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3 reasons why the Fed is likely interpreted as hawkish – BofA

  
  Analysis

Fed strategy from Bank of America

Fed strategy from Bank of America

Bank of America Global Research discusses its expectations for tomorrow’s FOMC policy meeting.

“The Fed is likely to announce tapering at the upcoming November FOMC meeting, reducing TSY purchases by $10bn and MBS by $5bn, while noting asset purchases are not on a pre-set course. We think Chair Powell will likely separate taper and rate hikes as two distinct decisions; the latter will depend on realized and future inflation at 2% or above coupled with achievement of maximum employment. Rate hikes are “a ways off” but Chair Powell is unlikely to push back on the market timing of rate hikes, which have been brought forward materially ,” BofA notes.

“We see risks Fed comments are interpreted as hawkish due to (1) recognition of upside inflation risks, (2) faster taper pace, and (3) potential future balance sheet reduction. This could sustain or extend the recent UST curve flattening trend. Similarly, risks to the US dollar are skewed to the upside around this week’s Fed meeting, in our view,” BofA adds.

Dow, S&P, NASDAQ close at record highs. Russell 2000 trades to a new intraday all-time high

  
Analysis, US Market

Russell 2000 sets the first intraday high since March

A quadruple record close for the major indices. In addition to the Dow S&P and NASDAQ posting a record closes, the Russell 2000 index also joined the party with its own new all-time high.

  • NASDAQ recorded its fourth straight record close
  • Dow industrial average closed at a record level for its third consecutive day.
  • NASDAQ closed at a record level for the 40th time
  • Dow industrial average closed at a record level for the 41th time
  • S&P index closed at a record level for the 61st time
  • NASDAQ is up for the seventh straight day
  • Winning sectors included Materials rose 1.1% real estate rose 0.94%, technology rose 0.82% and consumer staples rose 0.69%
  • Losing sectors included energy which fell -1.01%, discretionary fell -0.62%

The gains come despite the expectations at the Federal Reserve will start to taper process when they announce their decision tomorrow at 2 PM ET. The expectations are for $15 billion. That would put the Fed on schedule for finishing the taper by midyear 2022. There is a possibility that they speed up the taper process could be a problem for the stock market if that should happen.

The final numbers are showing:
  • Dow industrial average +138.79 points or 0.39% at 36052.63
  • S&P index rose 17.04 points or 0.37% at 4630.71
  • NASDAQ index rose 53.69 points or 0.34% at 15649.60
  • the Russell 2000 rose 3.74 points or 0.16% at 2361.86

Commodity currencies hit new lows into the London fix

  
  Analysis

Odd fixing time this week

The London fix this week hits right at noon in New York because the UK changes clocks a week before NY. That might have left the market a bit thinner, especially ahead of the Fed tomorrow.
In any case, the commotion currencies are getting hit hard today, especially the antipodeans. AUD and NZD are down about 1.2% while CAD is down 0.4%.
However in the past few minutes, USD/CAD has run to a session high so that bears watching, especially with WTI extend its loss to $1.
Odd fixing time this week

Eurozone October final manufacturing PMI 58.3 vs 58.5 prelim

  
  Analysis

Latest data released by Markit – 2 November 2021

The preliminary report can be found here. A slight revision lower but it just reaffirms the loss in momentum in manufacturing output and new orders as supply chain issues weigh. Of note, supplier lead times lengthened drastically, pushing cost inflation to a new record. One would expect the ongoing issues to persist further in the months ahead.
Markit notes that:

“Eurozone manufacturers reported a worsening of the supply chain situation in October, which curbed production growth sharply during the month. Average delivery times for raw materials lengthened at a rate exceeded only twice in almost a quarter of a century of survey data as companies reported demand once again running ahead of supply for a wide variety of inputs and components. Production constraints at suppliers were reported alongside a growing list of logistical issues. These include a lack of shipping containers and inadequate freight capacity, port congestion, driver shortages and broader transport delays linked mainly to the pandemic.

“These shortages have led to the weakest rise in factory output since the recovery began in July of last year, and also pushed inflationary pressures to new survey highs, raising further questions about just how transitory the recent spike in inflation will be.

“Business confidence also lost some ground to hit a one-year low in October, as increasing numbers of producers grew concerned about the supply situation and the impact of rising costs and prices, adding to the indications that manufacturers face some challenging months ahead.”

Lower bond yields weigh on yen pairs to start the session

  
  Analysis

2-year Treasury yields down over 3 bps to 0.48%

USGG2YR

Meanwhile, 10-year yields are also down 2.2 bps to 1.55% and that is weighing on the mood in yen pairs as USD/JPY is down 0.3% and trading at the lows near 113.60.
There is still some hints of pushing and pulling since the start of trading yesterday with the market continuing to count down to the FOMC meeting tomorrow. That will inevitably set the tone for the remainder of the week as highlighted in this post yesterday.
The RBA already did its part by ruling out a rate hike in 2022 – at least for now – but opened the door for one in 2023 as it drops the previous forward guidance of not foreseeing a scenario in which it will hike rates until 2024 at least.
The Fed is arguably also going to offer some pushback to rate expectations by making clear that tapering will not necessarily mean immediate rate hikes to follow.
But again, the market reaction may not be as straightforward considering the train of thought that a policy accident is in the works. Thus, we’ll only get more clarity on things once the dust settles later in the week.
For now though, yen pairs are feeling some pressure with AUD/JPY in particular falling back below 85.00 for the first time in over a week:
AUD/JPY D1 02-11
The 22 October low around 84.60 may offer some reprieve after the failure on buyers’ part to hold a break above 86.00 but below that, there isn’t much stopping a further drop/retracement lower in the pair.

AUD/USD eases to fresh one-week lows post-RBA

  
Analysis, Forex

A dovish RBA weighs on the aussie today

The pair is down 0.6% to its lowest since 25 October, with the low hitting 0.7471 as sellers start to explore further downside potential on the day.
AUD/USD H1 02-11
The post-RBA drop also sees price action fall back below both key hourly moving averages, with the 200-hour moving average (blue line) seen @ 0.7506. This sees the near-term bias shift back to being more bearish now.
There is still some minor support from the region around 0.7460-80 in general, with the 23.6 retracement level of the October swing higher sitting at 0.7464.
That may help to limit the downside for now but break below that and it could be a quick drop back towards 0.7400 for the pair with little else in the way.
But for any real momentum to be sustained, it needs confirmation from the dollar side of the equation and that will only come after the FOMC meeting tomorrow.
For now, the technicals are starting to side with sellers but we’ll see if that can continue until the end of the week as the Fed looms just around the corner.
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