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China Liquidity Injection Helps Propel Risk Assets Higher


Today's financial recap and tomorrow's financial outlook.

Two pieces of relevant news was released near midday that propelled risk assets higher. Fed watcher Jon Hilsenrath of the WSJ said on a discussion panel that he thinks the central bank will keep its "considerable time" language in the FOMC's statement, scheduled for release tomorrow, on when the central bank would begin normalizing monetary policy. This caused a sharp drop in the USD, steepening in the yield curve, and a rally in commodities.

Separately, it was revealed that the People's Bank of China (PBoC) had lent 500 billion yuan to the five largest Chinese banks through a special lending facility. The move is the equivalent of a 50bps rate cut to the banks' reserve requirements. Chinese H-shares indices - only tradeable by locals - had been down more than 1.8% last night following a report on foreign direct investment that showed a collapse in August. The 1.82% drop in the Shanghai Composite (SHCOMP) is the equivalent of two standard deviations or a 230 point drop in the Dow Jones Industrials (INDU).

Much of the rally in US stocks was attributed to generally heavy short positioning in preparation for tomorrow's FOMC meeting and the Scottish independence vote in Thursday. With the risk of a hawkish meeting diminishing and further polls showing the gap between the "No" and "Yes" votes widening, this provided a tailwind for the S&P 500 (SPX). The benchmark index opened the day down a few points and reversed more than 1% during the session to finish up 0.75%. Healthcare, utilities, and energy stocks all led with every sector finishing positive. Trading activity on US exchanges was the most active it's been in months.

The August producer prices report was completely inline with expectations. Prices were flat in the month and the rate of growth from a year ago rose to 1.8% from 1.7% in the month prior. Same-store sales showed a drop of 2.6% for the week ending September 13 following a spending spree around the turn of the month coinciding with the back-to-school shopping season. Demand for fall apparel has not picked up yet, according to ICSC.

Tomorrow's Financial Outlook

Tomorrow will be the long awaited conclusion of the FOMC meeting. The Federal Reserve's monetary policy committee will release its statement and economic projections at 2:00pm ET with a press conference scheduled to begin thirty minutes later. The statement will reveal the committee's 2017 economic projections for the first time. Many market participants expect the release of the economic projections to show a higher rate of Fed funds in 2017 than is currently priced into the interest rate market. Additionally, they expect the FOMC to reconfigure its language surrounding the normalization of policy, which would leave the door open for a rate hike in the first quarter of next year. The market currently expects the Fed to hike at the June meeting or slightly after. Trading will likely be quiet up until the statement is released as positions have largely already been set.

The August consumer price index will be released tomorrow morning. Following 15 months of sequential gains, consumer inflation is expected to remain flat for August and at a 1.9% annual pace of growth. That is down from 2.0% in the month prior. The NAHB survey of homebuilder and real-estate sentiment is due to be reported in the late morning.

Overnight, the Bank of England (BoE) will release the minutes from its latest monetary policy meeting. At the last meeting, two members of the Monetary Policy Committee (MPC) dissented, having advocated the need for a rate hike at that meeting. In the release of the minutes, their dissent was marginalized as a "minority," which was received positively by the market. Some of that dissent has been quelled by recent speeches from both BoE Governors Carney and Broadbent. However, if more MPC members dissent at this meeting, then it may become a problem and accelerate the central bank's time table. Separately, Carney is scheduled to speak at 9:45am ET to the UK Parliament.

Lennar (LEN), Fedex (FDX), Pier 1 Imports (PIR), and General Mills (GIS) are scheduled to report earnings tomorrow. Fedex will be an important bellwether to help corroborate the recent acceleration in activity seen in various manufacturing surveys.

Twitter: @Minyanville

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