Dovish tone of FOMC minutes boosts market sentiment

• Markets have welcomed the minutes from the November FOMC meeting released yesterday, which showed that ‘a substantial majority of participants judged that a slowing in the pace of increase would likely soon be appropriate.’ This reaffirms our expectation that the next move upwards in December will be 50bps, rather than a fifth consecutive 75bps hike. However, the level at which rates would top out was not made any clearer by the minutes, which deployed the ambiguous term ‘various participants’ noting that ‘their assessment of the ultimate level of the federal funds rate that would be necessary to achieve the goals was somewhat higher than they had previously expected.’ Moreover, concerns around the risk of the lagged effect of cumulative hikes seemed to be rising, and officials warned that the risk of a recession was about as likely as narrowly avoiding one.
• Data yesterday was largely about PMI numbers, with a number of major European economies releasing their November prints. In a positive development for the economic outlook, the surprises were broadly to the upside, although they remained in contractionary sub-50.0 territory. Both Germany and France’s manufacturing PMIs came in above expectations, contributing to the aggregate Eurozone measure recording 47.3 compared with the predicted 46.0. This was also higher than the previous month’s 46.4. Germany factories recorded an improvement in the supply shortages which have constrained output throughout 2022, while responses across the single currency bloc indicated that inflation could peak soon. Services contracted at the same pace as seen in October, coming in at 47.8 for the second month running, better than the predicted 47.0. In the UK, the November manufacturing PMI was flat on October at 46.2, again better than the predicted 45.8. Services were also flat on the previous month, at 48.8.
• In addition to the FOMC minutes, there were a round of data releases from the US yesterday ahead of the Thanksgiving holiday today. These were mixed, with the durable goods orders for October surprising to the upside at 1.0% m/m (predicted 0.4% and compared with 0.3% in September). Stripping out transportation, growth was 0.5% m/m and there was a 0.7% m/m gain in core capital goods orders, suggesting that US firms are not being overly troubled by rising interest rates as yet. New home sales surprised to the upside also, hitting 632,000 in October compared with consensus expectations of 570,000.
• On the other hand, initial jobless claims in the week to November 19 came in modestly above expectations at 240,000 compared with 225,000. This was a three-month high for the measure and could be an indication that the Fed’s tightening measures are finally starting to have a tangible impact on the labour market. Meanwhile, the PMI survey for November came in sharply below expectations. The manufacturing survey dropped to 47.6, down from 50.4 and missing projections of a neutral 50.0. Services also disappointed, slipping to 46.3, down from 47.8 in September and missing the projected 48.0.

Key Economic Data and Events

• US markets are closed today for the Thanksgiving holiday
• 13:00 Germany IFO business climate, November. Forecast: 85.0
• 15:00 Turkey one-week repo rate decision. Forecast: 9.0%

Fixed Income

• The minutes of the November FOMC seemed to support a stepdown in the scale of rate hikes at the December meeting with markets firming up expectations for a 50bps hike. The minutes also didn’t give much clarity on the ultimate peak in the Fed Funds rate, noting that “various” officials thought it needed to be higher than previously assumed. Treasury markets took the minutes as relatively dovish and rallied as a result. The 2yr UST yield dropped almost 4bps to 4.4773% while the 10yr yield dropped by 6bps to 3.6927%. Markets will be closed today for Thanksgiving.
• Bond markets in Europe also ended the day higher with some countries getting strong gains. Gilt yields dumped almost 13bps to 3% while the 10yr bund yield fell 5bps to 1.923%. South African 10yrs also gained with yields down 10bps to 10.714%.

FX

• The dovish tone of the FOMC minutes helped to sink the dollar against peer currencies. EURUSD rallied by 0.9% to 1.0397 while GBPUSD soared, up by 1.4% to 1.2055. USDJPY also settled in favour of the yen, down 1.1% at 139.60.
• Commodity currencies also pushed higher, led by the antipodeans. AUDUSD added 1.3% to 0.6733 while NZDUSD added 1.5% to close at 0.6243. USDCAD was more modest by comparison, with a drop of just 0.15% to 1.3354.

Equities

• The day started positively in equity markets, with all the major Asian markets closing higher. The Hang Seng and the Nikkei both gained 0.6% and the Shanghai Composite closed up 0.3%.
• In Europe, the DAX closed almost flat, up less than half a percentage point, while the FTSE 100 added 0.2% and the CAC 0.3%.
• US equity markets took the FOMC minutes as a dovish indicator from the central bank, and a bout of risk-on sentiment ensued. The Dow Jones, the S&P 500 and the NASDAQ added 0.3%, 0.6% and 1.0% respectively.
• Locally, the DFM dropped -0.1% while the ADX ended the day 1.3% higher.

Commodities

• Oil markets are waiting for more clarity on the oil price cap level as the EU is reportedly looking at a level between USD 65-70/b. That has been rejected by some as too favourable for Russia and is being pushed for by others that rely on shipping as a vital part of their economy. A high price cap would likely be more beneficial in keeping oil supplies uninterrupted as it would mean prices close to what Russia is already receiving. Brent futures sank on the news, down 3.3% to USD 85.41/b while WTI dropped by 3.7% to USD 77.94/b.
• Crude inventories in the US fell by 3.7m bbl last week while both gasoline and distillate stockpiles were higher. Oil production was unchanged at 12.1m b/d.

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