- We think that the next FOMC Committees in October and December will become the new possibilities for a rate move
- We are beginning to question the ability of the Fed to succeed in its mandate
- EUR/USD, in the medium-term, the pair remains in its uptrend channel and still has room before testing the bottom, lying around 1.12
- USD/JPY is heading toward the next resistance standing at 121.33, while on the downside a support can be found at 119.40
- We remain bearish yen on the medium/long-term perspective as we believe that the latest developments have increased the odds for the BoJ to raise the size of its stimulus
- FOMC, In case of rate hike, the consequences promise to be large starting with the emerging markets which are likely to suffer
US inflation reports put the final nail in the coffin for interest rate hike in September. The uncertainty surrounding the timing of the first rate hike by the Federal Reserves in almost 10 years has held the market’s attention for the last few months. However, one should remember that the Fed’s dual mandate is to promote maximum sustainable employment and price stability. One can reasonably say that the first mandate is fulfilled or at least that the job market is on the right track as unemployment rate fell to 5.1% in August. However, according to last month CPI reports, inflation pressures remain subdued in the US. Yesterday, August headline CPI printed at 0.2%y/y or -0.1%m/m, matching median forecast. Core inflation remained stable at 0.1%m/m or 1.8%y/y, below market expectations of 1.9%y/y. On the news, EUR/USD completely erased yesterday’s early session losses and bounced back above the 1.13 threshold and reached 1.1321, up 0.95%, in the late European session. In the medium-term, the pair remains in its uptrend channel and still has room before testing the bottom, lying around 1.12.
*** Yann Quelenn, Market Analyst: After months of discussion, markets will have all eyes on the FOMC rate decision tonight. The probability of a rate hike has been going up and down for the last three months and Bloomberg estimates a current probability of an upside move of around 32%. There are still big uncertainties concerning the Federal Reserve Monetary Policy as recent data has come in mixed over the last few months. A rate hike will push down inflation which remains very low. It has been just under a decade since the U.S economy has been all-in, coupling massive quantitative easing with a zero-interest rate policy. We believe that this policy has not delivered the anticipated results.
In the case of a rate hike, the consequences promise to be significant especially for the emerging markets, which are likely to suffer. Hence they will keep their fingers crossed as commodity prices become more expensive and most trades in the world are denominated in U.S. dollar. Concerning stocks, we think that a rate move will drive global equity markets higher and would put an end to the era of cheap money. However, we think that is not be the case for the time being and it appears that current investor sentiment shows fears that world equity markets might be over-valued.
In any case, the story is not going to stop. We think that the next FOMC Committees in October and December will become the new starting/perfect moment for a rate move. Nonetheless, we are starting to question the ability of the Fed to succeed in its mandate of stabilizing price and securing full employment. And as we see it confidence is what makes a central bank reach its objectives.”***
In other big news, Standard & Poor’s has downgraded Japan’s sovereign credit ratings to A+ from AA- with stable outlook. The rating agency argued that “Despite showing initial promise, we believe that the government's economic revival strategy - dubbed "Abenomics" - will not be able to reverse this deterioration in the next two to three years”. On the data front, August seasonally adjust trade balance came in on the soft side, printing at -¥358.8bn versus -¥377.3bn median forecast and above last month revised deficit of -¥375.1bn. In spite of substantial improvements of the trade balance since 2014, the trend appears to be reversing as export failed to keep the pace despite a weak yen. Exports rose 3.1%y/y in August versus 4.3% median forecast, well below 7.6% increase in July. Meantime, imports contracted -3.1%y/y versus -2.5% expected, almost stable compared to -3.2% in July. USD/JPY is heading toward the next resistance standing at 121.33 (high from September 10th) while on the downside a support can be found at 119.40 (low from September 15th). We remain bearish yen on the medium/long-term perspective as we believe that the latest developments have increased the odds that the BoJ will increase the size of its stimulus.
On the equity, Asian regional markets are mixed this morning with Chinese shares blinking red on the screen. In Hong Kong the Hang Seng lost -0.56% while in mainland China, stock indexes paired losses with the Shanghai Composite down -0.79% and the Shenzhen Composite down 0.07%. In Japan, the Nikkei gained 1.43% as traders anticipated an increase of the size of Boj’s quantitative easing programme. In Australia, the S&P/ASX gained 0.94% while the Aussie is lacking the fresh required to break the 0.72 resistance (psychological threshold and high from August 28th) to the upside.
Today traders will be watching: Retail sales from UK; housing start, building permits, initial jobless claims, Bloomberg consumer comfort index, Philadelphia Fed business outlook and FOMC rate decision.