Fed Chair Powell surprised markets by signalling faster tapering. The S&P500 fell 1.6% and short-maturity bond yields rose. Risk-sensitive currencies and commodities fell. The US dollar index is down 0.3% on the day, with defensive currencies outperforming and risk-sensitive currencies underperforming. EUR initially rose from 1.1300 to 1.1383 before falling sharply to 1.1236 on Powell’s comments. USD/JPY roundtripped from 113.60 to 112.53 and back. AUD was volatile ahead of Powell, then plunging from 0.7171 to 0.7063 – a 12-month low. NZD similarly fell from 0.6856 to 0.6773 – a 12-month low. AUD/NZD fell from 1.0470 to 1.0429.
US 2yr treasury yields jumped from 0.44% to 0.57% in response to Powell’s comments, while the 10yr yield is lower overall, from 1.50% to 1.45% via 1.41%. Markets fully price the first Fed funds rate hike to be in July 2022. Australian 3yr government bond yields (futures) ranged between 0.99% and 1.08%, while the 10yr yield ranged between 1.66% and 1.73%. Markets fully price the first RBA rate hike to be in July 2022.
Commodities, Brent crude oil futures fell 4.3% to $70, copper fell 1.4%, gold fell 0.5%, and iron ore fell 0.3% to $102.
Overnight Currency Range
AUD/USD 0.7063 0.71705
EUR/USD 1.1235 1.1387
GBP/USD 1.3194 1.3371
USD/JPY 112.53 113.90
NZD/USD 0.6773 0.6855
USD/CAD 1.2732 1.2838
USD/CNH 6.3646 6.3845
AUD/JPY 80.08 81.38
AUD/NZD 1.0425 1.0483
Fed Chairman Jerome Powell sparked significant moves overnight after telling a Senate committee that it is time to stop using the word "transitory" in regard to inflation. He also suggested that they could finish tapering a few months earlier than previously thought. All three US indices were 1.6% lower in late trade while 2-year yields rose 3.7bps to 0.52%. Oil was again hit hard and fell 5.2% to $66.20 a barrel. USD was stronger across the board including against the AUD which traded to a low of 0.7063 before recovering to 0.7120.
The CEO of Moderna has predicted that existing COVID-19 vaccines may struggle with the new Omicron variant, and that it may take months before variant-specific jabs are available at scale. Travel bans have already hit international supply-chains and the variant could add to price pressures if it exacerbates supply-chain disruptions. AUD/USD had bounced to .7120 in the final hours of trade with risk having steadied.
Event Risk Data Today
Aust: Q3 GDP will be released. The delta lockdowns in NSW and Vic have certainly harmed activity, but the damage is less than originally feared. A sharp fall in consumer spending and weakness in business investment is expected to be partially offset by support from home building and net exports.. November’s CoreLogic home value index is expected to indicate a further modest slowing in house price growth as affordability becomes a greater concern (f/c: 1.1%).
NZ: October’s building consents are expected to hold firm, with issuance elevated across the country.
Japan: The final release for the November Nikkei manufacturing PMI should reflect the strength of the sector despite ongoing supply concerns.
China: The November Caixin manufacturing PMI is expected to report only modest growth with delta and supply issues still present (market f/c: 50.6).
Eur/UK: The final release of November’s Markit manufacturing PMIs are due for Europe and the UK; both rose slightly in the flash release.
US: Momentum in employment should produce another strong result for ADP payrolls in November (f/c: 570k). The ISM and final Markit manufacturing PMIs for November should highlight again the robust strength of US manufacturing. Construction spending is meanwhile expected to lift in October given the underlying strength of housing (market f/c: 0.4%). The Fed’s Beige Book will later provide insights into economic conditions across the 12 Fed districts. FOMC Chair Powell and Treasury Secretary Yellen will then take part in a hearing before the House Financial Services Committee on CARES Act relief.