USDJPY is currently trading around 112.18 in the US session Wednesday, slumped by almost -0.30% on the concern of a dovish hike by Fed amid an all-round pressure on the US central bank not to hike further. The USD is also under stress on Italian budget truce and soft Brexit optimism after the EC President Juncker said disorderly Brexit would be an “absolute catastrophe”.
The US dollar index slumped almost -0.45% and USDJPY slips over -0.30%, while EURUSD jumped +0.60% and GBPUSD surged almost +0.25% ahead of the Fed decision about the much anticipated Dec rate hike and projections for the same in 2019 (dot-plots).
EURUSD surged as Italian bank stocks rallied on Italian budget truce after the EC decided against launching a disciplinary procedure against Italy over its budget and said that concessions by Italy on its budget meant the country didn't warrant triggering the excessive deficit procedure. The EC’s deputy budget commissioner Dombrovskis said the agreement that had been reached would lead to an expected budget deficit next year of 2.04% compared with 2.4% of Italy’s original plans.
Actually, the figure of 2.04% budget deficit is almost at mid-point of the EC’s target of 1.6% and Italy’s ambition of 2.4%. The EU/EC does not want another Brexit from Italy (Italexit) and Italy is also not in a position for an exit out of the EU or face consistently higher Bund yields/spreads.
On Wednesday, Dombrovskis tweeted and confirmed that an agreement is made with Italy regarding 2019 budget. He wrote: “A lot of hard work and negotiation went into finding solution on the Italian budget. Let’s face it: the solution on the table is not ideal. But it allows us to avoid an Excessive Deficit Procedure at this stage, provided that the agreed measures are fully implemented”.
Dombrovskis added: “I hope this solution would also be the basis for balanced budgetary & economic policies in Italy. Italy urgently needs to restore confidence in its economy to ease financial conditions and support investment. Ultimately, this is what will support the purchasing power of all Italians”.
Talking about the Fed, the FOMC is expected to raise the Fed funds rate target by 0.25% at the conclusion of today's policy meeting to reach for the US rate at +2.50%, although the US 10Y bond yield made tumbled to a 6.5-months low of 2.799% on expectations the FOMC will signal a slower pace or even a pause in interest rate hikes next year (dovish hike).
Overall, the US dollar is under stress on hopes of a dovish hike by Fed amid an all-round pressure from the main street to Wall Street (on Fed) on subdued US/global economic data and risk of an imminent economic slowdown, if not an outright recession. The US President is also “fed-up” with the Fed for its hawkish dual QT stance.
But, as of now, the Fed is expected to hike at least 2-times in 2019 to reach the mean-neutral of 3.00% and may hike in Q2 and Q4 next year. The Fed may update its dot-plots for 2-hikes (Q2/Q4) instead of 3 subjected that the US core PCE inflation stays around 2% symmetrical target (i.e. a range of +1.75% to +2.25%).
In other words, the Fed may indicate a pause for next 6-months to assess the incoming economic data after 4-quarterly hikes in 2018 (including the highly anticipated Dec hike) and will be data (inflation) dependent to go for further 2-hikes in 2019 at half yearly mode. This Fed stance will only change if the US core PCE inflation slips below +1.75% or surge above +2.25%, which is very unlikely. The Fed may like to have the mean neutral (real rate of interest) at +1.00% (+0.50% to +1.50%).
Although this Fed stance is well anticipated by the market, any projection of slower US rate hikes next year could cause a year-end slump in the US dollar and a “Santa Rally” in stocks to some extent. And if the Fed chooses to not hike amid Trump’s political pressure, it will be seen as negative for the US economy for a possible slowdown and Fed policy mistakes coupled with bending to political pressure from Trump & Co.
On Monday, the US market/USD came under more stress in late day trade after Doubleline’s Gundlach, an influential market participant said:” This is definitely a bear market, the S&P500 is heading to new lows and the Fed is kind of helpless here, the fact that the deficit is so out of control this late in the economic cycle. We have never before had the Fed raise interest rates while the budget deficit was expanding”.
The so-called “bond king” Gundlach is quite correct as the US market is sustaining well below 200 DEMA since late November and the Fed is issuing a deluge of US Treasuries to fund “Trumponomics”. The surging US fiscal deficit is one of the primary reasons for higher US bond yields and the Fed has to make sure that angel investors got a higher yield by its hawkish dual QT; otherwise who is going to fund Trump’s “America growth story”?
Trump seems die-hard not to let Fed another hike. Trump tweeted Tuesday: “I hope the people over at the Fed will read today’s Wall Street Journal Editorial before they make yet another mistake. Also, don’t let the market become any more illiquid than it already is. Stop with the 50 B’s. Feel the market; don’t just go by meaningless numbers. Good luck!”
Trump is actually urging the Fed not to hike and also stop the ongoing B/S tapering, running in the auto-pilot mode of $50B per month; i.e. Trump is pressurizing the Fed to stop its dual QT, which is causing financial tightening (illiquid market) and support the stock market.
On the economic data front, Wednesday the US existing homes sales for November surged by +1.9% from prior +1.4%, higher than expectations of a slump of -0.6%. In November, the US existing home sales surged to 5.32M from prior 5.22M, higher than expectations of 5.20M as “rising inventory is clearly taming home price appreciation”.
The rebound in November still leaves sales well short of the pace implied by the recent rebound in the mortgage applications numbers, so there could be real scope for hefty further gains in sales over the next few months. This will reduce the excess inventory in the market and support prices, but the market is not expecting the revival to last beyond the spring, because the mortgage rates may rebound. Still, anything which interrupts the ‘housing is collapsing’ narrative is welcome because it isn’t and that may be a relief for the Fed ahead of the most crucial FOMC decision for the year.
Overall, after a deluge of negative news for the housing sector, Wednesday’s report is a welcome change. Longer-term, however, the trend in housing is clearly slowing as affordability takes a bite for rising raw materials costs and higher mortgage rates, although in the last few weeks, there was some decline in the home borrowing costs.
On Tuesday, data shows that the US November building permits surged BY 5% to 1.328M from prior 1.265M, higher than expectations of 1.259M. The November US housing starts surged +3.2% to 1.256M from prior 1.217M (revised lower from 1.228M), higher than expectations of 1.225M. The US Housing starts surged in November, as builders stressed on rental apartments (US public are now leaning more on renting an apartment than owing/buying it on costly mortgage loans), which may be disappointing.
The US housing starts rebounded in November, driven by a surge in multi-family/rental housing projects, but the construction of single-family homes fell to a 1.5-year low, pointing to deepening housing market weakness that could spill over to the broader economy. The negative revision for October also showed housing starts fell in that month instead of rising as previously reported.
Details show that the pace of single-family starts was 4.6% lower on the month. As a thumb rule, single-family homes are almost always built for purchase, while multi-family properties are almost always built for rent. If the US builders are prioritizing single-family work, it’s a sign of faith in a strong economy and financial system and also a sign of more labor-intensive construction, which helps boost economic activity.
The relatively strong permits numbers suggest that homebuilders think the fall in sales will prove temporary, probably because much of it has been triggered by the two hurricanes and the wildfires, while mortgage demand has strengthened.
Overall, these housing data are consistent with the market view that the underlying housing market is nothing like as weak as some of the recent data - notably, home sales and the NAHB survey - suggest. Thus the market is now expecting both to rebound over the next few months, winter weather permitting. The US housing market is being affected by higher mortgage rates as well as land and labor shortages, which have led to tight inventories. While the overall housing inflation has slowed, it continues to outpace US real wage growth, sidelining some first-time homebuyers and such persistent housing market weakness could be flagging a slowdown in the overall US economy.
The 30-year fixed mortgage rate has increased more than 0.60% this year to about 4.63% and with the Fed expected to raise interest rates on Wednesday for the fourth time this year and two more times in 2019, mortgage rates are likely to remain high and may surge above +5% in the coming days, negative for the US housing market and the overall economy, where housing was always a bright spot.
But, Trump’s unprecedented comments about the Fed and its Chair Powell are making even the known Fed doves turning into hawks and thus there may be a unanimity in the FOMC to go for at least just median neutral at 3% nominal US rate by Dec’2019.
Technical view: USDJPY
Technically, whatever may be the Fed narrative, USDJPY now has to sustain over 111.95-112.10 for a rebound and rally to 112.50*/112.80-113.10/113.50 and 113.85/114.25*-114.55/114.75 in the near term (under bullish case scenario).
On the flip side, sustaining below 111.70, USDJPY may further fall to 111.50/111.30*-110.90/110.55 and 110.30/109.70*-109.20/108.45 in the near term (under bear case scenario).
Pivot: 111.95 Support: 111.3 110.3 109.7 Resistance: 112.8 113.85 114.75 Scenario 1: USDJPY now has to sustain over 111.95-112.10 for a rebound and rally to 112.50*/112.80-113.10/113.50 and 113.85/114.25*-114.55/114.75 in the near term (under bullish case scenario) Scenario 2: On the flip side, sustaining below 111.70, USDJPY may further fall to 111.50/111.30*-110.90/110.55 and 110.30/109.70*-109.20/108.45 in the near term (under bear case scenario) Comment: SHORT TERM RANGE: 109.70/111.30-113.85/114.75