Things to Know about Trading the Fed Pivot

Summary:

The current Fed Pivot is all about market expectations, and the two most weighty data this week has yet to come out. Market trends can only be judged when GDP and PCE are released. Besides, the current market trend is merely tentative. Until there is definitive data support and clear wording from the Fed, trading the Fed Pivot needs to be extra cautious.

The USD has recently reversed sharply, falling off a cliff from last Friday's high of 113.942, and is now down to 109.800. It was triggered by an article by Wall Street Journal reporter Nick Timiraos, which mentioned that the Fed will raise rates by another 75 basis points at its November meeting, when it may discuss whether and how to signal a smaller rate hike in December. Later, San Francisco Fed President Daly's speech also confirmed the article's veracity. Daly said, "it's not the time to slow down interest rate hikes, but it's time to start talking about it and start planning to slow it down". This has kicked off the policy regarding the Fed Pivot.

This has also been the main tone in recent trading sessions. But for the Fed, the path of rate hikes this year has been largely locked in, namely 75 and 50 basis points in November and December, respectively. The slowdown in the pace of interest rate hikes is reflected in the September dot plot, and the Fed never denied slowing the pace of rate hikes after a certain degree of tightening.

Interestingly, the official statement quoted in Nick's article is supposed to be out of context. He quoted Governor Waller's speech on October 6th: "We will have a very thoughtful discussion on the pace of tightening at the next meeting."

But what Waller emphasized in this speech was the stickiness of rent inflation and the accompanying problem of potentially high core inflation, while it is neutral to state that the pace of rate hikes will be discussed at future meetings. Otherwise, what would officials be discussing at the meeting?

Anyway, although the cutting in the rate hike is still a rate hike tightening, the market assumed the Fed to fast tighten as the Fed kept buying assets during Taper last year. It is rational for the market to expect that the Fed may be ready for future loosening as the terminal rate is getting clear and the interest rate hike is getting cut, because if the Fed further lifts the terminal rate to more than 5% of the level (currently the highest forecast by officials is 4.75%), it may need to face downside risks to the economy from excessive tightening in the future. Thus, it will be forced to consider the trade-off between economic growth, employment targets, and inflation targets. Conversely, without a further increase in the terminal rate, monetary policy cannot bring additional tightening surprises to the market with the existing information.

This is the market's current logic regarding trading the Fed Pivot.

It was mentioned in the previous analysis that as further rate hikes enter restrictive policy areas, interest rates are raised several times, the concerns about financial stability accumulate. The market will consider it a signal of stopping raising interest rates or even may think the Fed will start to cut interest rates (anyway the market always acts in advance). Consequently, it is hard for the Fed to cut interest rate hikes for the first time, as any tiny adjustment will be misunderstood as a 'shift in policy.'

There are often discrepancies between market expectations and facts, but for traders, what the market recognizes is correct. And right now, a Fed Pivot is indeed happening. So how do to judge the pros and cons of the Fed's wording on the Fed Pivot at the November meeting?

If the Fed continues to emphasize the resilience of inflation at the November meeting, or makes new, more hawkish forward guidance on interest rate levels for next year, then the expectation that terminal rates will remain high will defeat the expectation that the Fed will cut rates soon. In other words, when the Fed considers lowering the rate hike (space), it will tend to use a longer tightening cycle (time) to balance the market's expectations of a rate cut, to trade time for space.

At the same time, if the data also fails to support, that is, no signs of downward movement of inflation, growth is weak and employment slows rapidly, then the turn is even less to talk about. For example, the GDP and PCE to be released today and tomorrow will require extra vigilance.

Conversely, if the Fed emphasizes the resilience of inflation while starting to increase the use of the word "risk", such as downside risks to the economy, target balance risks, excessive tightening risks, two-way risks, etc. If this part of the risk is confirmed by the data, then it is sure that the current rate hike cycle has come to an end.

In addition, the Fed is very strict in terms of wording, for example, before Taper, the Fed clearly stated that it needs to achieve "substantial further progress" before it will start to turn. Therefore, there must be a matching word out when turning to expansionary, which should be cared for.

At the same time, no one rejected raising interest rates by 75 basis points in the last meeting. If there are different opinions in future voting, it means that the focus of each voter diverges. At present, the common target is to manage inflation, but it will certainly change with the passage of time and changes in fundamentals.

Referring to the speech, Waller is currently the most optimistic one about the economic situation, and if his views start to soften, then the shift to trading will be more reliable.

The caveat is that the current Fed Pivot is all about market expectations, with the one and only support being an article by Wall Street Journal reporter Nick Timiraos, a speech by San Francisco Fed's Daly, and the U.S. housing market data released on Tuesday. Furthermore, the support of the first two is too thin, and the last one, too optimistic, is a coincidence or will continue to maintain the decline and form a trend, which is still unknown, and need to be watched. Moreover, it reminds the market that when July CPI dropped for the first time, the market was optimistic similarly. Besides, the two most significant data this week are released, the market trend can be judged only when the GDP and PCE are released, and the current market trend is only tentative.

The Fed Pivot is still pending, and the brake of tightening hasn't happened either. Therefore, trading the Fed Pivot will not be consistent, and a new round of appreciation is not likely to happen only based on the change of currency factors. Thus, it is recommended to put extra caution on trading the Fed Pivot without certain data and clear confirmations from the Fed.

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You understand and acknowledge that there is a high degree of risk involved in trading. Following any strategies or investment methods may lead to potential losses. The content on the site is provided by our contributors and analysts for information purposes only. You are solely responsible for determining whether any trading assets, securities, strategy, or any other product is suitable for investing based on your own investment objectives and financial situation.

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Owen Li

Energy

Saudi Arabia's sovereign wealth fund said it auctioned 1.4 million tonnes of carbon credits at the Middle East's first carbon offset auction.

Top crude exporter Saudi Aramco, Olayan Financing Company and Saudi Arabian Mining Company bought the largest number of credits in the auction, the Public Investment Fund said in a statement on Wednesday.

The carbon credits comply with Corsia, a programme run by the International Civil Aviation Organisation, and are registered with Verra, operator of the world's largest registry of carbon credits.

Carbon credits, also known as carbon offsets, are permits that allow companies to emit a certain amount of carbon dioxide or other greenhouse gases. The market for the financial instrument could be worth more than $50 billion by 2030, according to consultancy firm McKinsey.

PIF has joined forces with Saudi Tadawul Group, the holding company that operates the kingdom's stock exchange, to establish the Regional Voluntary Carbon Market Company.

Headquartered in Riyadh, the new company will support regional businesses as they contribute to the global transition towards net zero.

"The company will play an important role in PIF's wider efforts to drive the investment and innovation required to address the impact of climate change and support Saudi Arabia's efforts to achieve net zero by 2060," Yazeed Al Humied, deputy governor and head of Middle East and North Africa investments at PIF, said on Tuesday.

The company's establishment is a continuation of PIF initiatives to support Saudi Arabia's green agenda. Earlier this month, it raised $3bn through its first bond issuance as it considers financing or refinancing its investments in renewable energy, energy efficiency, green buildings and clean transport.

Saudi Arabia, the world's biggest crude exporter and the Arab world's biggest economy, is looking to diversify away from oil exports as part of its plan to achieve net-zero carbon emissions by 2060.

The kingdom plans to more than double its target of reducing annual carbon emissions to 278 million tonnes by 2030, Crown Prince Mohammed bin Salman said in October last year. This was up from a previous target of 130 million tonnes.

This year, The Abu Dhabi Global Market teamed up with AirCarbon Exchange (ACX) to create the "world's first fully regulated" carbon trading exchange and clearing house in the emirate.

ADGM will regulate carbon credits and offsets as emission instruments, and issue licences for exchanges to operate both spot and derivative markets.

While governments globally are pursuing carbon neutral goals, significant investment is required to achieve those targets.

Source: thenationalnews

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Kevin Du

Russia-Ukraine Conflict

Ukrainian troops are holding out against repeated attacks by Russian forces in two eastern towns while those at the southern front are poised to battle for the strategic Kherson region, which Russia appears to be reinforcing.

Ukrainian President Volodymyr Zelenskiy said in a Wednesday evening video address that there would be good news from the front but he gave no details.

He did not mention what was happening in Kherson, which officials and military analysts have predicted will be one of the most consequential battles of the war since Russia invaded Ukraine eight months ago.

The most severe fighting in eastern Ukraine was taking place near Avdiivka, outside Donetsk, and Bakhmut, Zelenskiy said.

"This is where the craziness of the Russian command is most evident. Day after day, for months, they are driving people to their deaths there, concentrating the highest level of artillery strikes," he said.

Russian forces have repeatedly tried to seize Bakhmut, which sits on a main road leading to the Ukrainian-held cities of Sloviansk and Kramatorsk.

The looming battle for Kherson city at the mouth of the Dnipro River will determine whether Ukraine can loosen Russia's grip on the south.

SHELLING

While much of the front line remains off limits to journalists, at one section of the front north of the Russian-occupied pocket on the west bank of the Dnipro, Ukrainian soldiers said Russian shelling was stepping up again after having tailed off in recent weeks.

Radio intercepts indicated freshly mobilised recruits had been sent to the front and Russian forces were firmly dug in.

"They have good defensive lines with deep trenches, and they are sitting deep underground," said Vitalii, a Ukrainian soldier squatting in a weed-choked irrigation canal, concealed from any prowling enemy drones by overhanging trees.

Ukrainian forces advanced along the Dnipro River in a dramatic push in the south at the start of this month, but progress appears to have slowed. Russia has been evacuating civilians on the west bank but says it has no plans to pull out its troops.

Oleksii Reznikov, Ukraine's defence minister, said wet weather and rough terrain were making Kyiv's counter-offensive in Kherson harder than it was in the northeast, where it pushed Russia back in September.

At the front, intermittent artillery fire echoed from both sides, with towers of smoke rising in the distance.

A Ukrainian helicopter gunship swept low over the fields, loosed rockets at the Russian positions and wheeled around spitting flares to distract any heat-seeking anti-aircraft rockets fired at it.

"In this area, they are very active. They shell every day and are digging trenches and preparing for defence," a unit commander at the front, who asked to be quoted by his nickname, Nikifor, said of the Russians.

His location in Mykolaiv province could not be identified under Ukrainian military regulations.

The unit holds a network of well fortified trenches dug into tree lines opposite the Russian fortifications, and rain has turned the dirt tracks that access them to mud, especially where tank treads have churned them up.

Australia said it was sending 30 more armoured vehicles and deploying 70 soldiers to Britain to help train Ukrainian troops there to bolster Kyiv's war effort.

"We're mindful that Ukraine needs to now be supported over the longer term if we're going to put Ukraine in a position where it can resolve this conflict on its own terms," Defence Minister Richard Marles told ABC television.

NUCLEAR REHEARSAL

Since Russia began losing ground in a counter-offensive in September, Russian President Vladimir Putin has taken a series of steps to intensify the conflict, calling up hundreds of thousands of Russian reservists, proclaiming the annexation of occupied land and repeatedly threatening to use nuclear weapons to defend Russia.

This month, Russia launched a new campaign of strikes using missiles and Iranian-made drones against Ukraine's energy infrastructure, also hitting parks and homes across the country.

In Russia, the military staged a high-profile rehearsal for nuclear war, with state television broadcasts dominated by footage of submarines, strategic bombers and missile forces practicing launches in retaliation for an atomic attack.

Moscow has conducted a diplomatic campaign this week to promote an accusation that Kyiv is preparing to release nuclear material with a so-called "dirty bomb", an allegation the West calls baseless and a potential pretext for Russian escalation.

Despite the rising tensions, United Nations aid chief Martin Griffiths said he was "relatively optimistic" that a U.N.-brokered deal that allowed a resumption of Ukraine Black Sea grain exports would be extended beyond mid-November.

Source:reuters

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Michelle

Energy

Recasts story with comments from officials

U.S. and Western officials are finalizing plans to impose a cap on Russian oil prices amid a warning from the World Bank that any plan will need active participation of emerging market economies to be effective.

Officials said no price range has been decided yet, however one person familiar with the process said the cap will be determined in line with the historical average of $63-64 a barrel - a level that could form a natural upper limit.

Such a level is in line with recent comments by Treasury Secretary Janet Yellen that a price cap in the $60 range would give Russia an incentive to keep producing oil.

The administration of President Joe Biden has seen the price cap as a way to cut oil revenues for Russia, a major source of its funding for its war against Ukraine, while keeping Russian oil flowing and avoiding price spikes.

The actual price will be set in coming weeks ahead of the planned Dec. 5 launch of a European embargo on Russian oil and associated restrictions on transportation and insurance of seaborne oil.

A senior Biden administration official said reports of any price range were wrong, but declined to elaborate.

U.S. officials pushed back against a report by Bloomberg News quoting unnamed sources saying they were being forced to scale back plans for the price cap, with fewer participating countries and a higher price level.

The administration has told reporters for weeks that the price cap was already bearing fruit by empowering countries to demand bigger discounts from Moscow.

Bloomberg also reported South Korea had privately told G7 nations it planned to comply and G7 officials were also trying to bring New Zealand and Norway on board.

"The White House and the administration are staying the course on implementing an effective, strong price cap on Russian oil in coordination with the G7 and other partners," a spokeswoman for the White House's National Security Council, Adrienne Watson, said in a statement to Reuters.

Yellen told reporters earlier this month the coalition pushing for the price cap included the Group of Seven, the European Union and Australia, and they were "not trying to sign up additional countries."

"For us, success is going to be not how many countries raise their hand to say 'We endorse what you're doing, we're part of the coalition.' We're not looking for that. What we want to see is that Russian oil continues to flow into the market, and that countries are using the leverage provided by the existence of this cap to bargain lower prices."

DOWNWARD PRESSURE

Western diplomats say the price cap is already giving India and other buyers of Russian oil better leverage in negotiations with Moscow, enabling them to secure good discounts.

Indonesian Finance Minister Sri Mulyani Indrawati told the Jakarta Post in an interview published on Wednesday that Yellen told her the cap would be set at a level that was just enough to create profit, but not "supernormal profit."

"If it was 60 (dollars per barrel), that would really fit with my budget. That would be nice," Sri Mulyani told the newspaper.

The World Bank on Wednesday said the G7 oil price cap could affect the flow of oil from Russia, but was an "untested mechanism" and needed the participation of large emerging markets and developing countries to be effective.

It noted Russia has said it will not trade with countries participating in the price cap.

U.S. officials say the price cap will be policed by attestations taken from buyers in local jurisdictions.

Source: reuters

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Ukadike Micheal

The European Central Bank will raise interest rates again on Thursday and likely reel in a key subsidy to commercial banks, taking another huge step in tightening policy to fight off a historic surge in inflation.

Fearing that rapid price growth is becoming entrenched, the ECB has already raised rates at the fastest pace on record, and there is little let-up in sight as unwinding a decade worth of stimulus could take it well into next year and beyond.

The ECB is almost certain to raise its 0.75% deposit rate by 75 basis points - for a cumulative 2 percentage-point increase in three meetings - and signal that it is not yet done, even if the size of subsequent moves remains open to debate.

But in a potentially more important decision, the bank is also likely to take the first steps in reducing its 8.8 trillion euro balance sheet, bloated by years of debt purchases and ultra cheap loans extended to banks.

"The ECB is still in catch-up mode," BNP Paribas said. "We think there is now a comfortable majority for taking rates into restrictive territory."

But the rate decision is likely to be the easy part of Thursday's meeting.

Unlike in September, no policymaker has openly opposed the idea of a 75 basis-point hike on Thursday, and markets have fully priced in such a move, suggesting an easy unanimity, especially since the U.S. Federal Reserve has also hinted at a similar increase.

Signalling that future moves will be more difficult, ECB President Christine Lagarde is likely to provide only vague guidance, arguing that more hikes are needed but incoming data and new economic projections in December will be key.

While inflation is high and underlying price growth is broadening, the overall picture may be more balanced than in the past as energy prices are falling, a looming recession will dampen price pressure, and there are no signs of a wage-price spiral.

The ECB's rate decision is due out at 1215 GMT, followed by Lagarde's news conference at 1245 GMT.

BALANCE SHEET BATTLE

The real battle is likely to be over how to reduce the ECB's balance sheet.

The most pressing issue is dealing with some 2.1 trillion euros worth of ultra-cheap loans handed out to commercial banks, which are now causing both a political and financial headache.

Having borrowed at zero or even negative rates, banks can now simply park this cash back at the ECB for a positive, risk-free return, which rises with each deposit rate hike.

"The optics are bad against the backdrop of a historical shock to households' income, and political pressure cannot be ignored," Pictet economist Frederik Ducrozet said. "Note that some countries have implemented a windfall tax on bank profits for similar reasons."

The ECB would also be justified on monetary policy grounds to act, as abundant liquidity is keeping interest rates too low - money market rates are still slightly below the central bank's deposit rate.

This is essentially stopping rate hikes from getting fully transmitted to the real economy, so the ECB is likely to decide to change the terms of these so-called Targeted Longer-Term Refinancing Operations, or TLTROs, to encourage banks to repay them early.

The bank is likely to decide to change the bank loan terms, but the devil will be in the detail as only imperfect options are available to it.

The most controversial would be a simple change in the terms, a move likely to be challenged in court.

"Changing the TLTRO terms could hit the ECB's credibility and would lead to reluctance of banks to ever make use of the TLTROs in the future again," ING Economist Carsten Brzeski said.

The ECB could also create a system of tiering where reserves equalling TLTRO borrowing would be remunerated at lower rates, while it could also set a lower rate applied to excess reserves.

An even more controversial discussion for Thursday will be how to wind down the 5 trillion euros worth of debt, mostly government bonds, bought by the ECB.

While no decision is likely on this, policymakers are likely to signal that they have started devising plans to wind down a 3.3 trillion euro Asset Purchase Programme by not investing all cash back into the market from maturing bonds.

Source: reuters

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Devin

Energy

TotalEnergies TTEF.PA and the Lebanese government have reached a deal handing the French oil major temporary majority control of an offshore exploration block and paving the way for negotiations with Qatar over a stake in the gas project, two sources said.

TotalEnergies and the Lebanese government have been tussling over the fate of Russian group Novatek's 20% stake after Beirut announced in September that Novatek would exit.

TotalEnergies can now pursue talks to find a new partner for what must be a three-way consortium in which the Lebanese state may take a share of any financial windfall, the two sources said.

They added it also allows the Lebanese government to remain compliant with a landmark maritime border agreement with longtime foe Israel, due to come into force on Thursday.

Offshore areas in the eastern Mediterranean and Levant have yielded major gas discoveries in the past decade. Interest in them has grown since Russia's invasion of Ukraine disrupted flows.

The sources, both familiar with details of the arrangement, spoke on condition of anonymity because they are not authorised to talk publicly about the matter.

Lebanon's cabinet issued an unpublished decision on Oct. 21, a copy of which was seen by Reuters on Wednesday, assigning the stake previously held by Novatek NVTK.MM to a company called Daja 216 and transferring TotalEnergies's 40% stake to another company, Daja 215. LINK

They gave no details on who controls Daja 215 and Daja 216.

The two sources told Reuters that Daja 215 and Daja 216 are vehicles for TotalEnergies.

"They are just vehicles, ready-made," one of the two sources said. "This effectively and temporarily gives Total 60% of the consortium."

TotalEnergies, asked if it controlled Daja 215 and Daja 216, did not immediately respond.

Official French records show that Daja 215 and Daja 216 are both registered to the same address as TotalEnergies' headquarters in the French capital's La Defense business district.

A Lebanese energy ministry source said Daja 215 and Daja 216 were "transition entities".

TEMPORARY TRANSFER

The initial exploration license was held by a tripartite consortium of TotalEnergies, Italy's Eni ENI.MI and Novatek NVTK.MM.

Previously, the Lebanon government said Qatar expressed an interest in joining the consortium.

The transfer of stakes to Daja 215 and Daja 216 was temporary, Lebanon's caretaker government said in its decision. The two sources said the understanding between TotalEnergies and the Lebanese government was that the French group would enter negotiations with state-owned QatarEnergy over the former Novatek stake.

They added that Qatar was expected to enter the consortium within three months and was seeking a 30% stake, comprised of Novatek's former 20% stake, and a 5% stake from each of TotalEnergies and Eni.

TotalEnergies did not immediately respond when asked if it planned talks with the Qataris.

Qatar's government media office, contacted outside business hours, also did not immediately respond to a request for comment.

The exploration license for Bloc 9 expired on Oct. 22 and under the terms of the license, three signatures were required for renewal, the two sources said.

Block 9 lies mostly in Lebanese waters but a segment lies south of the newly delineated border with Israel. Total and Israel have agreed a separate deal for any revenues emanating from there.

According to the exploration and production agreement for Block 9, a copy of which was seen by Reuters, the consortium exploring the field must consist of three partners.

The maritime border agreement to be signed by Lebanon and Israel on Thursday stipulates the Block 9 operators will not include "Israeli or Lebanese corporations".

Source: reuters

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Glendon

The Bank of Canada announced a smaller-than-expected interest rate hike on Wednesday and said it was getting closer to the end of its historic tightening campaign as it forecast the economy would stall over the next three quarters.

The central bank increased its policy rate by half a percentage point to 3.75%, coming up short on calls for another 75 basis points move. It has lifted rates by 350 basis points since March, one of its fastest tightening cycles ever. Bank of Canada Slows Pace of Rate Hikes as Recession Fears Mount_1

Bank of Canada Slows Pace of Rate Hikes as Recession Fears Mount_1

"This tightening phase will draw to a close. We are getting closer, but we are not there yet," Governor Tiff Macklem told reporters at a news conference after the decision.

How much higher rates need to go "will depend on how monetary policy is working to slow demand, how supply challenges are resolving and how inflation and inflation expectations are responding," he said.

When asked if those considerations could lead the bank to not hike at all at its next decision or whether they would simply inform the size of a inevitable increase, Macklem said it "would be closer" to the latter.

"We expect rates will need to rise further. That could mean another bigger-than-normal increase, it could mean that we can move to more normal size 25-basis-point increases," he said.

Macklem said the central bank was still far from its goal of low, stable and predictable inflation at 2%, but was trying to balance the risks of under- and over-tightening.

This as the bank slashed its growth forecasts for 2023 and said economic activity would be close to flat from the fourth quarter of 2022 through the first half of 2023.

When asked if that meant a recession was possible, he said: "Yes, a couple - two, three quarters - of slightly negative growth is just as likely as two or three quarters of slightly positive growth. That's not a severe contraction, but it is a significant slowing."

A technical recession is considered to be two consecutive quarters of negative growth.

DOVISH PIVOT

That darkening outlook likely guided the decision to challenge market pricing with a smaller move, said analysts, noting that while warnings of future hikes take the edge off the surprise, the Bank of Canada may be getting more cautious.

"Today's dovish pivot supports our view that the BoC will continue to taper its tightening cycle into year-end with a 25 bp increase in December leaving the terminal rate at 4%," said Josh Nye, senior economist at RBC Economics, in a note.

The Bank of Canada has been one of the most hawkish major central banks in the current tightening campaign and its policy rate is now the highest of 10 large developed economies, though the U.S. Federal Reserve is expected to hike by 75 basis points next week. Bank of Canada Slows Pace of Rate Hikes as Recession Fears Mount_2

Bank of Canada Slows Pace of Rate Hikes as Recession Fears Mount_2

While falling behind the Fed's pace could hit the Canadian dollar, adding to the inflation pinch for importers and consumers, some economists were happy to see the divergence.

"We have several indicators suggesting that we're playing with fire if we think we can follow the Fed all the way up to 5% or so," said Jimmy Jean, chief economist at Desjardins Group.

Inflation in Canada has slowed to 6.9% from a peak of 8.1%, but core measures remain broad-based and persistent. The central bank revised its inflation outlook a touch lower and said it sees a return to the 2% target by end-2024.

The Canadian dollar CAD= was trading 0.3% higher at 1.3560 to the greenback, or 73.75 U.S. cents.

Money markets now see interest rates peaking between 4.0% and 4.25% in the coming months, down from nearly 4.5% before the announcement.