Its no real surprise to see limited moves in financial markets ahead of tomorrow mornings (04:00aest) FOMC meeting, with fixed income still very much at the epi-centre of traders focus.
In equity markets, small upside was seen in euro markets, while the S&P 500 traded a range of 2923 to 2913 and closing -0.1%, on volumes very much in-line with the 30-day average. Consumer names worked well, which won’t necessarily surprise when you see US consumer confidence pushing up a further 3.7 points and to the highest level since September 2000. As a Segway, we can overlap the S&P 500 with the US consumer confidence chart and see a reasonable correlation for many years, and one questions how much more confident the consumer can feel and what the ramifications would be to equities should the US consumer feel a little more pessimistic. Can we see this consumer confidence gauge as something of a leading indicator for equities from here, perhaps combined with more traditional indicators such as narrowing and widening of credit spreads?
(Source: Bloomberg)
This is undoubtedly one to watch going forward, but for now there is little reason to put money to work today, although implied volatility, if we look at the VIX index, remains subdued at 12.4% and even if we look across the VIX futures curve there are few signs that traders are gunning for higher volatility. All is calm on the Western front, and it seems this will spill over into Asia, where we see the ASX 200 unwinding closer to 6200 and likely holding a flat line through trade, with small weakness seen in the Nikkei 225 and the Hang Seng, which have both had a solid run of late.
In FX markets, we can see limited moves in G10 or EM (emerging markets) currencies, with the USD index closing the session largely unchanged. EM has seen better days of late, and we can see the EM currency index recently closing through the April downtrend, with a number of research houses moving to more neutral stance on this space. It seems the technicals and the fundamentals are aligned here, but I guess much falls on USD moves in the wake of Fed governor Powell’s statement tonight. 
(EM currency index)
(Source: Bloomberg)
We have seen further follow-through buying in GBP, with GBPUSD pushing into the upper 1.31 level, with a focus on Theresa May ruling out a new election, although its hard to say this is new news and elections surely raise the stakes for a leadership challenge – not the smartest move. Labour leader, Jeremy Corbyn, speaks in UK trade today at the party conference and while it is unlikely to cause big tremors through FX markets, those interested in the Brexit saga will naturally want to hear his views on where we are in the negotiations.
EURUSD continues to grind higher, where the pair further testing the ceiling of 1.18, where a break, which I see as a high possibility, should see the 14 June failure high of 1.1851 coming into play. The EUR was taking inspiration from a further sell-offs in the fixed income markets, with 10-year German bund higher by a three basis points (bp) to 54bp – the highest since May. In the rates market, we’ve seen traders playing calendar spreads, buying the Euribor December 2018 contract and selling the December 2020 contract, with the idea to profit from increased rate expectations in the coming years. As suggested yesterday, buying EURAUD is a compelling trade here, and that seems to be working well at this stage, and I would target the September failure highs of 1.6333 even if the Aussie rates markets have joined the party and we can now see a 74% chance of a hike priced for end-2019 now.
We perhaps would have already seen EURUSD through the figure if it weren’t for US treasuries feeding off the moves in the Euro bond complex, with the US 10-year Treasury pushing a solitary basis point to 3.09%, with the fixed income market very much focused on 3.12% – the May highs. USDJPY has been a beneficiary of higher US bond yields, even if the Japanese bond curve (the difference between 2s and 10s) has steepened to 22bp and the highest since November 2017. A steeper curve incentives Japanese funds to look at Japan as an investment destination, although the price is true here and USDJPY is gradually creeping higher and is testing 113 as I type. Expect very little to materialise through trade today, and really, it’s a day where traders have to manage exposures and risk ahead of a potential volatility event in the FoMC meeting.
With so much focus on the US and European fixed income markets, its worth also reflecting on the US housing market. Here, we see 30-year fixed mortgage rates at 4.66%, which is the highest since 2013. Put into perspective of fairly stagnant ‘real’ wages and it is not out of the question that housing affordability becomes a more dominant market thematic should bond yields keep heading higher.
So, we focus on the FoMC, and it’s all anyone is going to be focused on today, with sales teams talking to clients about their views on tonight’s proceedings. Some in the markets have expressed a view that the Fed could be more troubled by trade tensions. However, I see this theme perhaps getting a mention, but at this stage, there isn’t enough clarity for the central bank to have the insights to alter their forecasts. Expect this to get more focus though in the December meeting. We can also consider the ‘dots’ plot projections and see if there is more conviction around their prior projections and for another hike in December, three in 2019 and one in 2020. There is a clear disparity between the Fed and the market, and the potential for convergence over time, but as things stand to price for the September, December and March meetings is rich, and it feels as though traders go into this meeting expecting a modest hawkish shift.
It suggests the odds are stacked against the USD and in favour of US Treasury appreciation. However, betting on this trade is always tough, and the preference is to understand the risks and manage exposures accordingly, with a view to add risk as and when clarity is restored.  
(US 30-year fixed mortgage rates)

Published by Chris Weston, Head of Research, Pepperstone