Credit Agricole
USD: Don’t count your hawks before they hatch. Today’s Fed meeting is easily the most important event of the week, overshadowing the latest pandemic developments as well as a total of 20 central bank meetings (six of which in G10). Recent conversations with clients have suggested that the FOMC is widely expected to switch to a more hawkish policy stance in December by speeding up QE taper and signalling (via the updated ‘dot plot) rate hikes in 2022. That being said, we further note that the bar for a hawkish surprise today maybe too high with the US rates markets already pricing in around five rate hikes by the end of 2023.
Should the Fed dot plot signal two rate hikes in 2022, followed by another two (or even three) in 2023 (as we would expect), this could still point at less aggressive and frontloaded tightening than expected by the markets at present. In addition, the long-term inflation and employment projections can further reflect the Fed’s long-held belief that growing labour force participation should limit any potential overheating of the economy as cost-push inflation starts abating in 2022.
Last but not least, there will be a lot of focus on the FOMC’s view on the pandemic and its impact on the near-term economic outlook. We think that a less hawkish Fed today could be a boon for risk sentiment and can weigh on the USD vs risk-correlated currencies. At the same time, the USD could remain supported vs low-yielding safe havens like the JPY and CHF if the UST yield curve bear steepens (using UST 2s10s) in the wake of the meeting.
Citi
European Open
A typical pre-FOMC session in Asia, with thin liquidity and little movements to note. USD held steady while UST yields ticked slightly lower. NZ bonds rallied as the government cut the issuance plan over 4 years. Bond yields were down -3.6bps on the day, while NZD traded flat. China saw no change to its MLF and a mixed retail sales and IP release, following the Securities Times report today, citing analysts, that a reduction in the MLF rate could trigger a cut in Loan Prime Rate ahead of the holiday season. Oil ticked lower while equities traded flat.
The limelight today is on the FOMC at 19:00 GMT, followed by Fed Chair Powell’s presser at 19:30 GMT. This will follow Retail Sales data 13:30 GMT for the US. CPI prints will be seen in GBP at 07:00 GMT and CAD at 13:30 GMT, while SEK sees Prospera's Big Swedish Inflation Expectations Survey at 07:00 GMT. Over in the EM space, we see ZAR CPI & PPI at 08:00 GMT, BRL Economic activity at 12:00 GMT, RUB GDP at 16:00 GMT and ARS CPI at 19:00 GMT.
Join us today for FedLive: Citi Reacts to the Latest FOMC Decision at 20:30 GMT. Citi offers an exclusive live reaction to the December 2021 FOMC decision and Federal Reserve Bank Chair Jerome Powell's subsequent press conference.
FOMC Preview – Speeding up taper, bringing rate hikes earlier. Citi Economics believes the outcome of this week’s FOMC will likely to feature a doubling of the pace of tapering of asset purchases to USD30bn per month. “Dots” will drift higher with a median most likely for two but possibly for three hikes in 2022. “Transitory” will be “retired” from the post-meeting statement as a descriptor for inflation as projections for core inflation in 2021 and 2022 are likely revised up.
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With 10 years of experience as a private trader and professional market analyst under his belt, James has carved out an impressive industry reputation. Able to both dissect and explain the key fundamental developments in the market, he communicates their importance and relevance in a succinct and straight forward manner.