The Federal Reserve said it will double the pace at which it’s scaling back purchases of Treasuries and mortgage-backed securities, putting it on track to conclude the program in early 2022.
Projections published alongside the statement showed officials expect three quarter-point increases in the benchmark federal funds rate will be appropriate next year, according to the median estimate.
“If inflation is more persistent than they [Fed policymakers] think and UR keeps on falling I could see four rate hikes in 2022,” said Harvard professor Jason Furman.
The local currency was 1 per cent higher near 8.30am AEDT, extending very modest pre-Fed statement gains. The Bloomberg dollar spot index turned negative. Bitcoin leapt to $US49,200 after having fallen to $US46,615 earlier.
The yield on the US 10-year note was 1 basis point higher to 1.45 per cent at 4.30pm in New York.
As for when the Fed may begin to lift rates, omicron may be a key determinant, according to Pantheon Macroeconomics.
“If it weren’t for omicron, we’d expect it in March, but experience elsewhere signals that the US is about to see a massive, unprecedented surge in COVID-19 cases, with unknowable – but likely temporary – consequences for the economy. We think this will delay the first hike until May, with the next moves in September and December.”
Today’s agenda
Local: Consumer inflation expectations December at 11am AEDT, November labour force at 11.30am AEDT
TD Securities is forecasting a 200,000 jobs gain last month: “The labour market recovery should gather momentum from the rollback in restrictions and we don’t expect a repeat of last month poor outturn. However, seasonal adjustment may place a drag on the November print.
“We expect the participation rate to jump to 65.5 per cent from 64.7 per cent due to the reopening and could drive u/e rate down to 5.1 per cent (Oct: 5.2 per cent) despite the significant expected job gains.”
Overseas data: NZ third quarter GDP at 8.45am AEDT; Markit December manufacturing for Euro zone and the UK; Markit December services for Euro zone; European Central Bank policy decision; Bank of England policy decision; US November housing starts, building permits and industrial production
Market highlights
ASX futures up 40 points or 0.6 per cent to 7253 near 8am AEDT
- AUD +1% to 71.75 US cents
- Bitcoin on bitstamp.net +1.3% to $US49,193.50 as of 8.30am AEDT
- On Wall St: Dow +1.1% S&P 500 +1.6% Nasdaq +2.2%
- In New York: BHP +0.3% Rio -0.2% Atlassian +3.6%
- Tesla +1.8% Apple +2.9% Amazon +2.5% NYSE Fang +1.9%
- In Europe: Stoxx 50 +0.4% FTSE -0.7% CAC +0.5% DAX +0.2%
- Spot gold -0.3% to $US1765.45/oz at 1.05pm New York time
- Brent crude -0.2% to $US73.58 a barrel
- US oil -0.4% to $US70.47 a barrel
- Iron ore -0.8% to $US111.00 a tonne
- 2-year yield: US 0.66% Australia 0.60%
- 5-year yield: US 1.24% Australia 1.29%
- 10-year yield: US 1.45% Australia 1.55% Germany -0.37%
- US prices as of 4.31pm in New York
From today’s Financial Review
States shrug off surge in virus cases: States continued to reopen despite business and community anxieties over surging cases, and NSW predicting it could face 175,000 cases a week by the end of January.
Unemployment down, wages up, MYEFO sets up budget repair: The mid-year budget update forecasts one million new jobs will be created over the next four years.
New ACCC chairwoman is Murdoch family insider: Gina Cass-Gottlieb has vowed to step away from all private roles, including acting for Lachlan Murdoch in the trust that manages the family’s stake in Fox and News.
Chanticleer: Westpac gets the protest vote it deserves: Westpac chairman John McFarlane tried empathy and pragmatism at the bank’s AGM, but it didn’t calm unimpressed investors.
United States
Andreessen Horowitz-backed Samsara on Wednesday priced its initial public offering (IPO) at $US23 per share, at the upper end of its target range, valuing the software company at $US11.5 billion.
Retail sales rose 0.3 per cent last month after surging 1.8 per cent in October. Sales have now risen for four straight months. Economists polled by Reuters had forecast retail sales rising 0.8 per cent.
Morgan Stanley on the sales data: “Coming into the retail sales report, we were tracking +4.0 per cent annualised growth in real PCE in 4Q21 and real GDP at +7.4 per cent, with elevated PCE inflation widening the gap between real and nominal PCE.
“Incorporating today’s retail sales release and upward revisions to our services spending assumptions in November, we lower our real PCE tracking 20bp to +3.8 per cent and we lower real GDP tracking 10bp to 7.3 per cent, with consumption providing a 2.6pp contribution to GDP.”
Oxford Economics on the Fed: “The December FOMC policy statement crystalised the Fed’s hawkish pivot. The term “transitory” was benched in favour of “elevated”, the pace of QE tapering was doubled, and the Fed hinted that rate liftoff would occur if the economy is on track to reach full employment as the inflation goal has been met.”
Charlie Ripley, senior investment strategist for Allianz Investment Management: “The Fed is likely going to continue to tread lightly as they walk the fine line of attempting to cool inflation without slowing the economy too dramatically.”
Ripley said investors should interpret the rate outlook cautiously given that four members of the forecast won’t be voting for policy next year.
“Additionally, it is very likely the pivot on tapering opens the door for more optionality as the Fed approaches rate lift off next year. The reality is uncertainty surrounding Fed policy is high and will likely remain that way as Chairman Powell attempts to unwind the largest monetary stimulus package in history without disruption.”
Europe
UK hits record daily caseload as omicron reaches warp speed: Officials predict ‘staggering’ increases in COVID-19 infections in the run-up to Christmas in ‘the most significant threat since the start of the pandemic’.
European royalty casts eye over wealthy Australians: The Princely House of Liechtenstein will tip its toes in the Australian market as its LGT Group private banking arm acquires Sydney-based Crestone.
European shares rose on Wednesday helped by stronger technology and healthcare stocks.
The pan-European STOXX 600 closed 0.3 per cent higher to end a five-session losing streak. Technology stocks led gains, adding 1.3 per cent after a recent bout of selling while healthcare stocks climbed 1.1 per cent
A disappointing earnings update from Zara owner Inditex weighed on retail shares and, along with lower oil stocks, capped the broader gains.
The STOXX 600 is up about 1.7 per cent so far in December, in what is typically a strong month for global equity markets.
London’s FTSE 100 dropped 0.7 per cent, a sixth consecutive decline and the worst losing streak since the pandemic hit in March 2020, on weakness in retail, oil and travel stocks.
Data showed British consumer price inflation soared to a more than 10-year high of 5.1 per cent year-on-year in November ahead of the Bank of England’s meeting on Thursday.
The European Central Bank is also meeting on Thursday, with policymakers expected to decide how to adapt the bank’s regular asset purchase programme (APP) once the much larger pandemic-fighting PEPP scheme ends in March.
Asia
China stocks ended lower on Wednesday, as healthcare firms slumped on concerns that the US would place some biotech firms on investment and export blacklists.
The blue-chip CSI300 index fell 0.9 per cent to close at 5005.90, while the Shanghai Composite Index lost 0.4 per cent to 3647.63.
Consumer staples lost 1.5 per cent amid resurgent COVID-19 cases and China’s zero-tolerance policy that hurt domestic consumption. The latest outbreak has disrupted activities in parts of China’s biggest manufacturing hubs.
In Hong Kong, the Hang Seng Index fell 0.9 per cent to 23,420.76, while the China Enterprises Index lost 0.9 per cent to 8342.91.
The healthcare sub-index slumped more than 9 per cent, with Wuxi Biologics leading the decline and plunging nearly 20 per cent, the biggest percentage decliner on the HSI and dragged down the benchmark 126 points.
The Hang Seng Tech Index lost 1.5 per cent, with Meituan down 1.8 per cent, while Alibaba Group gained 1.9 per cent.
Currencies
Investors are making a mistake by thinking that UK interest rates will not rise as high as 3 per cent if the current surge in inflation proves persistent, according to the incoming head of macroeconomic analysis for the country’s budget watchdog.
Speaking to by lawmakers on the Treasury Select Committee, David Miles, a former Bank of England rate-setter, said he was seeing evidence of generalised inflation gathering in the UK through higher wages.
The former Morgan Stanley economist spoke after data showed inflation in November exceeded 5 per cent months before the BOE had forecast. The figure will add pressure on the central bank to act, but economists expect policymakers on Thursday to keep interest rates at 0.1 per cent as they weigh the risks from the omicron variant of the coronavirus.
Asked about a scenario published alongside the October budget in which interest rates get to 3.5 per cent, Miles said: “If we had persistent inflation that doesn’t fall away after spring, then we could see really quite significant rises in interest rates.”
Commodities
China steel demand tipped to fall as construction slows: The government’s official forecaster says steel production is on track to fall 5 per cent this year.
Chinese steel futures hit a one-week high on Wednesday, after data showed industrial output in the world’s biggest producer grew faster than expected in November.
Construction steel rebar’s most-active May contract on the Shanghai Futures Exchange ended daytime trading 1.1 per cent higher at 4441 yuan ($US697.82) a tonne, after touching 4468 yuan earlier in the session, its strongest since December 8.
The Baltic Exchange’s dry bulk sea freight index declined more than 9 per cent on Wednesday to its lowest level in three weeks, weighed down by the capesize vessel segment, which recorded its biggest daily percentage decline in over a year-and-a-half.
The overall index, which factors in rates for capesize, panamax and supramax vessels, shed 267 points, or 9.1 per cent, to 2665, its lowest since November 24.
Australian sharemarket
Tech shares lead ASX 0.7pc lower in broad sell-off: Shares fell in sentiment-driven selling that hit four out of five blue chips on the Australian stock exchange on Wednesday with tech stocks among the hardest-hit.
M&A boom and IPO tsunami fuel a record-breaking 2021: A perfect storm of dealmaking conditions saw record M&A volumes this year, and the Australian market rode the largest wave of IPOs in decades
