Spot values at a glance:
Stocks in Asia followed US equities lower as the Federal Reserve struck a hawkish tone in its latest policy statement. The dollar maintained losses and Treasury yields stabilized after briefly touching 3%. China reported softer-than-anticipated economic indicators for May. With the Fed now out of the way, investors move on to the European Central Bank, which will decide rates on Thursday. While no change is expected, investors are bracing for news on a potential end to the region’s quantitative-easing program.
Fed Lift Rates, Upgrades 2018 Forecast to 4 Hikes:
Federal Reserve officials raised interest rates for the second time this year and upgraded their forecast to 4 total increases in 2018, as unemployment falls and inflation overshoots their target faster than previously projected.
The so-called “dot plot” released Wednesday showed 8 Fed policy makers expected 4 or more quarter-point rate increases for the full year, compared with seven officials during the previous forecast round in March. The number viewing 3 or fewer hikes as appropriate fell to 7 from 8. The median estimate implied 3 increases in 2019 to put the rate above the level where officials see policy neither stimulating nor restraining the economy.
Chairman Jerome Powell told reporters following the decision, which lifted the Fed’s benchmark rate by a quarter percentage point to a range of 1.75% to 2%, that the main takeaway was that “the economy is doing very well.” Powell also announced he plans to start holding a press conference after every meeting in January, cautioning that “having twice as many press conference does not signal anything.”
Trump to Confront China:
US President Donald Trump said he’ll confront China “very strongly” over trade in the coming weeks, sending a warning to North Korea’s biggest trading partner after his meeting with Kim Jong Un. “China could be a little bit upset about trade, because we are very strongly clamping down on trade,” Trump said in an interview with Bret Baier of Fox News. The interview was conducted Tuesday aboard Air Force One after Trump met with the North Korean leader in Singapore.
The White House has said it’s proceeding with plans to impose duties on $50 billion of Chinese goods, after weeks of discussions between the US and China yielded little progress on a trade deal. China has vowed retaliatory tariffs and warned that it wouldn’t deliver on any commitments over trade if the US duties take effect.
White House Rebuts Singapore Summit Criticism:
Secretary of State Mike Pompeo said he expects North Korea to take major steps toward nuclear disarmament during Trump’s first term, as the US president tweeted that there’s “no longer a Nuclear Threat from North Korea.” Pompeo, speaking to reporters in Seoul on Wednesday, sought to quell criticism that North Korea didn’t make any substantial commitments at the summit in Singapore.
Trump has come under increasing criticism because the brief statement he and Kim Jong Un signed in Singapore spelled out no specific commitments from North Korea aside from working toward the “complete denuclearization of the Korean Peninsula,” a promise the regime has repeatedly made and broken since the 1990s
Chinese May Economic Data Disappoints:
China’s economy showed signs of losing steam in May, with an unexpected slowdown in factory output and lackluster investment and consumption.
- Industrial output rose 6.8% in May from a year earlier, versus a projected 7% in a Bloomberg survey, which was also the reading in April
- Retail sales expanded 8.5% from a year earlier, less than the forecast of 9.6%.
- Fixed-asset investment rose 6.1% year-on-year in the first 5 months, compared with an estimated 7%
- Surveyed jobless rate in urban areas fell to 4.8% from 4.9% in April
With a sharp deceleration in credit growth and the threat of a worsening trade dispute with the US, Chinese businesses face an increasingly uncertain outlook. The central bank has tried to support growth by increasing liquidity.
Australian Jobs Report Shows Weakness:
Australia’s unemployment declined in May as fewer people sought work, signaling a slightly weaker labor market. The jobless rate fell to 5.4% from 5.6% in April, the Australian Bureau of Statistics said Thursday. While that was better than the 5.5 percent median forecast of economists, it was a result of a decline in the workforce participation rate. Overall, the economy added 12,000 jobs last month, lower than forecast and all part-time.
RBA officials say strong forward indicators are likely to herald a renewed upswing in hiring and expect the jobless rate to fall toward 5%, a level that traditionally spurs wage growth. That in turn would drive faster inflation and clear the path for the nation’s first interest rate increase in 8 years.
According to Bloomberg news, traders only expect such a scenario to unfold over time, currently pricing in the first tightening in November 2019. A jump in labor force participation last year absorbed blockbuster job gains and kept unemployment around 5.5%.
USDSGD continues to be buoyed above its 1.3300 support level, briefly rising to 1.3400 overnight following the Fed forecasting 4 rate hikes in 2018, up from the previous 3. The FX pair looks likely to maintain between 1.3300 and 1.3500 for the time being, with a slight bias to the upside. Despite last night’s hawkish Fed decision, the US dollar faces some headwinds after news the US is contemplating moving forward with tariffs on Chinese goods.
Australia’s dollar declined against all of its Group-of-10 counterparts as growth in the nation’s employment fell short of economist estimates in May. AUDUSD fell to a 2-week low, with the Australian dollar being additionally weighed down by concern China will retaliate against planned US tariffs. AUDUSD remains biased to the downside; the key support of 0.7400 will be closely watched.
USDCAD jumped to a weekly high of 1.3050 last night with the initial reaction to the FOMC announcements but failed to hold on to its gains as profit-taking forced the greenback to lose its strength. The pair has since retreated back below 1.3000, on the back of stronger crude oil prices today.
USDCNH continues to fluctuate around the 6.4000 handle after the PBOC earlier left its reverse repo rates unchanged, a surprise move as markets had expected a 5bp increase in response to the Fed’s overnight hike.
Following the breach of the pair’s 6.3800 last month, the bias remains to the upside with the 200-day moving average of 6.4545 as the next target.
USDJPY reversed its overnight gain earlier today, retreating back to its 200-day moving average of 110.20, after the BOJ reduced buying of bonds for a second time this month, lowering purchases in the three-to-five year segment earlier this morning.
GBPUSD recovered from a 1-week low, on the back of a weaker USD earlier today as dollar bulls took profit following yesterday’s Fed hike. UK economic data has been soft of late; weaker-than-expected retail sales data due for release later today could drive the pair back towards its lows.