Despite the noise of US earnings thus far, the week gets serious from today as we head into a serious amount of tier-1 data with tonight's main act, the Federal Reserve FOMC rate decision due at 0200 SGT. Among the other headline acts though will be US GDP QoQ at 2000 SGT, expected at 1.60%. German unemployment is released earlier at 1655 SGT ahead of European business confidence 1800 SGT.
The FOMC rate decision will, of course, be the main focus this evening. As I have previously stated, I believe the market is placing far too high an expectation of a 25bp cut. Neither the data nor the international trade situation justifies a third cut so soon. The GDP number, even if it misses lower, will come too late to affect the FOMC's thinking, although I concede that if the Fed does not move today, a lower GDP will increase the noise for a December cut.
On target, US GDP and a steadfast FOMC, represent a substantial short-term risk for equity markets globally. Prices have been pumped up to record levels on a diet of optimism, hope and falling bond rates. A rather ugly short-term downward correction could occur, and the Fed holding could add extra fuel to the quiet up-move in government bond yields of recent times.
The accompanying statement, of course, will, in the end, have more weight than the decision itself. Future expectations of the path of US interest rates are one of two critical macro-economic themes that will drive markets for the remainder of 2019 and into 2020. The US-China trade dispute is, of course, the other. The Fed may surprise with this by being content to wait and watch. It makes complete sense not to join the markets preferred narrative and watch to see how the US-China trade dispute evolves, and to monitor the progress of the previous mid-cycle cuts through the system.
A no rate-cut decision should provide entertainment in the shape of President Trump's social media account. Expect the vitriol to flow. I would note, though, that if the US President wants lower funding costs and lending to flow to business, it would be beneficial if his government didn't run trillion-dollar annual deficits. That is a debt orgy that would make Caligula jealous and does rather tend to crowd out the private sector's borrowing needs.
In Asia, both Vietnamese and Thailand industrial production data disappointed yesterday, implying that the trade war continues to make its presence felt in the factory of the world. Luckily EM bonds and currencies are listening to the beat of the rate cut drum for now and doing quite well. That could hit a pothole early tomorrow morning though. The Asia calendar is bare today as the region awaits the main act in the US this evening.
Equities
The US earnings season continued unabated overnight with Wall Street finally edging lower after a robust one-week run to record, or near record highs. Facebook will be today's highlight with the social network likely to announce improved profits and a series of likes from analysts. Its timing is rather fortuitous for a company that usually courts publicity, often for all the wrong reasons. Whatever their results, it will be drowned out in the noise of the FOMC.
The S&P 500 edged 0.08% lower, the Nasdaq dropped 0.59%, and the Dow Jones Industrial eased 0.07%. In the greater scheme of things, the drops were minuscule. They likely reflect position lightening ahead of quite a bit of event risk for the remainder of the week, rather than overnight earnings. With noisy equity markets, it is essential to put earplugs in and keep one's eyes on the prize.
Asia has taken a more cautious approach ahead of the FOMC tonight, with position reduction seeing most regional bourses lower. The Nikkei 225 has fallen 0.30%, the Shanghai Comp and Kospi are 0.4% lower, and the ASX 200 is 0.60% lower.
FX
The Euro rallied against the greenback overnight, coat-tailing the extended Brexit deadline. The single currency regained 1.1100 and rose to 1.1115. Gains will be limited ahead of this evening's US rate decision.
Elsewhere the Sterling was almost unchanged at 1.2860 as the Brexit extension was balanced by the UK Parliament voting for a December 12th general election. The calm is unlikely to last as we get into the campaign proper.
The dollar index was almost unchanged at 97.60. EM currencies continue to outperform on the month as trade tensions ease. The FOMC holding rates could cause some short-term pain to recent EM longs, but the effects will be transitory. The US-China trade deal carries far greater weight, and the noises from both sides continue to be positive on progress.
Oil
Oil's correction continued overnight with Brent crude finished unchanged at $61.60 a barrel despite falling below $61.00 in early US trading. WTI though, fell 0.70% to $55.60 after falling below $55.00 initially, after the API Crude Inventories announce a 592k barrel increase.
There was nervousness about the crude inventory build overnight as well as pre-Fed position squaring. The sharp bounce by both contracts though to close mid-range is encouraging. It implies that prices have reached equilibrium for now, although official US inventories data this evening will temper further rallies today.
Gold
Gold fell slightly overnight, reflecting a directionless day for the yellow metal. Gold finished the session 0.33% lower at $1488.00 an ounce.
Tonight's FOMC rate decision is the most important catalyst for gold's next direction, with a cut likely providing substantial support and propelling it back about $1500.00 an ounce. Conversely, a no-cut decision could see gold est longer-term support at $1475.00 an ounce.