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The morning after the much anticipated FOMC interest rate statement has left financial markets exhibiting hangover-like symptoms, as a risk-off feel engulfed price action during the overnight session in the wake of the Fed removing the QE-punchbowl and showing a vote of confidence in the state of the American economy.   The relatively hawkish (or not as dovish as expected) tone to the FOMC’s statement, specifically referencing the underutilization of labour resources are gradually diminishing, took financial markets somewhat by surprise, and while the reaction in equities was muted yesterday, stocks are now playing catch up to the price action displayed by the greenback and treasuries.   One of the key takeaways from yesterday’s statement is that while the Fed is still data dependent, they have remained confident in their assessment of the economy so soon after the recent volatility surrounding the outlook for global growth, and thus are likely to remain comfortable engaging in a tightening cycle by mid-2015 absent any large shocks to the system.   The USD bulls are continuing their charge after yesterday’s move higher, but the first look at Advanced GDP for the US economy over the third quarter will be closely watched to see whether the Fed’s vote of confidence can be corroborated.

Heading over to Europe, equities are trading well in the red midway through the trading session, echoing the risk-off feel permeating through markets despite some better than expected employment data out of Germany, which saw the change in unemployment drop by 22k instead of the 5k rise that had been forecast.   Overshadowing the strong job numbers was the fact that regional CPI prints have begun to hit the wires, with the vast majority showing declines from the previous month, subsequently leading the harmonized measure for the country to miss expectations and decline by 0.3% on a month over month basis.   A continuation of CPI’s downward trend in the Eurozone could make for an interesting ECB meeting next week, given there is more talk of the ECB expanding their asset purchase program over the next few months if the covered bond and ABS purchase program doesn’t elicit the desired results.   While we think the ECB will want to wait possibly a few more meetings to gauge the effects of the new asset purchase program before making any tweaks, a lower than expected CPI reading on Friday would bring forward those expectations and put downward pressure on the Euro.

Getting set for the North American open, the first look at Q3 GDP for the American economy just hit the wires, coming in at 3.5% and down from the 4.6% Q2 figure, but above the median consensus of 3.0%.   The strong headline number was propped up by increases in government expenditures and exports while a slowdown in personal consumption and give back in private inventories detracted from a more robust report.   The next two revisions to the GDP figure are likely the see the net export figure revised, with the export component potentially weighed down by a stronger greenback, and thus we’ve seen some of the shine of the headline figure mitigated.   Risk assets continue to generate bids post release as a collective sigh of relief from market participants is issued in the wake of the Fed’s vote of confidence yesterday, with S&P futures coming off the overnight lows, EURUSD clawing its way back into the 1.26 region, while USDCAD falls away from the 1.12 handle.

 

Further reading:

German CPI falls 0.3% m/m, +0.8% y/y, HICP only +0.7% – below expectations

US GDP growth +3.5% – internals mixed