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MACRO MORNING NOTE September 21, 2017

SBA’s Alastair Williamson concludes the Macro Morning Note from Baltimore, Maryland. 

A decade of  stimulus in the United States has come to an end, as the Fed begins balance sheet unwinds. Fed futures are pricing in one more rate hike this year most likely in December. During yesterday’s historic Fed meeting, Yellen did not raise rates, but kept a hawkish stance on normalization, with reinvestments slowed/stopped starting in October.

Headlines:

  • *FED: HURRICANES UNLIKELY TO ALTER ECONOMY’S COURSE MEDIUM TERM
  • *FED: JOB MKT STRENGTHENED, ECONOMIC ACTIVITY RISING MODERATELY
  • *FED KEEPS RATES UNCHANGED, PLANS BALANCE-SHEET RUNOFF IN OCT.
  • *FED FORECASTS STILL SIGNAL ANOTHER 2017 HIKE, 3 MORE IN 2018
  • *FED REPEATS RISKS TO OUTLOOK APPEAR ROUGHLY BALANCED
  • *FED SAYS FOMC VOTE WAS UNANIMOUS
  • *FOUR FED OFFICIALS SEE NO MORE 2017 HIKES, UNCHANGED FROM JUNE 

Forecast in liquidity changes for global centra banks paints a troubling outlook for asset prices.

In the currency market, the dollar is attempting to reverse the auction following normalization rhetoric from the Fed. The dollar has declined around -1234bps on the year from the 103 handle to 91 level. Overnight action is attempting to reverse the auction, but with de-dollarization in full swing this could limit upside. The important break is 92.79 200sma (weekly).. In other news, the BOJ remains dovish keeping rates unchanged in NIRP sending the USD/JPY higher to the midpoint of 112.50 level. The EUR/USD declines to the midpoint of the 1.19 level following a stronger dollar. The AUD/USD declines -124bps to the .79 area following a weakness in commodity prices.

In important central bank news, the Bank of Japan kept monetary policy unchanged, with a dovish dissenter Goushi Katoka. The divergence between Fed and BOJ policies shows the true nature of Japan, as the country drowns in debt.

The entire island of Puerto Rico is destroyed according to the island’s emergency director.. Hurricane Maria took a direct hit on the island with damage estimates exceeding $30 billion. Maria, now a cat-3, is moving away from the island heading to the east coast of the United States. Considering Puerto Rico’s debt problems, this weather event is more bad news for the island.

Trajectory of Hurricane Maria

Overall, markets are mixed following the Fed’s decision to start normalizing. S&P futures and across the pond MSCI Asia Pacific Index fell 70bps, while Japan’s Nikkei225 rose +10bps helped by weaker Yen. In China, regional stock markets are mixed following S&P Global Ratings downgraded China’s sovereign rating to A+ from AA-, citing the country’s credit growth as a risk to the economy. Over in Australia, commodity pressure sends the ASX200 index lower -65bps. In Europe, the CAC40 +53bps, DAX -23bps, and UK100 -33bps.

US calendar

  • 8:30am: Initial Jobless Claims, est. 301,500, prior 284,000; Continuing Claims, est. 1.98m, prior 1.94m
  • 8:30am: Philadelphia Fed Business Outlook, est. 17.1, prior 18.9
  • 9am: FHFA House Price Index MoM, est. 0.4%, prior 0.1%
  • 9:45am: Bloomberg Consumer Comfort, prior 51.9; Economic Expectations, prior 54
  • 10am: Leading Index, est. 0.3%, prior 0.3%
  • 10:15am: Fed’s Fisher Speaks at BOE Independence Conference, London
  • 12pm: Household Change in Net Worth, prior $2.35t

In commodities, WTI is lower -110bps despite prior sessions data from EIA of slight crude build, but hefty product draw. Base metals are slammed lower this morning with copper and iron ore under pressure. Precious metals including gold and silver are lower amid Fed normalization to start in October.

What the US reflation trade looks like

European stock markets and yields have advanced in tandem with the U.S. from early Sept. UK100 index fails to participate on stronger Sterling. With EUR/USD fading into the 1.18 handle following Fed’s normalization.

Also seen in Japan as well, Nikkei25 index to the upside with yields from early Sept.

Here are the US industries rotating post Fed normalization.

Another perspective of US reflation surge..

but Bank stocks didn’t care about details like that… h/t zerohedge

Weakness in URE/REK Real Estate Ratio

De-dollarization

Visualizing the Fed’s Balance Sheet overtime..

S&P500 Daily hangman spotted

Who to believe? Consumer or 2s10s curve?

Gold/Stock Ratio

UST10Y monthly/weekly need a clean break above 2.317 for a retest to 2.641, otherwise this will be another failed attempt in reflation.

US Dollar monthly/weekly auction is attempting to reverse on highest timeframe following Fed’s normalization rhetoric. For further upside 92.71 200sma (weekly) has to violate, otherwise if rejected the path to 87.50 will become more clear.