Asian Open: Inflation now deemed to be ‘entrenched’, not transitory

Asian Futures:

• Australia's ASX 200 futures are up 22 points (0.3%), the cash market is currently estimated to open at 7,451.30
• Japan's Nikkei 225 futures are up 360 points (1.26%), the cash market is currently estimated to open at 28,815.60
• Hong Kong's Hang Seng futures are down -62 points (-0.26%), the cash market is currently estimated to open at 23,892.91
• China's A50 Index futures are up 184 points (1.16%), the cash market is currently estimated to open at 16,153.88

Wednesday US Close:

• The Dow Jones Industrial rose 383.25 points (1.08%) to close at 35,927.43
• The S&P 500 index rose 95.08 points (2.08%) to close at 4,686.75
• The Nasdaq 100 index rose 479.503 points (2.35%) to close at 16,325.66

US equities erased earlier losses to close broadly higher, after Jerome Powell convinced markets the economy remains strong and that they have the tools to fight inflation. The Nasdaq 100 was the strongest performer and rose 2.4%, compared to 2.0% on the S&P 500 and around 1% on the Dow Jones.

At the December 2021 FOMC meeting

• The Fed held interest rates at the 0-0.25% target range
• Increased their pace of tapering from $15 billion to $30 billion per month
• This puts the Fed on track to complete tapering by March
• Dot plot shows the potential for three rate hikes in 2022

Jerome Powell: "The reality is we don't have a strong labour force participation yet and may not have for some time; inflation well above target and we need to make policy now".

The Fed delivered a faster pace of tapering which, at $30 billion per month, now has them on track to finish by March. And the dot plot suggests we could have 3 hikes in 2022. But the more interesting takeaway from today’s meeting is that the Fed seem to have given up on waiting for maximum employment to be achieved before hiking rates. Ultimately, they are above target on inflation and way behind on their employment mandate. And with inflation now deemed to be ‘entrenched’ and not ‘transitory’ the Fed will likely hike rates before maximum employment is achieved.

Naturally, Powell tipped his hat to concerns regarding Omicron in the press conference, although his comment that “people are learning to live with variants” suggest this is more a formality than a genuine concern. So the Fed’s focus is clearly on taming inflation that is no longer deemed to be transitory, but entrenched.

So, was the Fed hawkish or not?

The act of tapering and shifting to a faster 'lift off' is of course hawkish, although it was mostly expected to a degree. Yet as per usual, the press conference was used to tame any runaway hawkish expectations. This essentially saw a game of two halves; yields and the US dollar rallied at the monetary policy announcement, then handed back early gains during the press conference. The US dollar index and US 2-year yield both printed bearish hammers at their highs, which allowed AUD/USD and NZD/USD to bounce further form their lows and form bullish engulfing candles. AUD was the strongest major yesterday.

Australian employment at 11:30 AEDT

Over time it will be interesting to see if the RBA will reluctantly become even vaguely hawkish now the Fed are upping their own game. Although a good initial first step would be a decent employment report today at 11:30.

We can see that AUD/USD had a decent session yesterday and its recent 4-hour candle is on track to close above trend resistance. It managed to build a base around the weekly pivot point and the failed spike below 0.7100 suggests a corrective low has formed. From here we are looking for a break above the 0.7187 high and initial move to 0.7250 near the weekly R1 and monthly pivot point.

ASX 200 Market Internals:

ASX 200: 7327.1 (-0.70%), 15 December 2021

• Utilities (0.31%) was the strongest sector and Information Technology (-2.62%) was the weakest
• 10 out of the 11 sectors closed lower
• 6 out of the 11 sectors outperformed the index
• 40 (20.00%) stocks advanced, 150 (75.00%) stocks declined
• 56% of stocks closed above their 200-day average
• 44.5% of stocks closed above their 50-day average
• 46.5% of stocks closed above their 20-day average

Outperformers:

• + 4.05% - Virgin Money UK PLC (VUK.AX)
• + 3.88% - Alumina Ltd (AWC.AX)
• + 2.58% - Whitehaven Coal Ltd (WHC.AX)

Underperformers:

• -7.58% - Pointsbet Holdings Ltd (PBH.AX)
• -7.32% - Polynovo Ltd (PNV.AX)
• -7.25% - Hub24 Ltd (HUB.AX)

Up Next (Times in AEDT)

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