Enviado: 10/5/2006 15:35 FOMC Rate Decision Tonight
Sell US10Y's, watch out for EUR/USD. Sell European auto makers...
Tonight
Tonight, the FOMC will decide to hike the Fed’s Funds Rate to 5.00%. That is unanimously expected by market analysts. Thus, the rate decision tonight is not as important in itself as the statement accompanying the decision. The statement will spell out the future path and determinants of the Fed’s Funds Rate. The following is an elaboration of our expectations for the statement and some likely market reactions.
The statement
The statement tonight will reflect the stance that Bernanke aired at the semi-annual Humphrey-Hawkins Act Testimony before Congress at the 27th of April – i.e. the Fed will pause after hiking interest rates to 5.00% and see interpret the effect from previous hikes. It usually takes 6-9 months for changes in monetary policy to be reflected in the general economic development. This means that the current economic strength in the US economy might just be reflecting the 3.25%-4.00% Fed’s Funds Rate 6-9 months back.
Another reason for the coming pause will be that the Federal Reserve will be reluctant to let the yield curve invert, since it might spur unnecessary worries about the health of the US fundamentals. Given time, Bernanke should know that the treasury traders are more likely to let longer term yields rise, which will give the Fed an opportunity to tighten monetary policy once more without inverting the yield curve. Looking at inverted yield curve in the past 20+ years, it seems clear that every time the Fed has been in a tightening cycle, the increasing Fed’s Funds Rate was more to blame for the inversion than the treasury traders (i.e. the Feds Funds Rate increased faster than the long end of the curve fell). Another factor, which should lead to higher long-term rates is the fact that the long end of the US curve is being controlled by Asian central banks and Middle East Petrodollars, both of which are not as likely to flow into the US treasury market as they have used to be.
Thus, a tightening of monetary policy through higher long-term yields is a given, and without any increase in core inflation data, the Fed is more likely to wait for this to happen so they can hike once again without inverting the yield curve.
Fixed Income Trades
The historical average spread between US 10-year rates and 1-year rates is around 1 percent. It is currently very close to zero. With US economic data releases, will treasury traders dare to let the yield curve invert from here? No, the only issue that would justify an inverted yield curve would be a falling housing market, and so far it is still holding on go its gains from the last half decade.
Therefore, we have a distinct negative bias regarding US 10-Year Treasury Notes. Sell the June-2006 contract here, before the FOMC Rate Decision (and statement). The contract is likely to test recent lows and break even lower in the coming week.
FX Trades
EURUSD continues to find renewed upside strength after the break of 1.2590, which was the high from August 2005. We expect EURUSD to be trading in a wave 3 at the moment which will likely be capped by a test of 1.2891 61% long term retracement (from 1.3665-1.1639). We believe this should be the end of wave 3 with retracement support in the 1.2415 area which downside should be limited to for a wave 4 scenario. A wave 5 formation should then begin for a 1.3400+ long term target.
http://www.saxobank.com/__DotNet/Site/A ... f885aba4c3
Equity sectors
The market is clearly set for the 25bp hike and a clear message for a pause. That delivered will relieve the market of some uncertainty and could very well spark a smaller rally. We see US markets in strong momentum, whereas Europe is lingering without clear trend at the moment. With the latest FX-moves we see more and more reason to move ones long exposure overseas and stay out of Europe. The European exporting sector is largely dependent on US markets for margin expansion, as the home markets have been struggling for years. With a weaker USD, we see value of US sales erode and will be a direct hit on margins. Of course there is large degree of USD costs and production, but bulk part is still in EUR. To conclude our thoughts here, we see the FX-market as key for longer term development in the European markets.
One of the sectors we wish to highlight as very USD sensitive is the automakers. As JPY and EUR strengthen versus the USD we see Ford, GM and Daimler Chrysler gaining momentum on their home turf. The USD move will enable the US big three to be more competitive on price, as the foreign producers stand a choice of either hiking prices or slash their margins. To push through higher prices in the current environment with rising yields we see as extremely unlikely. As energy prices are high and seem to remain so, we see a continued trend towards fuel efficient vehicles. This puts the Asian automakers in a better situation than the Europeans. We conclude that all other things alike we should see European carmakers getting hurt by weaker US margin and possibly sales as well. Asian manufacturers will be more competitive as their model portfolio is more attractive. US carmakers to get relief on home turf and give GM and Ford time to take some lost ground back. Bottom line will be; sell Fiat and Volkswagen, be cautious on Asian carmakers and expect some relief in the US car sector.
Equity Trades
Buying US indices over Europe. Our choice of trade would be a short in DAX and a long in Dow Jones. Ratio should be short 1.5 DAX.I for every 1 long in DJI.I. Looking to build shorts in European carmakers, mainly in Fiat and Volkswagen. Dow Jones isolated we see reason to believe we will see the 11 750 level reached and possibly breached. SP500 is looking up as well, and as a final push in this more than 3 year long bull market, we could reach 1365/75 before our call for correction comes into play.
Sell US10Y's, watch out for EUR/USD. Sell European auto makers...
Tonight
Tonight, the FOMC will decide to hike the Fed’s Funds Rate to 5.00%. That is unanimously expected by market analysts. Thus, the rate decision tonight is not as important in itself as the statement accompanying the decision. The statement will spell out the future path and determinants of the Fed’s Funds Rate. The following is an elaboration of our expectations for the statement and some likely market reactions.
The statement
The statement tonight will reflect the stance that Bernanke aired at the semi-annual Humphrey-Hawkins Act Testimony before Congress at the 27th of April – i.e. the Fed will pause after hiking interest rates to 5.00% and see interpret the effect from previous hikes. It usually takes 6-9 months for changes in monetary policy to be reflected in the general economic development. This means that the current economic strength in the US economy might just be reflecting the 3.25%-4.00% Fed’s Funds Rate 6-9 months back.
Another reason for the coming pause will be that the Federal Reserve will be reluctant to let the yield curve invert, since it might spur unnecessary worries about the health of the US fundamentals. Given time, Bernanke should know that the treasury traders are more likely to let longer term yields rise, which will give the Fed an opportunity to tighten monetary policy once more without inverting the yield curve. Looking at inverted yield curve in the past 20+ years, it seems clear that every time the Fed has been in a tightening cycle, the increasing Fed’s Funds Rate was more to blame for the inversion than the treasury traders (i.e. the Feds Funds Rate increased faster than the long end of the curve fell). Another factor, which should lead to higher long-term rates is the fact that the long end of the US curve is being controlled by Asian central banks and Middle East Petrodollars, both of which are not as likely to flow into the US treasury market as they have used to be.
Thus, a tightening of monetary policy through higher long-term yields is a given, and without any increase in core inflation data, the Fed is more likely to wait for this to happen so they can hike once again without inverting the yield curve.
Fixed Income Trades
The historical average spread between US 10-year rates and 1-year rates is around 1 percent. It is currently very close to zero. With US economic data releases, will treasury traders dare to let the yield curve invert from here? No, the only issue that would justify an inverted yield curve would be a falling housing market, and so far it is still holding on go its gains from the last half decade.
Therefore, we have a distinct negative bias regarding US 10-Year Treasury Notes. Sell the June-2006 contract here, before the FOMC Rate Decision (and statement). The contract is likely to test recent lows and break even lower in the coming week.
FX Trades
EURUSD continues to find renewed upside strength after the break of 1.2590, which was the high from August 2005. We expect EURUSD to be trading in a wave 3 at the moment which will likely be capped by a test of 1.2891 61% long term retracement (from 1.3665-1.1639). We believe this should be the end of wave 3 with retracement support in the 1.2415 area which downside should be limited to for a wave 4 scenario. A wave 5 formation should then begin for a 1.3400+ long term target.
http://www.saxobank.com/__DotNet/Site/A ... f885aba4c3
Equity sectors
The market is clearly set for the 25bp hike and a clear message for a pause. That delivered will relieve the market of some uncertainty and could very well spark a smaller rally. We see US markets in strong momentum, whereas Europe is lingering without clear trend at the moment. With the latest FX-moves we see more and more reason to move ones long exposure overseas and stay out of Europe. The European exporting sector is largely dependent on US markets for margin expansion, as the home markets have been struggling for years. With a weaker USD, we see value of US sales erode and will be a direct hit on margins. Of course there is large degree of USD costs and production, but bulk part is still in EUR. To conclude our thoughts here, we see the FX-market as key for longer term development in the European markets.
One of the sectors we wish to highlight as very USD sensitive is the automakers. As JPY and EUR strengthen versus the USD we see Ford, GM and Daimler Chrysler gaining momentum on their home turf. The USD move will enable the US big three to be more competitive on price, as the foreign producers stand a choice of either hiking prices or slash their margins. To push through higher prices in the current environment with rising yields we see as extremely unlikely. As energy prices are high and seem to remain so, we see a continued trend towards fuel efficient vehicles. This puts the Asian automakers in a better situation than the Europeans. We conclude that all other things alike we should see European carmakers getting hurt by weaker US margin and possibly sales as well. Asian manufacturers will be more competitive as their model portfolio is more attractive. US carmakers to get relief on home turf and give GM and Ford time to take some lost ground back. Bottom line will be; sell Fiat and Volkswagen, be cautious on Asian carmakers and expect some relief in the US car sector.
Equity Trades
Buying US indices over Europe. Our choice of trade would be a short in DAX and a long in Dow Jones. Ratio should be short 1.5 DAX.I for every 1 long in DJI.I. Looking to build shorts in European carmakers, mainly in Fiat and Volkswagen. Dow Jones isolated we see reason to believe we will see the 11 750 level reached and possibly breached. SP500 is looking up as well, and as a final push in this more than 3 year long bull market, we could reach 1365/75 before our call for correction comes into play.