Sun, Jan 26, 2020 @ 20:40 GMT

China to stop iron ore export tariffs on Jan 1

    China’s Ministry of Finance announced adjustments on some import and export tariffs today, effective January 1. In short, export tariffs on 94 products are canceled, including iron ore, and fertilizers. For imports, China will levy temporary tariffs on 706 products and maintain relatively low import tariffs for aircraft engines.

    Import tariffs on 14 information technology products will be cancelled starting July 1, 2019. China will also further cut most favoured nation tariffs on 298 information technology products from July 2019.

    Full release from MoF of China.

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    Lots of US political headlines, but markets steady

      US politics catch a lot of headlines today and over the weekend which might caused some anxiety in analysts. But such nervousness is not really reflected in the markets, in particular the currency markets. Major pairs and crosses are staying in very tight range today. At the time of writing, the biggest mover, AUD/USD, is just up 28 pips.

      Headlines mainly centered around four issues. Firstly, it’s reported on Friday that Trump is considering to fire Fed Chair Jerome “Jay” Powell after last week’s rate hike. Treasury Secretary Steven Mnuchin then tweeted and denied it. Mnuchin noted Trump said “I never suggested firing Chairman Jay Powell, nor do I believe I have the right to do so”. Then WSJ reported on Sunday that advisers of Trump have discussed in recent days arranging a meeting between him and Powell.

      Secondly, it’s Mnuchin again. He said he made individual calls with CEOs with the six largest banks. And, “The CEOs confirmed that they have ample liquidity available for lending to consumer, business markets, and all other market operations.” “He also confirmed that they have not experienced any clearance or margin issues, and that the markets continue to function properly.” Mnuchin will convene a call with the President’s Working Group on financial markets on Monday too. Some criticized that Mnuchin’s move was counter-productive as it portrayed a sense of worry to investors.

      Thirdly, the partial federal government shutdown with start today with no immediate end in sight. Mick Mulvaney, the acting chief of staff of Trump, warned that “It’s very possible this shutdown will go beyond (December) the 28th and into the new Congress.”

      Fourthly, Trump is going to replace Defense Secretary Jim Mattis two months earlier than expected after being annoyed by the latter’s resignation letter.

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      Fed Williams: Two rate hikes in 2019 would make sense in a really strong economy

        Speaking on CNBC, New York Fed President John Williams warned that “there are risks to that outlook that maybe the economy will slow further”. He also emphasized that Fed is “listening” and it’s “ready to re-assess and reevaluate our views and…policy stance”. And, Fed will “go into the new year with eyes wide open, willing to read the data and listen to what we are hearing, re-assess our economic outlook, and take the right policy decisions.”

        To be more specific, Williams said “Something like two rate increases would make sense in a really strong economy going forward. But we’re data dependent, we’re going to adjust our views dependent on how the outlook changes.”

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        US Q3 GDP revised down to 3.4%, ex-transport durable orders contracted

          Released from US, Q3 GDP growth was finalized at 3.4% annualized, revised down from 3.5%. GDP price index was revised up from 1.7% to 1.8%. Durable goods orders rose 0.8% in November, much lower than expectation of 1.8%. Ex-transport orders even dropped -0.3% versus expectation of 0.3%.

          On the other hand, Canada GDP rose 0.3% mom, in October, above expectation of 0.2% mom. Headline retail sales rose 0.3% mom, below expectation of 0.6% mom. Ex-auto sales rose 0.0%, below expectation of 0.3%.

          USD/CAD extends recent up trend in early US session to as high as 1.3563 so far.

          But that’s mainly because WTI crude oil is extending recent free fall to as low as 45.00.

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          UK Q3 GDP finalized at 0.6%, services the strongest contributor

            UK Q3 GDP growth was finalized at 0.6% qoq, unrevised. Annually, GDP grew 1.5% yoy, revised up by 0.1%. ONS noted that “services remained the strongest contributor to growth in the output approach to GDP in Quarter 3 2018, with growth easing slightly from the previous quarter; construction and manufacturing also contributed positively to growth.”

            At the same time, ONS also said “In comparison with the same quarter a year ago, the UK economy has grown by an unrevised 1.5%. This is a slight pickup from previous quarters in the year, although the longer-term picture remains one of relatively subdued growth compared with historic standards”

            Also from UK, current account deficit widened to GBP -26.5B in Q3, larger than expectation of GBP -22.2B. Public sector net borrowing rose to GBP 6.3B in November, below expectation of GBP 7.0B

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            Japan cabinet approved record fiscal 2019 budget

              Japan Prime Minister Shinzo Abe’s Cabinet approved budget for fiscal 2019. The general account budget would rise for the seventh straight years, to JPY 101.5T, comparing to current fiscal year’s initial estimate of JPY 97.7T.

              Of the JPY 101.5T, around JPY 2T will be spent specifically to ease the impact from the planned sales tax hike in October 2019, from 8% to 10%. Measures will include shopping vouchers to help low income households.

              However, stimulus measures will altogether hit JPY 6.5T, far exceeding the estimated increase in sale tax revenue. Some economists noted that Abe has now set the precedence that rise in tax would actually be delaying fiscal reform.

              Nevertheless, Finance Minister Taro Aso emphasized that “we were able to manage both needs of economic revival and fiscal consolidation with this budget.”

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              Asian update: Nikkei dropped to lowest since Sep 2017, Yen stays strongest for the week

                Risk aversion once again spread from US to Asian session. Nikkei closed down -1.11%, or 226.39 pts to 20166.19. That’s the lowest level since September 2017 and 20000 handle is now vulnerable. At the time of writing, China Shanghai SSE is down -1.3% at 2504. However, losses in Singapore Strait Times (-0.27%) and Hong Kong HSI (-0.03%) are relatively limited.

                Overnight, DOW lost -1.99% or -464.06pts to 22859.60. S&P 500% dropped -1.58% and NASDAQ dropped -1.63%. DOW is now pressing key support level at 38.2% retracement of 15450.56 to 26951.81 at 22558.33. There is prospect of some recovery before yearly close. But it has to overcome near term resistance at around 23500 before declaring bottoming.


                On important development to note is that acceleration in flattening of US yield curve. Overnight, 5-year yield closed up 0.026 to 2.653. 10-year yield rose 0.011 to 2.789. More importantly, 30-year yield breached 3% handle to 2.957, then closed at 3.012, down -0.003. Meanwhile, yield curve remains inverted between 2-year (2.675) and 3-year (2.652).

                The currency markets are generally in range today. For the week, Yen remains the strongest one on risk aversion, followed by Euro. Commodity currencies are all in deep red.

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                US jobless claims rose to 214k, Philly Fed business outlook dropped to 9.4

                  US initial jobless claims rose 8k to 214k in the week ended December 15, below expectation of 219k. Four-week moving average of initial claims dropped -2.75k to 222k.

                  Continuing claims rose 27k to 1.688M in the week ended December 8. Four-week moving average of continuing claims rose 6.75k to 1.6725M.

                  Also released Philly Fed business outlook dropped sharply to 9.4 in December, down from 12.9 and missed expectation of 15.6. That’s also the lowest level since August 2016.

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                  BoE keeps Bank Rate unchanged at 0.75%, Brexit uncertainties have intensified considerably, full statement

                    BoE left Bank Rate unchanged at 0.75% as widely expected. Asset purchase target is also held at GBP 435B. Both decisions are made with unanimous vote.

                    The overall tone of the statement is rather dovish. Firstly it noted that “near-term outlook for global growth has softened and downside risks to growth have increased” since last meeting. With significant decline in oil prices, UK CPI is “likely to fall below 2% in coming months. Though, loosening of fiscal policy in Budget 2018 will boost GDP by the end of the forecast period by 0.3%.

                    Secondly, BoE said “Brexit uncertainties have intensified considerably”. And, the “further intensification of Brexit uncertainties, coupled with the slowing global economy, has also weighed on the near-term outlook for UK growth.”

                    But BoE emphasized that Brexit uncertainties would lead to “greater-than-usual short-term volatility in UK data”. The MPC would look through these short term developments, from “the dynamics of the economy once greater clarity emerges about the nature of EU withdrawal.”

                    BoE also reiterated that he broader economic outlook will “depend significantly on the nature of EU withdrawal”. And, “the monetary policy response to Brexit, whatever form it takes, will not be automatic and could be in either direction”.

                    Full statement below.

                    Bank Rate maintained at 0.75%

                    Our Monetary Policy Committee has voted unanimously to maintain Bank Rate at 0.75%. The committee also voted unanimously to maintain the stock of corporate bond purchases and UK government bond purchases.

                    The Bank of England’s Monetary Policy Committee (MPC) sets monetary policy to meet the 2% inflation target, and in a way that helps to sustain growth and employment. At its meeting ending on 19 December 2018, the MPC voted unanimously to maintain Bank Rate at 0.75%.

                    The Committee voted unanimously to maintain the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at £10 billion. The Committee also voted unanimously to maintain the stock of UK government bond purchases, financed by the issuance of central bank reserves, at £435 billion.

                    Since the MPC’s previous meeting, the near-term outlook for global growth has softened and downside risks to growth have increased. Global financial conditions have tightened noticeably, particularly in corporate credit markets. Oil prices have fallen significantly, however, which should provide some support to demand in advanced economies. The decline in oil prices also means that UK CPI inflation is likely to fall below 2% in coming months. The Committee judges that the loosening of fiscal policy in Budget 2018, announced after the November Inflation Report projections were finalised, will boost UK GDP by the end of the MPC’s forecast period by around 0.3%, all else equal.

                    Brexit uncertainties have intensified considerably since the Committee’s last meeting. These uncertainties are weighing on UK financial markets. UK bank funding costs and non-financial high-yield corporate bond spreads have risen sharply and by more than in other advanced economies. UK-focused equity prices have fallen materially. Sterling has depreciated further, and its volatility has risen substantially. Market-based indicators of inflation expectations in the United Kingdom have risen, including at longer horizons.

                    The further intensification of Brexit uncertainties, coupled with the slowing global economy, has also weighed on the near-term outlook for UK growth. Business investment has fallen for each of the past three quarters and is likely to remain weak in the near term. The housing market has remained subdued. Indicators of household consumption have generally been more resilient, although retail spending may be slowing.

                    The MPC has previously noted that shifting expectations about Brexit among financial markets, businesses and households could lead to greater-than-usual short-term volatility in UK data. Judging the appropriate stance of monetary policy requires separating these shorter-term developments from other more persistent factors affecting inflation and from the dynamics of the economy once greater clarity emerges about the nature of EU withdrawal.

                    Domestic inflationary pressures have continued to build. The labour market remains tight, with employment growth picking up in the latest data and the unemployment rate likely to stay around 4% in the near term. Annual growth in regular pay has risen to 3¼%, stronger than anticipated in the November Report. In contrast, services CPI inflation has been subdued. The inflation expectations of households and professional forecasters have remained broadly unchanged.

                    The Committee judged in November that, were the economy to develop broadly in line with its Inflation Report projections, which were conditioned on a smooth adjustment to the average of a range of possible outcomes for the UK’s eventual trading relationship with the European Union, a margin of excess demand was expected to emerge. In that context, an ongoing tightening of monetary policy over the forecast period, at a gradual pace and to a limited extent, would be appropriate to return inflation sustainably to the 2% target at a conventional horizon.

                    The broader economic outlook will continue to depend significantly on the nature of EU withdrawal, in particular: the form of new trading arrangements between the European Union and the United Kingdom; whether the transition to them is abrupt or smooth; and how households, businesses and financial markets respond. The appropriate path of monetary policy will depend on the balance of the effects on demand, supply and the exchange rate. The monetary policy response to Brexit, whatever form it takes, will not be automatic and could be in either direction. The MPC judges at this month’s meeting that the current stance of monetary policy is appropriate. The Committee will always act to achieve the 2% inflation target.

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                    European update: Dollar suffers renewed selling, Euro strongest

                      Dollar suffers deep selling in European session, in particular against European majors and Yen. This could be partly due to delayed reaction to Fed’s dovish shift overnight. Also there are rumors that US Commerce Department’s report regarding autos imports on US markets is delayed to mid January. German magazine WirtschaftsWoche said that the investigation report regarding imposition of 25% tariffs on auto was not approved during the consultation process between government departments.

                      Euro leads the way higher, with EUR/USD breaking 1.1443 and 1472 resistance levels. The development could have now set the stage for further rise back towards 1.1814 resistance. Sterling remains cautious ahead of BoE rate decision, despite stellar retail sales data. Even though Canadian, Australian and New Zealand Dollar recover against Dollar too, they remains the weakest ones for the week, with no sign of bottoming yet.

                      In other markets, at the time of writing:

                      • FTSE is down -0.30%
                      • DAX is down -0.90%
                      • CAC is down -1.33%
                      • German 10 year yield is down -0.0032 at 0.239
                      • Italian 10 year yield is down -0.022 at 2.749
                      • German-Italian spread stays at around 250. With budget approved by EU, spotlight will be off Italy, at least for a while.

                      Earlier in Asia:

                      • Nikkei dropped -2.84% to 20392.58, both losses were limited elsewhere
                      • Hong Kong HSI dropped -0.94%
                      • China Shanghai SS dropped -0.52%
                      • Singapore Strait Times dropped -0.26%
                      • Japan 10 year JGB yield dropped -0.0032 to 0.031
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                      Sterling shrugs stellar UK retail sales, awaits BoE

                        UK retail sales came in stronger than expected in November. But the pound paid little attention to the data, as BoE rate decision looms. Also, Sterling is overwhelmed by strength of Euro and Swiss Franc, and selloff in Dollar.

                        • Retail sales including auto and fuel rose 1.4% mom, 3.6% yoy versus expectation of 0.3% mom, 1.9% yoy.
                        • Retail sales excluding auto and fuel rose 1.2% mom, 3.8% yoy versus expectation of 0.2% mom, 2.3% yoy.

                        ONS noted that
                        “retailers reported strong growth on the month due to Black Friday promotions in November, which continues the shifting pattern in consumer spending to sales occurring earlier in the year”.

                        Full release here.

                        Suggested readings on BoE:

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                        MOFCOM: Both US and China took proactive measures on to resolve trade frictions, more talks in Jan

                          Commerce Ministry spokesman Gao Feng confirmed in a regular press briefing there were talks between China and US on trade yesterday. Both sides exchanged opinions on topics including balancing trade and intellectual property protection. Further than that, there are plans for more US-China trade talks in January. He said that both sides had maintained very close communications after Xi-Trump meeting earlier this month.

                          Also Gao hails that both sides took “proactive” measures on resolving trade conflicts and released “positive signals”. And he emphasized this is ” an important condition for the smooth progress of the consultations” on trade and economic frictions. Gao pointed to US formally suspended additional tariffs on Chinese imports till March 2. Also, China suspended additional tariffs on US autos still March 31.

                          Full Q&A in simplified Chinese.

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                          BoJ Kuroda laid out options for additional easing if necessary

                            In the post meeting press conference, BoJ Governor Haruhiko Kuroda warned of downside risks to the economy “particularly via overseas economic developments”. He added, “if trade frictions persist, that could have a broad impact on Japanese and overseas economies.” Nevertheless, he also pointed to tankan survey and BoJ’s internal hearings, and noted “trade frictions on Japan’s economy is limited for now”. There is so far no change in the view that the economy is “expanding moderately”. Also, ” momentum for achieving our price target is sustained.”

                            Kuroda also sounded open to more easing and noted “If we think doing so would be necessary to sustain the momentum for achieving our price target, we will ease monetary policy further as appropriate.” The options for additional easing include cutting the short-term interest rate target, lowering the long-term yield target, ramping up asset buying and accelerating the pace of increase in base money.

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                            BoJ stands pat as widely expected, with 7-2 vote

                              BoJ left monetary policy unchanged today as widely expected. Short term policy rate is held negative at -0.1%. The central bank will continue with asset purchase at around JPY 80T a year to keep 10 year JGB yield at around 0%. The decision was again made by 7-2 vote. Y. Harada against said allowing long-term yields to move to some extent was too ambiguous. G. Kataoka continued to push for strengthen easing.

                              On economic outlook, BoJ said the economy is “likely to continue its moderate expansion”. Domestic demand is likely to follow an uptrend, “with a virtuous cycle from income to spending being maintained in both the corporate and household sectors”. CPI is “likely to increase gradually toward 2 percent, mainly on the back of the output gap remaining positive and medium- to long-term inflation expectations rising”.

                              BoJ also maintained the risks include US macroeconomic policies, protectionist moves, emerging markets, Brexit and geopolitical risks.

                              Full release here.

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                              Australia employment grew 37k, but full time jobs dropped -6.4k

                                Australian employment market grew 37.0k, seasonally adjusted, in November, much better than expectation of 20.0k. However, the growth was mainly driven by part-time jobs, which rose 43.4k. Full-time employment has indeed dropped -6.4k. Unemployment rate also rose 0.1% to 5.1%, above expectation of 5.0%. Participation rate rose 0.2% to 65.7%.

                                The set of data provided no support to Australian Dollar. Risk aversion is a factor weighing down the Aussie. Also, it’s sold off against Dollar on less dovish than expected Fed, and against Euro in Italy-EU budget deal. AUD/USD’s fall from 0.7393 is on track to retest 0.7020 low.

                                EUR/AUD is also on track for retesting 1.6357 high.

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                                New Zealand GDP grew only 0.3%, sharp contraction in construction and manufacturing

                                  New Zealand Dollar drops sharply today after big miss in GDP data. GDP grew 0.3% qoq in Q3, sharp slow down from Q2’s 1.0% qoq and missed expectation of 0.6% qoq. Deep contraction is seen in both construction and manufacturing. Construction fell -0.8%, driven by a decrease in heavy and civil construction. Manufacturing dropped -0.8% “with 6 of 9 manufacturing industries declining.” Services growth also eased to 0.5%, slowest rate of growth in six years. Also from New Zealand, trade deficit shrank to NZD -861M in November.

                                  NZD/USD’s recovery this week proved to be rather short-lived. Fall from 0.6969 resumed and reached as low as 0.6736 so far. Such decline is expected to extend to 61.8% retracement of 0.6424 to 0.6969 at 0.6632. For now, we’d expect strong support from there to bring rebound. Price actions from 0.6424 medium term bottom would develop into a consolidative pattern that lasts for a while.

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                                  Stocks tumble, yield curve flattens as Fed is not dovish enough

                                    US stocks tumbled sharply overnight, together with bond yields as markets saw Fed’s dovish turn as being not dovish enough. Dollar also rebounded. At least, Fed isn’t pausing yet after yesterday’s rate hike. In particular, Fed maintained in the statement that “some further gradual increases” in federal funds rate will be consistent with sustaining the expansion and keeping inflation near target. Fed Chair Jerome Powell, while admitting that global growth is “softening”, also said “policy does not need to be accommodative” as the US economy continues to perform well.

                                    After initial recovery, DOW resumed recent decline and hit as low as 23162.64 before closing at 23323.66, down -1.49%. S&P 500 dropped -1.54% while NASDAQ dropped -2.17%. As long as 24057.34 resistance holds, the medium term corrective fall from 26951.81 will extend to 38.2% of 15450.56 (2016 low) to 26951.81 (2018 high) at 22558.33 before completion.

                                    US treasury yields tumbled sharply, specially at the long end. 10-year yield dropped -0.047 to 2.778. 30-year yield dropped -0.064 to 3.015, and it’s now risking 3% handle. More importantly, yield curve flattened further and it’s now inverted from 1-year (2.648) to 5-year (2.622).

                                    Dollar is so far mixed for the week, up versus commodity currencies by down against others.

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                                    Dollar rebounds despite Fed’s dovish economic projections

                                      Dollar rebounds after Fed’s rate hike, in particular against Aussie Yen also strengthens together against Euro and Swiss Franc. Meanwhile, Stock pares back some initial gains. The driving force for Dollar’s rebound is to be investigated. But overall, Fed’s new projections are quite dovish. (Yet, a possible reason might be….. Fed is not stopping after today’s hike yet).

                                      First and most important on longer run federal funds rate, seen as Fed’s view on neutral:

                                      • Median – revised to 2.8%, down from 3.0%
                                      • Central tendency – revised to 2.5-3.0%, somewhat down from 2.8-3.0%
                                      • Range – unchanged at 2.5-3.5%

                                      For 2019

                                      • Median – revised to 2.9%, down from 3.1%
                                      • Central tendency – revised to 2.6-3.1%, down from 2.9-3.4%

                                      Overall, the revision argues that Fed might have one or at most two more rate hikes in 2019, rather than three as implied in September projections.

                                      On growth:

                                      • 2019 median growth projection was revised to 2.3%, down from 2.5%
                                      • 2020 median growth projection was unchanged at 2.0%

                                      On unemployment:

                                      • 2019 median unemployment rate projection was unchanged at 3.5%
                                      • 2020 median unemployment rate projection was revised to 3.6%, up from 3.5%

                                      On core inflation:

                                      • 2019 median core PCE projection was revised to 2.0%, down from 2.1%
                                      • 2020 median core PCE projection was revised to 2.0%, down from 2.1%
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                                      Fed hikes by 25bps to 2.25-2.50% by unaimous vote, full statement

                                        Fed raised federal funds rate by 25bps to 2.25-2.50% as widely expected. The decision was made by unanimous vote.

                                        Full statement below.

                                        Federal Reserve Issues FOMC Statement

                                        Information received since the Federal Open Market Committee met in November indicates that the labor market has continued to strengthen and that economic activity has been rising at a strong rate. Job gains have been strong, on average, in recent months, and the unemployment rate has remained low. Household spending has continued to grow strongly, while growth of business fixed investment has moderated from its rapid pace earlier in the year. On a 12-month basis, both overall inflation and inflation for items other than food and energy remain near 2 percent. Indicators of longer-term inflation expectations are little changed, on balance.

                                        Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee judges that some further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term. The Committee judges that risks to the economic outlook are roughly balanced, but will continue to monitor global economic and financial developments and assess their implications for the economic outlook.

                                        In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 2-1/4 to 2‑1/2 percent.

                                        In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

                                        Voting for the FOMC monetary policy action were: Jerome H. Powell, Chairman; John C. Williams, Vice Chairman; Thomas I. Barkin; Raphael W. Bostic; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Mary C. Daly; Loretta J. Mester; and Randal K. Quarles.

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                                        Into US session: Euro strongest as Italian budget deal made, Dollar soft ahead of FOMC

                                          Entering US session, Euro is trading as the strongest one today. European Commission finally agreed with Italy on its 2019 budget, thus the so called “Excessive Deficit Procedure”. Italian 10 year yield tumble to as low as 2.778. German-Italian spread also narrowed to 253. Swiss Franc is, as a result of relief rally in European stocks too, trading as the weakest one for today. Dollar is the second weakest as markets await FOMC rate decision.

                                          In short, Fed is widely expected to raise federal funds rate by 25bps to 2.25-2.50% today. The question is on the rate path in 2019 after all the political pressures Fed policymakers faced. The new economic projections will provide the key guidance to market expectations. More on the projections here.

                                          Also, here are some suggested readings on FOMC:

                                          In European markets, at the time of writing:

                                          • FTSE is up 1.00%
                                          • DAX is up 0.73%
                                          • CAC is up 0.72%
                                          • German 10 year yield is down -0.004 at 0.243
                                          • Italian 10 year yield is down -0.169 at 2.778

                                          Earlier in Asia:

                                          • Nikkei dropped -0.60%
                                          • Hong Kong HSI rose 0.20%
                                          • China Shanghai SSE dropped -1.05%
                                          • Singapore Strait Times rose 0.43%
                                          • Japan 10 year JGB yield rose 0.0048 to 0.033
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