continued to accelerate in September, well above the Fed’s objective of 2%, allowed market participants to consider a tapering start at this meeting as a done deal, and to bring forth their bets with regards to the first interest rate hike. According to the yields of the Fed funds futures, they now nearly fully pricing in a 25bps hike to be delivered in September 2022, while a few weeks ago, such a move was expected in the first months of 2023.
So, with all that in mind, we do expect the Committee to begin tapering this week, and bearing in mind that at the prior press conference Chair Powell noted that a gradual tapering process could concludes around the middle of next year, we expect a pace of USD 20bn per month. Having said all that though, given that a tapering is largely anticipated by the financial community, all the attention is likely to fall on the statement accompanying the decision and Powell’s press conference for comments on inflation and hints on interest rates. Anything suggesting that inflation could stay elevated for longer than previously anticipated and that interest rates could start rising soon after the tapering is over, could support the US dollar. The opposite may be true in case policymakers try to push back against interest-rate pricing.
Now the big question is: How the equity market will react? Will it slide on signals of faster rate hikes, which could hurt profitability of firms, or will it rise as this would mean that the US economy is performing better than many may have recently feared due to the latest supply shortages? In our view, although the former has been the case in the past, we believe that lately, it’s been the latter. Thus, anything suggesting that the Fed is confident to keep withdrawing monetary policy support following a start today, may allow equity investors to buy more. After all, they may have already digested the idea that interest rates will start rising at some point soon.
USD/CAD – Technical Outlook
USD/CAD inched higher yesterday, breaking above the downside resistance line drawn from the high of September 20th. In our view, this move canceled the bearish case, but has not signaled a bullish reversal yet. We will start examining that upon a break above 1.2435. For now, we prefer to stay sidelined.
A clear break above 1.2435, marked by the high of October 27th, could come after a hawkish Fed today and would confirm a forthcoming higher high. Initially, the bulls may target the peak of October 12th, at 1.2500, the break or which may carry extensions towards the high of October 8th, at 1.2560. If the rate does not stop at that zone either, then we could see it climbing towards the high of October 6th, at 1.2650.
The move that could turn the outlook bearish again may be a dip below 1.2290, the low of October 21st. This will confirm a forthcoming lower low on the daily chart and could encourage the bears to push for the 1.2205 zone, marked by the inside swing high of June 15th, at 1.2205. If they are not willing to stop there, then we may see them diving towards the 1.2155 barrier, which is the low of the day after, or towards the 1.2127 level, which provided support on June 14th and 15th.
Nasdaq 100 – Technical Outlook
The Nasdaq 100 cash index kept climbing north yesterday, eventually hitting the 16000 zone. With no signs of weakness, we believe that the index may be poised to continue trending higher, as marked by the upside support line drawn from the low of October 13th.
With no prior highs and lows to mark new resistance barriers, we would expect a break above 16000, which means an entrance into uncharted territory, to open the path towards the next psychological figure, at around 16500, with a potential small break at around halfway, meaning near 16250.
Now, in order to start examining the case of a decent correction to the downside, we would like to see a drop below the 15500 zone, marked by the inside swing high of October 21st. The index will already be well below the aforementioned upside line and may slide towards the 15305 area, which provided support between October 21st and 25th. If investors are not interested near that price either, then we could see the fall extending towards the 15050 or 14915 hurdles, marked by the low of October 18th, and the inside swing high of October 11th respectively.
As for the Rest of Today’s Events
During the early Asian session, we already got New Zealand’s employment report for Q3. The unemployment rate declined by more than expected, while the employment change accelerated faster than thought. Only the Labor Cost Index fell short of matching its forecast, but still, it was higher than in Q2. In our view, those numbers paint a positive picture and add to the case of more interest-rate increases by the RBNZ soon.
Later in the day, we have the final Markit services and composite PMIs for October from the UK and the US, as well as the ISM non-manufacturing index for the month. The final Markit prints are expected to confirm their initial estimates, while the ISM index is anticipated to have increased to 62.1 from 61.9. The ADP employment report is also coming out and the forecast points to a slowdown to 400k from 568k.
With regards to the energy market, we have the EIA report on crude oil inventories for last week. The forecast points to a 2.225mn barrels build after a 4.267mn increase the week before. However, bearing in mind that, yesterday, the API reported a 3.594mn barrels rise, we would consider the risks surrounding the EIA number as titled to the upside.
As for the speakers, besides Fed Chair Jerome Powell, who will hold a press conference after the FOMC decision, we will also hear from ECB President Christine Lagarde, ECB Executive Board member Frank Elderson, and BoC Deputy Governor Toni Gravelle.
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