* Dollar finds buyers after better retail sales, another WSJ Timiraos article

* Stocks flat after benchmark S&P 500 prints intraday record high

* Gold sells off as yields and dollar better bid

* Fed walks messaging tightrope as it begins path back to normal

FX: USD strengthened against most major currencies following better-than-expected US retail sales. The data seemed to support a less aggressive stance by the Fed, though bets on a jumbo sized 50bps rate cut tomorrow didn’t alter too much – 63% vs 67% prior to the release. As we said yesterday, the dovish bar is high for a break of major support at 101.61, the December 2023 cycle low.   

EUR lost ground as it struggled at the December high at 1.1139. The German ZEW business survey saw a sharper than expected decline in current conditions and expectations. Major support sits at the high 1.09s. The recent top is 1.1201.

GBP underperformed after initially moving north to a high of 1.3229. UK inflation data is released tomorrow ahead of the BoE meeting. Headline CPI is forecast to remain at 2.2% y/y and core rise two-tenths to 3.5% y/y. Key services inflation is expected to increase to 5.6% from 5.2%. Rate setters are expected to sit on their hands due to these elevated services prices, leaving the Base Rate at 5%.

USD/JPY bounced off the long-term Fib retracement level (61.8%) of the 2023 low to 2024 high at 140.48. This comes after five straight down days last seen at the start of August. US yields consolidated around recent lows. The BoJ is expected keep rates steady at its Friday meeting, though Governor Ueda is likely to be relatively hawkish.

AUD struggled above minor Fib retracement at 0.6759 as it printed a narrow range doji. But it outperformed most of its peers. USD/CAD looked to be pushing higher after soft CPI data. Annual inflation slowed one-tenth more than expected to 2% from 2.5% in July, marking the coolest pace since February 2021. The inflation battle seems close to being won though more rate cuts are priced in. Markets see roughly 100bps of easing in total in the final three BoC meetings of 2024.   

US Stocks: Stocks were mixed with the standout sector being energy while healthcare and consumer staples lagged. The S&P 500 added 0.03% to settle at 5,635. The tech-laden Nasdaq 100 gained 0.05% to finish at 19,432. The Dow closed 0.04% lower at 41,606 and hit a record intraday high for a second straight day. The benchmark S&P 500 is now up 4.18% over the past seven consecutive days to its fourth highest close in history. Energy was buoyed by strength in the crude complex amid escalating geopolitical updates after thousands of Hezbollah pager devices exploded.

Asian stocks: Futures are mixed. Asian stocks were mostly in the green with investors awaiting the Fed decision. The ASX 200 printed a fresh intraday record high on tech and real estate gains. The Nikkei 225 moved lower on yen strength and its return after a long weekend. The Hang Seng eventually climbed higher. Hong Kong’s biggest IPO in three years saw Midea H shares jump over 8% on debut.

Gold turned lower from record highs on better bid yields and the dollar. Traders are glued to the FOMC meeting.

Day Ahead – FOMC Meeting

Finally, as Jay Powell recently said, “the time has come and the direction of travel is clear”. So, we know we will get a first rate cut in four years. This comes after the biggest inflation surge since the 1970s and the worst global health crisis in over 100 years. But the size of that move and what comes after is still hugely up for debate. The odds have swung quite wildly, and certainly alot very recently. A not-as-bad-as-expected NFP lowered bets on a 50bps move, the hotter than forecast core m/m CPI print also did that.

But a procession of stories in the media have speculated about the dilemma the Fed faces and whether they should kick off this cycle with front-loading and a half-point reduction. Is the Fed behind the curve? Is the employment side of the mandate deteriorating enough? Do the Fed know something markets and investors don’t? There are many, many questions which typically shouldn’t be the case ahead of such a pivotal and historic meeting.

Chart of the Day – Dollar Index on big support

Updated economic projections and dot plot will inform markets on the pace and size of rate cuts coming in the months ahead. A Bloomberg survey expects the Fed to pencil in the median 2024-end dot at 4.9% versus the previous 5.1% in June. 44% of economists surveyed expect the Fed will tweak the statement to acknowledge the possibility of further adjustments. Markets price in over 115bps of cuts for the next three meetings – at this one, November and December. We think that is too much when the eoconmy is not exactly down and out, markets are functioning well and stocks are close to all-time highs. GDP forecasts for Q3% have jsu tbeen upgraded to 3%. But dual mandate data has been incrementally dovish since the July decision. And that meeting saw several officials state that recent data had provided a plausible case for a cut.

The December bottom in the Dollar Index at 100.61 has proved a tough nut to crack so far, in the last few weeks. A rebound may encounter resitance at the 21-day SMA at 101.24 and minor Fib retracement at 101.88. A breakdown on a very dovish Fed outocme, which seems tough to call, resides at the July 2023 low at 99.57.