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The Early

21 Sep 2017 07:10

Markets: get the message

The market response to the FOMC statement suggested that the commencement of the balance sheet unwind, and the prospect of another rate hike this year was not entirely priced in. Treasury yields moved higher, the US dollar firmed and the implied probability of that +25bp move in December climbed above 70%. For equity investors, the main signal is that the recent rotation away from the bond proxies and into financials and other 'rising rate winners' should continue to run.

Yesterday a mid-session jump in sterling presented another challenge for the FTSE 100, although the move was short-lived The senior index closed lower, with the consumer staples continuing to struggle; beverages lost another -2.53% and tobacco -0.79%, offsetting a good day for general retail +1.61% and media +0.92%. Mid and small caps were flat.

The rest of Europe was mixed, with the Spanish banking sector struggling in response to renewed political risk, this time surrounding the Catalan independence vote. Within the Euro Stoxx index energy outperformed +0.87% and technology lagged -0.68%.

The results of our September Investor Survey are published separately today. Market corrections often occur at periods of excessive investor optimism; the tone of this edition suggests that is unlikely be a threat to the UK equity market any time soon, as the overall message remains one of caution. The recent shift in Bank of England messaging, and its impact upon sterling and the FTSE 100, has only added to the confusion.

Overnight. The S&P dipped briefly on the Fed announcement but son regained its positive momentum, paced by energy +0.69%, industrials +0.68% and financials +0.62%, and ended with its sixth new high in the past seven sessions. Asian equities were mostly higher, with the Nikkei helped by a softer yen. It should be a positive start in Europe.

Early numbers. Dow +0.19%, S&P +0.06%, NASDAQ -0.08%, VIX 9.78; US 10yr 2.27%; Nikkei +0.32%, Hang Seng -0.06%, Shanghai Comp +0.13%; £=$1.3484, £=€1.1346, Brent $56.18/bbl, Gold $1297.86; FTSE 100 indication +1 (at 6.40 UK).

Macro: still shopping

UK retail sales delivered an upside surprise in August as headline volumes grew by +1.0% MoM, well ahead of market consensus, taking the annual rate to +2.4% YoY. The ONS characterised 'non-essential' spending as particularly strong, and there may also have been a boost from 'staycations' and more foreign visitors, both a likely consequence of sterling's weakness. However the day's other UK economic news was more mixed, as the Bank of England's agents reported pay increases remain in the modest 2-3% YoY range, not yet reflecting the MPC's expressed views about the impact of spare capacity being eroded. Meanwhile, the OECD downgraded its CY2018 GDP growth forecasts for the UK to just +1.0% YoY, well below the current market consensus.

The Fed, like most central banks, remains puzzled by the absence of inflation, but still believes that falling US unemployment will soon see domestic price pressures building. Hence it will commence the reduction of its $4.2tln holdings of US Treasuries and MBS next month, at an initial pace of up to $10bn/month. The 'dot plot' projections of individual members' rate projections showed 11 of 16 now expecting one more +25bp increase this year.

The Bank of Japan left its policy stance unchanged as expected, but one new member expressed dissatisfaction with the likely prospects of current measures achieving the +2% YoY inflation target.Today's events. UK Aug PSNB (9.30) £6.5bn; US Sep Philly Fed (1.30) 17.2; ECB President Draghi speech (2.30).

Ian Williams
Economics & Strategy
020 7418 8819
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