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Flat Futures Foreshadow FOMC Statement Despite Facebook Flameout

Futures are largely unchanged ahead of today's, if not the year's, key event: the FOMC meeting in which Janet Yellen will announce the end of QE3, and with that the market will finally realize that the training wheels from the past 6 years are off, if only until the next market tantrum, or European/Chinese gray swan, pushes the Fed right back in.

As Deutsche Bank observes, the Fed has been wanting to hike rates on a rolling 6-12 month horizon from each recent meeting but never imminently which always makes the actual decision subject to events some time ahead. They have seen a shock in the last few weeks and a downgrade to global growth prospects so will for now likely err on the side of being more dovish than in the last couple of meetings. They probably won't want to notably reverse the recent market repricing of the Fed Funds contract for now even if they disagree with it. However any future improvements in the global picture will likely lead them to step-up the rate rising rhetoric again and for us this will again lead to issues for financial markets addicted to liquidity. And so the loop will go on for some time yet and will likely trap the Fed into being more dovish than they would ideally want to be in 2015.

But for now, expect a creeping hawkishness to finally be realized by a broken market that has levitated on nothing but implicit and explicit Fed support for the past 6 years. In the meantime, for those curious how to trade today's FOMC, DB's Alan Ruskin notes that over the last two years the S&P 500 has on average been 0.35% down on the day of the statement when there is no press conference. When there is one the index is up 0.87%, perhaps reflecting the dovish nature of Bernanke and Yellen relative to the committee. There is also more volatility across different asset classes on press conference days. Alan speculates that this is perhaps due to the market's interpretation of the dots that appear at press conference meetings.

So will yesterday's epic short squeeze be undone? Tune in in just over 7 hours to find out.

In the meantime, despite yesterday's amazing Facebook flameout which rivaled the Antares rocket explosion, yet another rollercoaster night of Yen-carry levitation has assured that all initial losses in the Emini are made up futures are flat to start the day.

Turning to Asia markets are generally stronger across the board following the positive lead from the US. Bourses in Japan, Hong Kong, China and Korea +1.6%, 1.4%, +1.2% and +1.7% respectively as we type. Focusing on Japan, the September industrial production print surprised to the upside (2.7% mom v 2.2% exp) but all eyes will be on the conclusion of the Bank of Japan policy meeting on Friday for whether a refresh of policy is attempted or hinted at. Asian credit markets are also on a firmer footing overnight with IG spreads around 1-2bp tighter across benchmark names while new issues are also being well absorbed.

Looking at the rest of the day ahead, we’ve got a fairly quiet calendar in the US with just the mortgage application print to look forward to. in Europe the notable readings include the September retail sales for Spain and consumer confidence in France. All eyes will be on the FOMC statement today though.

Bulletin Headline Summary from Bloomberg and RanSquawk

  • Treasuries gain as market awaits FOMC policy statement at 2pm in Washington DC; Fed expected to keep “considerable time” language, end QE.
  • Fed won’t provide new economic projections, Yellen not scheduled for post-meeting presser; click here for Decision Day Guide
  • The end the Fed’s third round of bond purchases is proving to be a non-event for MBS, partly because even though the central bank won’t be adding more of the bonds to its balance sheet, it will still be buying enough to prevent holdings from shrinking
  • Bank of England Deputy Governor Jon Cunliffe said slowing inflation and a bleaker outlook for the economy justify keeping emergency stimulus for longer
  • EU said no nation has broken budget rules by a big enough margin to warrant immediate action, a move that gives France and Italy more time to win approval for their draft spending plans
  • Pimco, seeking to stem redemptions after its co-founder Bill Gross left unexpectedly, was dropped as manager of a $6.16b strategy offered by a unit of Prudential Financial Inc
  • Iraqi Kurdish fighters armed with mortars and Katyusha rocket launchers arrived in Turkey today on their way to the Syrian town of Kobani, where they’ll join the fight against Islamic State, according to live footage on NTV television
  • The U.S. vowed to continue its commercial space launch program just hours after a rocket carrying supplies to the International Space Station exploded over a Virginia launch pad
  • North Korean leader Kim Jong Un is seeking to erase the remaining influence of his dead uncle, executing about 10 senior Workers’ Party officials on charges from graft to watching South Korean soap operas, according to an aide to a South Korean lawmaker
  • Sovereign yields mostly lower. Asian and European stocks gain; U.S. equity-index futures mixed. Brent crude and copper gain, gold little changed

US Event Calendar

  • 7:00am: MBA Mortgage Applications, Oct. 24 (prior 11.6%) Central Banks
  • 2:00pm: Fed seen maintaining overnight bank lending rate of 0%-0.25%
  • Fed seen ending QE program
  • 11:30am: U.S. to sell $15b 2Y FRN
  • 1:00pm: U.S. to sell $35b 5Y notes

DB's Jim Reid Conludes the Overnight Recap

Two weeks ago today's FOMC conclusion was looking set to be a pretty exciting event. However the fact that the S&P 500 has rallied 9.03% off the intra-day lows that week to now only be around 1.3% off the all time highs probably means it will be a much more predictable affair. However it's likely that recent events will have had an impact in our opinion.

Our take is that the Fed has been wanting to hike rates on a rolling 6-12 month horizon from each recent meeting but never imminently which always makes the actual decision subject to events some time ahead. They have seen a shock in the last few weeks and a downgrade to global growth prospects so will for now likely err on the side of being more dovish than in the last couple of meetings. They probably won't want to notably reverse the recent market repricing of the Fed Funds contract for now even if they disagree with it. However any future improvements in the global picture will likely lead them to step-up the rate rising rhetoric again and for us this will again lead to issues for financial markets addicted to liquidity. And so the loop will go on for some time yet and will likely trap the Fed into being more dovish than they would ideally want to be in 2015.

On the specifics for today, DB's Peter Hooper expects the Committee to maintain a modestly dovish stance with relatively few changes other than those necessitated by the ending of QE. A big question mark will be as to whether they explicitly mention the recent volatility or tighter financial conditions similar to what they did in September last year. Peter doesn't think so as back then Treasury yields had climbed over 100bps and the labor market had showed signs of slowing which hasn't happened this time round. Peter thinks they are concerned about there being an 'investor put' if they make too much of the volatility of two weeks ago. For us though its easy for them to act like this now that markets have recovered but it might be a little circular. The rebound started with Bullard's about turn suggesting that QE might be extended and also as markets started to price out 2015's interest rate rises. The rally soon got extra legs when speculation arose that the ECB might be considering buying corporate bonds. So if the Fed use this rebound to be too hawkish then it may backfire so we'd expect some compromise probably in the form of keeping considerable time in and emphasising the global risks to growth and inflation.

DB's Alan Ruskin makes some interesting observations about the FOMC. Firstly he says that over the last two years the S&P 500 has on average been 0.35% down on the day of the statement when there is no press conference. When there is one the index is up 0.87%, perhaps reflecting the dovish nature of Bernanke and Yellen relative to the committee. There is also more volatility across different asset classes on press conference days. Alan speculates that this is perhaps due to the market's interpretation of the dots that appear at press conference meetings.

Ahead of all this markets shrugged off some mixed data in the US yesterday to rally strongly. The good news came from the Conference Board Consumer Confidence report that topped estimates (94.5 v 87.0) to print at a seven year high. The Richmond Fed manufacturing survey also came in stronger than expected (20 v 11). The bad news though came from September's durable goods data. The volatile headline series fell unexpectedly (-1.3% mom v +0.5% mom expected) and the core capex reading (ex. aircraft and defense) also weaker. A weak core capex adds downside risk to the Q3 GDP numbers as our US colleagues pointed out earlier this week. The other notable data release in the US yesterday was the S&P/Case Shiller house price index which came in slightly below expectations (+5.57% yoy v +5.70% expected).

With the S&P 500 (+1.19%) and the Russell (+2.86%) rallying, US Treasuries were unsurprisingly weaker. 10yr yields closed +3bp to 2.29%. Commodities were also stronger with WTI, Brent, and Copper up +0.5%, +0.2% and +0.8% on the day.

Turning to Asia markets are generally stronger across the board following the positive lead from the US. Bourses in Japan, Hong Kong, China and Korea +1.6%, 1.4%, +1.2% and +1.7% respectively as we type. Focusing on Japan, the September industrial production print surprised to the upside (2.7% mom v 2.2% exp) but all eyes will be on the conclusion of the Bank of Japan policy meeting on Friday for whether a refresh of policy is attempted or hinted at. Asian credit markets are also on a firmer footing overnight with IG spreads around 1-2bp tighter across benchmark names while new issues are also being well absorbed.

Looking at the rest of the day ahead, we’ve got a fairly quiet calendar in the US with just the mortgage application print to look forward to. Over on this side of the Atlantic, the notable readings include the September retail sales for Spain and consumer confidence in France. All eyes will be on the FOMC statement today though.