Risk on Post FOMC See’s Bitcoin Top 21k
It was a busy session for markets overnight with a host of economic data and an FOMC meeting for traders to digest.
The Federal Reserve held interest rates as expected and effectively confirmed they will remain at record lows until at least 2023. The Fed’s economic projections saw growth revised higher and unemployment revised lower over the next three years, and inflation is expected to rise to 2% by 2023. Furthermore, the Fed have vowed to continue their bond purchase program until “substantial further progress” is made. Talking to reporters after the interest rate decision, Jerome Powell said the Fed are hopeful that US may achieve widespread herd immunity by midway next year and that the major issues are “over the next three, four, fives months”.
Following the meeting bitcoin (BTCUSD) broke convincingly to a new record high and broke through 20k and 21k with apparent ease. Ethereum (ETHUSD) also made a marginal cycle high and now trades around 630, and Ripple (XRPUSD) produced a bullish outside day to suggest its recent correction may be nearing an end. Equity indices and AUD and NZD also rose to new highs in line with risk-on sentiment.
On the data front, a pattern emerged in PMI data for UK and Europe, with manufacturing expanding and services contracting. Yet data from Europe had the upper hand over the UK, with all headline PMI’s for France, Germany and the Eurozone exceeding expectations. The UK’s composite PMI crept over 50 to show expansion at 50.7 versus 49 prior, yet this is far below the 51.3 forecast. Furthermore, with parts of the UK back into lockdown then we expect the economy to shrink form here.
In the US, Markit’s manufacturing and services PMI expanded by 56.6 and 55.3 respectively, although retail sales disappointed and fell -1.1% versus -0.3% forecast. This comes as quite a surprise given it includes sales from Black Friday which in recent years has seen spending surge ahead of New Year sales.
Whilst Canada’s inflation data beat estimates, it still remains below BOC’s (Bank of Canada) 2% target so the central bank will remain reluctant to raise rates for some time.
The Fed Upgrades it’s Economic Outlook
The full table for economic forecasts can be seen on the Federal Reserve website.
Gross domestic product (GDP) has been upgraded between 2020 to 2022. Real GDP for 2020 is now seen at -2.4% versus -3.6% in September’s meeting, 4.2% in 2021 compared with 4% previously and 3.2% in 2022 compared with 3% prior.
Unemployment has also been given a facelift, which was revised to 6.7% in 2020 versus 7.6% previously. The Fed also expect unemployment will gradually reduce over the next three years to 5%, 4.2% and 3.7% by 2020.
Interestingly, they do not expect inflation to break above 2% by 2023. This is an important point to note because the Fed are happy to allow inflation to ‘run hot’ without raising interest rates. So if they do not expect inflation to even hit target, let alone run hot (exceed their target) then raising rates is clearly not on the Fed’s agenda. In turn this will keep downward pressure on central bank interest rates across the globe, which likely means asset prices will remain inflated and money remains cheap. It should therefore be no surprise to see the forecast for rates to remains at 0.1 through to 2023.
With Low Rates Here to Stay, The Usual Rules Still Apply
With low interest rates here to stay, the usual correlations held true overnight. The US dollar index (DXY) closed to its lowest level since April 2018 and its session low was just 11 points above 90. Given the significance of this number and that the market has traded lower for five consecutive sessions, then a minor rebound appears possible from a technical perspective. Yet the macro outlook very much remains bearish for the dollar.
The Australian dollar reached a 2.5 year high of 0.7578 and the euro broke above 1.2200 for the first time since April 2018. The British pound hit an intraday 33-month high but has since retreated below 1.3550.
As noted in yesterday’s report, equities were trading higher in anticipation of lower-for longer rates and hopes of extended stimulus. The Fed did not disappoint, and stock market indices extended their bullish moves. Among the major indices we track it was the DAX 30 (DE30) which took the lead and closed 1.5% higher, in line with our bullish bias.
Also taking advantage of the USD, commodities were broadly higher with Thomson Reuters CRB index hitting its highest level since March. WTI and Brent broke above $48 and $50 respectively, gold (XAU/USD) rose by 0.5% whilst silver (XAG/USD) put in a more impressive 3.5% rally.