Morning Brew December 15 2021

Good morning,

Today is the long expected day the FOMC will announce it`s rate and policy decision. Even though there are a few other data points today, eyes are on Powell at 20:00 and his press conference at 20:30. What to expect? Our John Hardy has outlined 3 scenarios and after the strong US  PPI yesterday, the hawkish case seems likely and “transitory” a thing of the past.  The question is how much hawkishness is priced in?

If you are looking to take a position over the number, a position with optionality might be a good idea.

FX Update: The Fed expectations conundrum.

• The dovish case (low probability) I have a very hard time seeing the Fed under-delivering relative to expectations, as the whole intent here has to be to at least meet the market at where it is priced, given the new tone. What would this look like? Some weird partial acceleration of the tapering and dot plots that don’t quite meet the market expectations for 2022 or 2023, perhaps. Don't want to dwell on this scenario...
• The base case scenario (60+% odds) this is one in which the Fed delivers a doubling of the speed of tapering by $30 billion as of this meeting, which puts it on schedule to zero balance sheet expansion by mid-March next year. The policy statement crystallizes the hawkish shift that has recently been made clear and includes watered down versions of the hawkish scenario below (keeping rate lift-off language a bit hazy so we don’t know whether to bring a March hike fully into view, a last residual sign that it is afraid of its own guidance, a dot plot that meets the market expectation at the median, etc..)
• The hawkish case (30%+ odds, and what I hope they deliver) the Fed delivers a doubling of the taper speed or faster (hinting that it wants it done ASAP) and sufficiently credible language on the timing of the lift-off to clearly bring the March FOMC meeting into view as a possibility. It will be important for the Fed to eliminate as much forward guidance as possible to really look hawkish and suggest merely that it is going to react to conditions as required. This could also be achieved in part with lots of dispersion in the dot plot forecasts for 2022 and 2023 to make it look as if the Fed can see a wide range of outcomes, depending on what is justified by incoming data and conditions on the ground.

Markets yesterday remained somewhat nervous, especially after the US PPI came 0.4% higher than expected at 9.6% rathe rather than the 9.2%.

US Indexes closed lower with the Dow -0.3%, the S&P 500 -0.75% and the Nasdaq -1.14%. The USD Index  seesawed but is basically at yesterday’s level, EURUSD at 1.1270 and GBPUSD at 1.3240. Gold and Silver lost on the PPI number and are still trading at 1769 (near support) and 21.90.  Adobe lost 6% on a downgrade by JP Morgan.

• Over night we see mixed data out of China with the Industrial Output higher at 3.8% but Retail Sales disappointing at 3.9% vs the expected 4.6%. 
• The US Congress approved raising the federal government's debt limit by $2.5 trillion to $31.4 trillion
• Toyota Motor will invest USD 70 bio to electrify its automobiles
• Tesla said it would start accepting Dogecoin on a test basis, the digital currency gains as much as 24%
• The Turkish Lira is under pressure again at 14.50 ahead of Central Bank meeting tomorrow.
•  The US will add eight Chinese companies to an investment blacklist this week

Events today:

UK Inflation data at 8:00, French CPI at 8:45, US Retail Sales at 14:30, FOMC at 20:00 and the press conference 30 Minutes later.

Please remember that Friday is the large expiry with Index Futures and Options for December trading for the last day.

Trade safely today, it should be an interesting day