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Dow slips Wednesday on a less dovish hike by Fed and tumbled further on more hawkish talks by Powell; Dow set to slump Thursday on lingering Fed phobia

calendar 20/12/2018 - 14:00 UTC

The US stock market slips Wednesday in a rollercoaster day of trading after less dovish than expected hike by Fed as it set to hike further twice in 2019 against market expectation of no hike or only one hike. The US market tumbled further on more hawkish talks by Fed’s Chair Powell, commenting that the Fed will not alter its B/S tapering pace in any way. As highly expected, the US Fed has hiked Wednesday unanimously its benchmark interest rate by +0.25% to +2.50% but predicted 2 more hikes in 2019 in its latest Dec dot-plots against 3 hikes in the Sep dot-plots.

On late Wednesday, the USD got more boost and the US stock market plummeted further as the Fed Chair Powell looked confident and more hawkish than expected. Powell bruised aside Trump’s perception of Fed’s B/S tightening and rate hikes as the sole cause of higher US bond yields and tighter financial conditions. Powell basically blamed Trump’s expansive fiscal policies (stimulus) for the higher US bond yields (borrowing costs) as the US Treasury is funding higher US fiscal deficits (Trumponomics) by borrowing more (excessive supplies of US Treasury bonds/papers and subsequent higher bond yields).

Powell said “We don't see balance-sheet runoff as creating problems and the amount of balance-sheet runoff has been small so far. I don’t see Fed changing the policy of keeping balance sheet runoff on autopilot”.

Powell added: “Policy doesn't need to be accommodative, can be neutral. We’ve reached the bottom end of estimates of neutral range (2.50% to 3.50%). The inflation trend allows the FOMC to be patient going forward. The economy will need 2 rate increases in the coming year as most FOMC colleagues see the economy doing well in 2019. The dot-plot projections show the modestly lower path for Fed funds rate and the current monetary policy doesn’t need to restrictive”.

On a question, whether the current stock market turmoil affects Fed for more hikes, Powell said: “No single market is a dominant indicator for the macro-economy”. Thus the Fed will not react to short-term stock market movement in its monetary policy decisions. Powell said: “Current mood of angst regarding growth may not work into real economic data. Evidence of a softening economy includes subdued growth abroad, financial volatility”.

Powell further clarified: “Since the last presser, some crosscurrents have emerged in the economy, but it has continued to perform well. The inflation ends 2018 a bit more subdued than expected, but the modestly lower path of Federal funds rate should support the economy, keep Fed near goals (of the dual mandate-maximum employment with price stability). The Inflation a bit below target gives the Fed room to be patient and we still have a positive forecast on growth with GDP above potential. Going forward, we will be looking for data to confirm that forecast. As we've reached the bottom end of the range of neutral, we're going to be looking at the data”.

Powell continues: “We took note of tightening of financial conditions and we're going to be watching carefully, but more broadly there is a sense of concern about global growth and that may be partly about trade tensions. The inflation has continued to surprise to the downside, but the inflation is no longer reactive to changes in growth”.

Overall, Powell looks quite optimistic about the US economy and the “Goldilocks” US wage growth and inflation. He clearly indicated that the Fed will hike two more times in 2019 (most probably in Q2/Q4-2019) to go for at least the median neutral range of 3%, unless and until the US core PCE inflation expectations slip well below +1.75% or surged well above +2.25% in a sustainable manner. The Fed may pause in Q1-2019 on Brexit and US-China trade truce uncertainty (excuses) and may go for the 1st hike in 2019 on Q2.

After the Fed and Powell presser, the US dollar index (DXY) jumped to a high of 97.10 from earlier low of 96.55, while USDJPY jumped to 112.66 from 112.09 and EURUSD slid from 1.1439 to 1.1365, GBPUSD plunged from 1.2679 to 1.2608. Dow future plunged almost -900 points from the session high of 24073.00 to 23177.00. The SPX-500 future tumbled from the session high of 2587.75 to a low of 2490.25.

Overall USDJPY rally was limited because of risk-aversion as Dow plunged, which also invited some bids to the safety of US bonds, resulting in lower US bond yields at 2.75%. There was also visible US bond yield flattening and a possible inversion as 2s10s again slide below 10 bps; i.e. the market is expecting an economic slowdown, if not an outright recession down the years. The risk-on mood may be also affected further as a report suggests that the US Senate not yet ready to move on an interim spending bill to avoid a government shutdown and Trump is not ready to sign the temporary spending bill.

The US stock market surged early Wednesday ahead of Fed on lower USD amid hopes of a dovish hike by Fed coupled with Italian budget truce and soft Brexit optimism after the EC President Juncker said disorderly Brexit would be an “absolute catastrophe”. The US dollar index slumped almost -0.45% and USDJPY slips over -0.30%, while EURUSD jumped +0.60% and GBPUSD surged almost +0.25% ahead of the Fed decision about the much anticipated Dec rate hike and projections for the same in 2019 (dot-plots); Dow surged almost +350 points.

EURUSD surged as Italian bank stocks rallied on Italian budget truce after the EC decided against launching a disciplinary procedure against Italy over its budget and said that concessions by Italy on its budget meant the country didn't warrant triggering the excessive deficit procedure. The EC’s deputy budget commissioner Dombrovskis said the agreement that had been reached would lead to an expected budget deficit next year of 2.04% compared with 2.4% of Italy’s original plans.

Actually, the figure of 2.04% budget deficit is almost at mid-point of the EC’s target of 1.6% and Italy’s ambition of 2.4%. The EU/EC does not want another Brexit from Italy (Italexit) and Italy is also not in a position for an exit out of the EU or face consistently higher Bund yields/spreads.

On early Wednesday, the US market was also helped on optimism of US-China trade truce after China's MOFCOM said both sides have held several rounds of talks in recent weeks and that they plan to hold a formal, face-to-face meeting in January. The US Treasury Secretary Mnuchin said on Tuesday that both sides are focused on trying "to document an agreement" by a Mar 1 deadline for their current temporary tariffs truce to run out. There was also a report that China is buying a record quantity of US soybeans.

The US market was also supported by energies early Wednesday as oil rebounded from Tuesday’s -7% plunge on bargain hunting, lower USD and EIA inventory report. Oil bounced back by almost +3%, but eventually closed around 2% higher as it slips on risk-aversion as Dow plunged.

The US risk-on sentiment was further buoyed on US border wall shutdown truce as the Senate is to pass a short-term spending bill that would delay government shutdown but deny Trump the $5B fund, he wants for the border wall. But Trump is funding (granting) almost the equivalent amount for the Mexican government to improve “border securities” and jobs thereby.

On Wednesday, the blue-chip Dow Jones Industrial Average (DJ-30) plunged -1.49% to close around 23323.66 (-351.98) after making a session low-high of 23162.64-24057.34 in a day of rollercoaster trading. The broader S&P 500 (SPX-500) tumbled -1.54% to close around 2506.96 (-39.20) after making a session low-high of 2488.96-2585.29 in a day of volatile trading. The tech-heavy Nasdaq Composite (IXIC) plummeted -2.17% to close around 6636.83 (-147.08) in a day of wild trading.

Overall, the US market was dragged by techs, such as Apple, Facebook (renewed data leak issues), Microsoft, Intel, AMD, Micron (subdued quarterly number and guidance) and BAC, while GE helped. Banks & financials also dragged on lower bond yields and yield flattening/inversion, negative for their lending/business model. Consumer discretionary/retailers such as Amazon, Target slumped. Almost all of the 11-major SPX-500 sectors were in red, but defensive sectors burnt less such as utilities (bond proxies), real estate, healthcare, and consumer staples.

FedEx tumbled on subdued guidance for 2019 after the logistics company slashed its 2019 forecast on “bad political choices” for weakness in its overseas business. The company, which is seen as a bellwether for US as-well-as global economy, basically blamed various geopolitical tensions for the current global economic slowdown.

The FedEx CEO said: "I'll just conclude by saying most of the issues that we're dealing with today are induced by bad political choices. I mean, making a bad decision about a new tax, creating a tremendously difficult situation with Brexit, the immigration crisis in Germany, the mercantilism and state-owned enterprise initiatives in China, the tariffs that the United States put in unilaterally. So you just go down the list, and they're all things that have created macroeconomic slowdowns”.

On early Thursday, Dow future is currently slumped by -65 points, while the SPX-500 future is currently trading around 2498.12, also slips by -0.25% after making a session low-high of 2479.00-2517.88 so far ahead of US market opening. Dow/SPX future recovered to some extent on lower USD but could be under stress on lingering Fed phobia and Trump's boder wall mania.

Technical Outlook: SPX-500

Technically, whatever may be the Fed narrative, SPX-500 has to sustain over 2555 for a further rally to 2585*/2610-2630/2650 and 2685*/2715-2735/2755 in the near term (under bullish case scenario).

On the flip side, sustaining below 2535-2515, SPX-500 may further fall to 2495*/2445-2415/2385 and 2340*/2305-2280/2235 in the near term (under bear case scenario).


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