December 20, 2018

Daily Observations:

The sell-off that rattled US stocks deepened in Asia after Federal Reserve Chairman Jerome Powell failed to quell investor concerns that tightening policy will choke economic growth. The yen rose as investors favored safe havens and Treasuries steadied. Japanese equities were on track to close in a bear market, as losses deepened from Tokyo to Sydney. US stock futures reversed earlier gains.

Fed Hikes, Sees Two More in 2019:

The Federal Reserve raised rates for the fourth time this year, looking through a stock-market selloff and defying pressure from President Donald Trump, while dialing back projections for interest rates and economic growth in 2019. By trimming the number of rate hikes they foresee in 2019, to two from three, policy makers signaled they may soon pause their monetary tightening campaign. Officials had a median projection of one move in 2020.

Chairman Jerome Powell, speaking at a press conference after the decision on Wednesday, stressed that policy was not on a preset course. “There’s significant uncertainty about  both the path and the ultimate destination of any further rate increases,” Powell told reporters.

Policy makers scaled back the number of rate increases they expect next year to 2, from 3 in September, according to their median forecast. That’s still more than investors expect; traders in interest-rate futures are pricing in less than half of a quarter-point increase in 2019.

Powell also reaffirmed that the central bank will press ahead with its plan to reduce its $4.1 trillion in bond holdings. Some analysts had hoped that recent stock-market turbulence might convince the Fed to halt the program, which, like rate hikes, acts to tighten credit.

The Fed chief repeatedly called the outlook for next year “positive,’’ though policy makers did slightly lower their forecast for growth in 2019 to 2.3% from 2.5% in September. The economy is expected to expand 3% this year, its best performance since before the financial crisis a decade ago.

Shutdown Averted?:

The US Senate will vote as soon as Wednesday on a bipartisan spending bill to avert a government shutdown, even as President Donald Trump vowed that he’d get his border wall built, eventually. The Senate GOP introduced a stopgap spending bill to keep agencies open through Feb. 8, and Democrats said they’re ready to pass it and put off the fight over Trump’s demand for $5 billion for the wall.

 The House could take up the measure as early as Thursday and lawmakers from both parties said they expect it to pass. The Senate vote could be delayed amid jockeying to attach lawmakers’ pet legislation to the stopgap measure, including expiring wildlife habitat funding. Without the stopgap measure, current funding for 9 government departments would run out after Friday.

BOJ Keeps Policy Unchanged:

The Bank of Japan left its stimulus settings unchanged at its final policy meeting of the year, as risks to inflation mount and just hours after the Federal Reserve signaled a slightly more dovish rate path ahead.

The BOJ left its yield curve control program and asset purchases unchanged, the central bank said in a statement Thursday, a result predicted by all 49 economists surveyed by Bloomberg.

Governor Haruhiko Kuroda faces a deteriorating environment with inflation only halfway to the BOJ’s 2% goal. With oil prices tumbling, economists see it falling toward zero in the year ahead. Slowing growth in China, the US-China trade war and a disruptive Brexit could all hit Japan’s export-dependent economy, which has contracted in 2 of the past 3 quarters.

PBOC to Supply Cheap Liquidity to Banks:

The PBOC said it would supply lower-cost liquidity for as long as 3 years to banks willing to lend more to smaller companies, as policy makers roll out targeted measures aimed at shoring up the flagging economy.

The central bank will create a “targeted” version of its Medium Term Lending Facility, and take applications from banks that meet regulatory requirements and have potential to increase credit supply to smaller companies, the PBOC said in a statement late Wednesday. The funds will be at a rate of 3.15%, lower than current facilities which have shorter maturities.

In addition to 4 cuts to reserve requirements so far this year, the new funding tool signals that policy makers remain concerned about the threat to economic growth posed by a clampdown on shadow banking that has gripped hard in recent months. Even so, the PBOC is stopping short, for now, of cutting borrowing costs across the board, a move that would pressure the fragile currency.

In tying longer-term liquidity to banks’ performance in lending to the real economy, China is further adapting an approach taken previously by central banks including the Bank of England and the European Central Bank. China’s major lenders have long had little incentive to lend to private companies, the majority of which are small firms, compared with safer bets funding state-owned enterprises.

Australian Employment November Gains More Than Expected:

Australia’s labor market loosened a little in November in a setback for the Reserve Bank’s drive for higher wages and faster inflation. Unemployment climbed to 5.1% and underemployment also rose, lifting the underutilization rate that combines both gauges to 13.6 percent, statistics bureau data showed in Sydney Thursday. On a more positive note, the rise in joblessness was driven by more people seeking work.

The data drew little reaction from markets due to its mixed nature: employment jumped 37,000 but full-time jobs fell and hours worked declined. The labor market is a key metric for the RBA as it uses a record-low cash rate to juice economic growth and push down unemployment, with the goal to force employers to offer higher pay to workers.

The strategy has paid dividends, with employment growing strongly this year and last, and the jobless rate largely held up by an expanding labor force, also a sign of optimism. But an accelerating slump in property prices that culminated in weaker economic growth last quarter, as household spending slowed sharply, has started to spook markets.

Investors are now beginning to doubt the RBA’s regular refrain that the next rate move is likely to be a hike, with money markets pricing in a slim chance of a cut in 2019.

US-China Deal to Dominate Spotlight in 2019, Says Goldman:

Goldman Sachs Group Inc. has identified the prospect of a genuine accord resolving the US-China trade impasse as potentially the biggest economic development next year. As the US and Chinese sides negotiate, Andrew Tilton, Goldman’s chief economist for Asia Pacific in Hong Kong, said markets need more than just positive comments about reform, which are nothing new.

“What market participants, both domestic and foreign, will be looking for is specific commitments and timetables,” Tilton wrote in the note. “A meaningful shift here, were it to occur, would likely be the most important global macroeconomic development of 2019.”

With trade uncertainty prolonged until at least March 1, when the current truce is set to expire if a deal can’t be struck, and larger policy measures potentially awaiting the National People’s Congress session in March, China’s economic growth is unlikely to bottom out until late in the first quarter or maybe the second, according to Tilton.

FX Updates:

USD/SGD:

Spot: 1.3726

USDSGD rebounded back above 1.3700 following broad USD strength overnight following a less-dovish-than expected forward guidance from the Fed last night. USDSGD has largely maintained within the 1.3600-1.3875 range over the past 6 months. A breach below the 1.3600 support will likely result in an accelerated selloff towards the 200-day moving average of 1.3563.

AUD/USD

Spot: 0.7106

AUDUSD declined to a fresh 6-week low last night, following hawkish comments from Fed Chair Powell last night. The unexpected rise in Australian November employment did little to boost the Aussie, and change the market’s expectation that the RBA will hike rates anytime soon. Continued expected policy divergence between the 2 central banks is likely to drive the currency pair lower to the 0.7000 support.

USD/CAD:

Spot: 1.3494

USDCAD is currently threatening to break above 1.3500; the last time the pair traded above 1.3500 was back in June 2017. The pair’s ascent towards the next resistance level at 1.3600 is likely to gain momentum, especially if crude oil prices continue to languish below $50/bbl.

USD/CNH:

Spot: 6.9093

USDCNH bulls regained control of the 6.9000 handle, after the pair added 0.3% to 6.9139 earlier today. was little changed last week, as the pair continued to fluctuate around the 6.9000 handle. The FX pair’s upside could be capped around its 50-day moving average at 6.9259.

USD/JPY:

Spot: 112.31

USDJPY maintained above the 112 handle, barely moving after this morning’s BOJ rate decision to keep its policy tools unchanged, as expected. From a longer-term perspective, the pair’s 2018 uptrend seems to be tapering out; the pair has failed to hold above the 114 handle each time it was tested since October. A decline below 112 will confirm the breakdown of the trendline..

GBP/USD:

Spot: 1.2630

GBPUSD has struggled to maintain above the resistance level at 1.2662 over the past couple of days. Investors will be keeping a close eye on BOE’s policy statement later today to see if officials are going to shift further into dovish territory as Brexit angst continues to weigh heavily on both the pound and the UK economy. The pair’s momentum remains firmly rooted to the downside, with a retest of the 1.2500 handle expected again soon. A break below it could lead a fall further to the next support target at 1.2351.

Sources: Bloomberg