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Good Morning: The Long & the Short of it and The Bigger Picture - xx December 2018 - ADM ISI





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Ostwald, Marc
08:56 (14 minutes ago)

to Marc





- Fed meeting in focus; awaiting UK CPI, RPI & PPI, US Existing Home Sales
and Canada CPI; digesting expected Thai rate hike, and awaiting EU
decision on Italy 2019 budget

- UK inflation reports: gasoline & energy to restrain all headline
measures; Core CPI to see additional drag from recreation/culture; no
signs still of any pipeline pressures from PPI

- Fed set to hike for fourth time in 2018, 'dot plot', forecast tweaks
and short and long-term 'neutral' rates in focus

..........................................................................

********************
** EVENTS PREVIEW **
********************

FOMC day has finally arrived, and should be directional for markets, as well as effectively "year ending" as well as a key steer for the start of 2019. Be that as it may, there is still a goodly volume of data and other events to ponder. Statistically Japanese Trade precedes the full gamut of UK inflation readings, US Q3 Current Account and Existing Home Sales & Canadian CPI ahead of NZ Q3 GDP this evening. In event terms outside of the FOMC meeting, news from the China Annual Economic Policy-Setting meeting, and the EU Commission decision on the Italian budget "compromise" will command some attention. Overnight the Bank of Thailand hiked rates 25 bps to a still historically low 1.75%, and as expected made little in the way of forward commitments on the rated trajectory. The US Q3 Current Account bears some scrutiny (greater than usual), in so far as it will signal just how much the benefits to the Capital Account from corporate tax cut related repatriations faded, and per se confirming another 'liquidity drain', the consensus assumes that the narrower $101.5 Bln deficit was mostly aberrant, with a much wider $-125 Bln expected, which would be the worst reading since Q4 2008.

** U.K. - November CPI, RPI & PPI **
Headline CPI at 0.2% m/m 2.3% y/y and core at 0.1% m/m 1.8% y/y are seen dipping from October's 2.4% and 1.9%, in principle indicating inflation is around the BoE's target, while also affirming a modest improvement in real wage growth. Petrol prices will be the key drag in headline terms, with weak spending on recreation & culture suggesting a muted core CPI reading . PPI Input will benefit from the sharp fall in energy prices (despite a sluggish GBP) and the projected -3.0% m/m would thanks to the additional benefit of base effects see the y/y slide to 4.6% from October's 10.0%, while Output Prices are also expected to remain well contained: -0.1% m/m 2.9% y/y headline, with core 0.2% m/m 2.3% y/y. Retail Sales have been rather sluggish after the summer 'sugar rush', and are seen recovering only modestly at

** U.S.A. - FOMC meeting **
- While markets have continued to pushed back on the probability for a 25 bps Fed rate hike to 2.25-2.50% this week, it is largely discounted at a 67% probability. The question of course is whether the dot plot is maintained (see chart attached), or the forward trajectory is lowered. Since Powell's comments that the Fed Funds rate was close to the lower end of FOMC participants 'neutral rate' range (currently 2.50% to 3.50%), per se an ostensibly sharply dovish turn, having as recently as October suggested that the Fed Funds rate was 'a long way' from neutral, markets have zeroed in on when the Fed might pause its current rate cycle, with most Fed speakers emphasizing that they are ultra 'data dependent'. The challenge for the FOMC is one of perceptions, while some survey and hard data points to a slower pace of activity, and headline CPI will doubtless drop sharply near-term due to the oil price fall, overall activity remains robust (as per Friday's core Retail Sales measures), and the labour market remains tight, so there may be some tweaks to its forecasts. Concerns about a weaker global growth outlook remain valid, but historically the domestic outlook has always been the ultimate arbiter of Fed policy. The challenge is about managing market expectations and perceptions, Trump's comments about a rate hike at this meeting being 'foolish', and the rather sour tone (or at the least heightened volatility) in credit and equities would inevitably see markets see any push back on the FOMC's rate trajectory as offering a signal that the 'Greenspan / Bernanke / Yellen put' is alive and well, and construed as the Fed as caving into political pressure. There certainly appears to be a strong case for arguing that such a market interpretation as being wholly borne of self-interest, rather a proper analysis of the economic and monetary environment, but that does not make the Fed's task any easier. Financial conditions have obviously tightened, and the meltdown in leveraged loans and high yield credit imply some further tightening, but most related indices are around the level that they were in December 2015, when the current rate cycle commenced. It is expected that the Fed will again make a smaller 20 bps hike to the IOER (interest on excess reserves), but perhaps the more interesting element is what is or is not said about its balance sheet reduction programme. aka QT (currently $50 Bln per month), particularly with Treasury Secretary Mnuchin floating the idea that a better strategy for the Fed would be to pause on rates, while maintaining balance sheet reduction at its current pace. There is little doubt that what happens at this meeting will dictate the tone for markets for the rest of the year, and going into early 2019.
 
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