It’s all about the Fed taper and beyond…

Overnight Headlines

*US stocks post record highs, eyes on the FOMC meeting

*USD edged higher, trading just above 94

*US spending bill shows new progress in house, sticking points remain

*Bumper NZ jobs report, unemployment equal lowest ever at 3.4% vs 3.9% expected

*China imposes new restrictions, most widespread Covid outbreak since Wuhan

US equities rose moderately but this was enough to make new all-time highs. Growth and quality names like tech and healthcare led the gains. The small cap rally continued. Asian markets are lower weighed by declines in Hong Kong and China. Investors are looking to a major Chinese Communist Party gathering on November 8-11. US and European futures are lower.

USD edged higher in quiet trade. EUR struggled above 1.16 for a second day. GBP saw continued weakness down into support around 1.36. USD/JPY was whippy falling to a low of 113.46 before rebounding close to 114. AUD plunged over 1% after the RBA and is currently trading below the September high at 0.7478. NZD bounced off the 200-day SMA at 0.7097 on the strong jobs data.

Market Thoughts – Fed wording and guidance in focus

The Fed will finally pull the trigger on reducing its bond buying programme after intense speculation over many months. The consensus expects tapering to start immediately with a pace of $15bn per month. Market sentiment is generally pretty positive with equities near record highs and volatility measures subdued.

The focus now turns to how fast purchases will be and potential forward guidance. The likely optimal end date of bond buying is seen as mid-2022. The market is pricing in a full 25bp rate hike by July 2022. This means a faster pace of tapering would be needed to confirm this date for rate lift off. That may be tough to achieve with the FOMC wanting to see stronger employment data as part of their dual mandate. The Fed’s “transitory” description is also under the spotlight. Chair Powell will have to tread carefully here to keep the Fed’s commitment to support the recovery.

Chart of the Day – USD/JPY consolidating around 114

The RBA meeting led to sharp moves in bond markets yesterday as yields fell across global rates. We saw a strong reversal of the previous days market reaction leading up to and after the ECB meeting. US 10-year treasury yields, a big driver of USD/JPY, look to be rolling over with next support above 1.50%.

USD/JPY is near the midpoint of its recent range. After making highs late last month at 114.69, prices have fallen back. A major resistance zone sits at 114-115 with long-term highs form 2017 and 2018. The weekly chart shows prices coiling with pressure building for an upside breakout. But the pair is still overbought on a several indicators. Support comes at the bottom of the recent range at 113.25.

European Central Bank

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