Final FOMC of 2021 begins today

• The Federal Reserve begins its final FOMC meeting of 2022 today with a renewed focus on bringing inflation to heel. While no change in policy rates is expected at this week’s meeting, the Fed may decide to accelerate its pace of tapering asset purchases, perhaps as much as doubling the USD 15bn monthly pace it is currently running. The Fed will also release economic projections for next year where the median is likely to show at least two hikes for 2022 compared with a more balanced outlook when its last projections were released. A faster taper timeline could mean rates start to go higher as early as Q2 next year if the Fed chose to start liftoff immediately after bringing asset purchases to an end.
• Industrial production in Turkey expanded in October, beating market expectations for a decline. Total output increased by 0.6% m/m and was up 8.5% y/y. Data also showed that Turkey recorded a current account surplus in October thanks to higher exports and tourism revenue. Most of the surplus came from services exports as trade recorded a narrow surplus of just USD 164m. The rapid depreciation of the Turkish lira in recent months may serve to hasten the expansion of the current account surplus as import demand softens and Turkish exports become relatively more affordable.
• Inflation in India came in softer than expected in November, rising by 4.9% y/y compared with market estimates of greater than 5% price gains. Food prices gained by around 1.9% y/y while fuel prices rose by more than 13%. The more modest than expected inflation print will likely be welcomed by the Reserve Bank of India, which held policy rates at its meeting earlier this month.

Today’s Economic Data and Events

• 11:00 UK ILO Unemployment rate 3m October: forecast 4.2%
• 17:30 US PPI Final demand m/m November: forecast 0.5%
• FOMC begins

Fixed Income

• US Treasury markets rallied into the start of today’s FOMC meeting as risk-sentiment soured overnight. While we don’t expect a change in policy rates at this meeting the Fed may choose to accelerate its pace of tapering asset purchases beyond the USD 15bn per month and bring forward the timeline for rate hikes in 2022. Yields on the 2yr UST fell 2bps to 0.6324% while the 10yr dropped almost 7bps to 1.4156%.
• Market action was similar in European benchmarks with longer dated bonds outperforming the front end. Yields on 10yr bunds fell by more than 3bps to -0.384% while the 10yr gilt yield dropped 4bps to 0.695%. The moves come ahead of decisions from both the ECB and BoE later this week where no change in policy is expected.

FX

• Currency markets showed renewed dollar strength leading into the FOMC. The broad DXY index added 0.2% to 96.317, benefitting both from expectations of tighter US monetary policy ahead and broad based risk aversion overnight. EURUSD fell 0.26% to 1.1284 whiled USDJPY rallied modestly to 113.54.
• The threat of more restrictions on activity is weighing heavily on GBPUSD which fell overnight by 0.4% to 1.3217, its lowest level in more than a year. The risk-off tone took commodity currencies weaker as well with USDCAD up 0.67% to 1.2807 and both AUD and NZD lower by around 0.6% each.

Equities

• The day started with a moderate amount of positivity in Asian equity markets yesterday, with markets in India generally gaining and the Sensex adding 0.9%. Earlier in the day the Shanghai Composite had gained 0.4% and the Nikkei 0.7%. However, this morning these East Asian markets have fallen back into the red, following on from the risk-off tone seen in Europe and the US yesterday.
• In Europe, the FTSE 100 was the major loser, dropping -0.8% as concerns over Omicron-related restrictions hit hospitality and travel stocks in particular. The CAC lost -0.7% while the DAX closed flat.
• The risk-off tone continued in the US as the S&P 500 dropped -0.9% from its record high. The Dow Jones also lost -0.9% while the tech-heavy NASDAQ, most vulnerable to faster monetary tightening by the Fed, lost -1.4%.

Commodities

• Oil prices closed lower overnight with Brent futures down 1% to USD 74.39/b and WTI falling by 0.5% to USD 71.29/b. OPEC released its monthly oil market report overnight and actually revised its demand expectation for Q1 2022 higher as it believes the global economy is “better equipped” to deal with Covid-19, including the new Omicron variant. The higher demand forecast helps to bring down, on forecasts at least, a pending market surplus at the start of next year as OPEC+ carries on with increasing production.
• Elsewhere Saudi Arabia’s energy minister again threatened “speculators” in the oil market, noting that the December OPEC+ meeting is technically still in sessions and the producers’ bloc could revise production targets at short notice. Prince Abdulaziz bin Salman told speculators they would be “ouching like hell” if markets endured another sell-off like the one endured during the US Thanksgiving holiday period.

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