The main event on most traders radar yesterday was the release of the minutes the two-day FOMC meeting where the tapering of the Federal Reserve’s asset purchase program was first announced. The minutes didn’t provide much in the way of new information for which the overall market had not prepared for, with board members highlighting the fact that most officials favored trimming the pace of asset purchases in a gradual fashion with many on the FOMC concerned about the waning marginal benefits of additional asset purchases compared to the rising marginal costs. Somewhat surprising was the fact that several participants acknowledged the rise in forward PE ratios on small cap stocks and the decline in the quality of leveraged loan issuances, suggesting nervousness on the board as to the effects of the QE program on financial stability.
If anything, the risks highlighted by the board favor a bias to wrap up QE in a punctual fashion. The DXY which was steadily increasing after the strong ADP print earlier in the morning, initially fell after the release, but managed to regain some ground by the North American close. The S&P was confused as to whether the strong ADP and a slightly nervous Fed was a net benefit for the economy moving forward, with stocks finding some supportive bids into the close, lifting the S&P back to unchanged at the bell. The minutes from the FOMC meeting are supportive in our view of a continuation in the gradual unwind of approximately 10bn in asset purchases per month, which has extended the rout of the Loonie as USDCAD remains comfortable putting in work north of the 1.0800 handle.
The overnight Asian session started out with some good news for China, which saw inflation fall to 2.5% on a y/o/y basis for the month of December. The soft reading was below the median analyst estimate of 2.7%, and a sharp drop from the previous months 3.0% print. The retracement in inflation bodes well for the Chinese economy and global growth in general, as it reduces the chance that the PBoC has to prematurely move to tighten monetary policy conditions in order to head off inflation. Despite the relatively strong developments in consumer price levels, the Shanghai Comp fell 0.82% on its session, while the Hang Seng slid lower by 0.91%.
The weakness in Asia leached over into European markets, however the sentiment was quickly reversed as firm demand for Portugal’s 5 year bond syndication and narrower price guidance boosted confidence across the pond. As expected, both the Bank of England and European Central Bank made no changes to their monetary policy prescriptions at their meetings today, so there was little to decipher on information from the respective central banks. Mario Draghi is set to speak at 8:30am EST to comment on the underlying decisions around the ECB’s decision to keep policy unchanged, which most traders will be watching for any clues as to if the ECB is getting closer to initiating some sort of supportive monetary policy measures to tackle the Eurozone’s problems of slumping inflation and cratering private loan growth. The Pound is flat against the USD in the mid-1.64s as on days where there is no change to monetary policy the BoE doesn’t publish anything further than the actual decision until the minutes are released in a few weeks. The EUR is higher against the big dollar as a bit of short-covering takes place on continued inaction from the ECB, however there is a good likelihood increased volatility in EURUSD could be displayed as Draghi discusses the path forward for monetary policy in the zone; heading into the press conference EURUSD has managed to make an attempt at retaking the 1.3600 handle.
As we get set for the North American open, and Draghi takes the podium for the ECB press conference, housing data for the Canadian economy hit the wires. Housing starts and Building Permits had been expected to come in slightly weaker than their respective prints of prior months, and both ended up sliding by more than forecast (permits more so than starts.) The softness in housing starts for December was in-line with estimates, but November’s numbers were upwardly revised to just shy of 200k, keeping the six-month moving average relatively stable around 196k. The decrease in new permits issued for November hit 6.7%, giving back the majority of the 8.0% increase seen in October and below the median analyst estimate of a 3.0% decrease. The uninspiring housing data has increased the squeeze on the Loonie this morning, pushing USDCAD above the May 2010 top and setting its sights on a test of 1.0900 where a good amount of corporate offers are clustered.
The turnaround in sentiment which pulled the major European indices out of the red has aided in boosting North American equity futures before the opening bell. Front month WTI is trading with a slight bid tone that has pushed light-sweet crude into the high $92/barrel range, while Gold remains flat just south of $1,230/ounce, and copper for delivery in March sheds 0.84%.
Looking ahead for tomorrow, the highly anticipated jobs data on both sides of the 49th parallel in North America are due to be released; however, prior data earlier in the week has helped traders position heading into the respective releases. With the soft Ivey PMI out of Canada (where the employment index remained in expansionary territory but dropped sharply from the prior month) and the better than expected US ADP numbers released yesterday, USDCAD has already put in some strong gains, so we would likely to have to see material deviations from expectations (<10k in Canada and >250k NFP) for USDCAD to begin another leg higher with some of the strong USD/weak CDN data already priced into the market. Should we see a slightly weaker NFP print and some resilience north of the border, this could give corporates with short USD exposure a chance to cover off some near-term exposure as that would likely be enough for a slight retracement in USDCAD.
Further reading:
ECB watching money markets closely – EUR/USD falls
ECB holds all rates unchanged for a second month in a row
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