• 202 days Could Crypto Overtake Traditional Investment?
  • 207 days Americans Still Quitting Jobs At Record Pace
  • 209 days FinTech Startups Tapping VC Money for ‘Immigrant Banking’
  • 212 days Is The Dollar Too Strong?
  • 212 days Big Tech Disappoints Investors on Earnings Calls
  • 213 days Fear And Celebration On Twitter as Musk Takes The Reins
  • 215 days China Is Quietly Trying To Distance Itself From Russia
  • 215 days Tech and Internet Giants’ Earnings In Focus After Netflix’s Stinker
  • 219 days Crypto Investors Won Big In 2021
  • 219 days The ‘Metaverse’ Economy Could be Worth $13 Trillion By 2030
  • 220 days Food Prices Are Skyrocketing As Putin’s War Persists
  • 222 days Pentagon Resignations Illustrate Our ‘Commercial’ Defense Dilemma
  • 223 days US Banks Shrug off Nearly $15 Billion In Russian Write-Offs
  • 226 days Cannabis Stocks in Holding Pattern Despite Positive Momentum
  • 227 days Is Musk A Bastion Of Free Speech Or Will His Absolutist Stance Backfire?
  • 227 days Two ETFs That Could Hedge Against Extreme Market Volatility
  • 229 days Are NFTs About To Take Over Gaming?
  • 230 days Europe’s Economy Is On The Brink As Putin’s War Escalates
  • 233 days What’s Causing Inflation In The United States?
  • 234 days Intel Joins Russian Exodus as Chip Shortage Digs In
  1. Home
  2. Markets
  3. Other

FOMC and Trade Figures Analysis

The Fed's only concrete change in today's FOMC statement is the addition of the word "substantial" to its description of the cooling housing market. This is a resounding transition towards admitting the protracted slowdown in the housing market. It is one thing is for the markets and the Fed to notice the repercussions of the extended slowdown in housing. Yet it's another thing for the Fed to tell the market it is aware of the prolonged slowdown.

The other change in the statement is the way in which it communicated its assessment that GDP will return to trend growth. This time, it acknowledged that although "recent indicators have been mixed", it expects growth to progress at a moderating pace over coming quarters.

By making the word "substantial" as the sole change to its statement, the FOMC signals to the market that despite the slowdown in housing, it continues to describe "readings on core inflation have been elevated". This affirmation of inflation vigilance aims at preventing excessive downside in yields at a time when the core PCE price index remains at the top of the Fed's preferred range.

As in other Fed decisions, the prolonged FX effect of today's FOMC statement is expected to carry through the Asia's and Europe's Wednesday's sessions where traders will reintroduce a fresh negative bias on the US dollar. It is important to remind that the dollar was under pressure in Tuesday European trade on improved investor sentiment in Germany and higher than expected rise in UK CPI -- both credible reasons for keeping the door for further tightening by the BoE and the ECB. The dollar recovery was mainly due to squaring positions ahead of this afternoon's Fed decision.

We mentioned in Thursday morning's note (before payrolls) that that "Keeping fundamentals aside, we reiterate our short-term forecast for a rebound in the dollar, bond yields and a pullback in gold (until Tuesday's FOMC meeting.

We expect modest dollar declines in Wednesday's Asian session, with EURUSD testing the 1.3340-45 resistance, USDJPY revisiting 116.30 and GBPUSD eyeing 1.9750. FX may then stabilize ahead of Wednesday's release of the November retail sales, which are expected to show a notable rebound (+0.3% in both core and headline following -0.4%) due to pre-holiday related sales. It is this holiday effect, however, that will prevent the dollar from staging any substantial recovery from any strong figures.

"Substantial" makes Fridays' CPI extra crucial

In the event that Friday's release of the November core CPI remains below 0.2%, then we should expect sustain considerable dollar downside on the rationale that the Fed will shift its worry from the uncomfortable levels of inflation to the substantial housing slowdown. For this reason, the effect of the word "substantial" in today's statement will prolong into the rest of the year.

Finally, market emphasis will shift from Washington to Beijing as central bank rhetoric and currency diplomacy overlap during the china visit by Treasury Secretary Paulson and Fed Chairman Bernanke. There will be more on this point in our next note.

Do Falling US Imports Portend Broader Slowdown?

The bigger than expected 8.4% decline in the US October trade deficit to $58.9 bln, was the sharpest monthly decline in over 5 years. The trade imbalance was the lowest since August 2005. Imports of petroleum products fell 17% to $21.8 bln, the lowest level since July 2005. Notably, petroleum imports as a percentage of total imports eased to 14% from the 15.3% high attained in the past 2 months. But the improvement in the deficit is also a result of rising exports as these increased 2.2% to $123.6 bln, while total imports fell 2.7% to $182.5 bln.

Undoubtedly, the falling dollar and strengthening European economies are playing a major role in helping close the US trade gap. But it's also worth pointing that the decline in US imports isn't solely reflected in falling oil imports but also in a protracted retreat of demand for foreign goods. US imports of industrial supplies fell 5.9% to $48.5 bln in October, the lowest in 8 months. Whether the 17% decline in imports over the past 2 months is a reflection of an overall retreat in US demand requires further evidence. As the chart shows below, the last time industrial supply imports fell by such a sharp rate was during the 2001 recession.

The sharp retreat in the October trade gap could prop Q4 GDP by as much as 0.3%, further supporting prevailing expectations of a pickup in Q4 growth. But the optimistic take on the economy may well shed more attention to the imports story.

 

Back to homepage

Leave a comment

Leave a comment