Markets
Main FI and FX markets treaded water during European trading, awaiting the outcomes of policy meetings in Turkey, the UK and EMU. The Turkish central bank raised its policy rate significantly, managing to lift TRY. Some expected spill-over into EUR/USD gains via improved risk sentiment on EM FX didn’t occur. August US CPI data disappointed and pulled the dollar and core bond yields (temporary) lower with US Treasuries outperforming. EUR/USD started ECB President Draghi’s press conference around 1.1650 and managed to build out some additional gains towards 1.17 afterwards. The ECB’s June policy decisions still stand. There was no discussion about apply special tactics to the reinvestment policy, but this will be on the table in November or December (extending maturity portfolio even further?). September GDP projections showed minor downward revisions in 2018 (2.1% to 2%) and 2019 (1.9% to 1.8%) because of a weaker contribution from foreign demand. The 2020 forecast was unchanged at 1.7%. Risks to the eco outlook remain broadly balanced, but protectionism, EM turmoil and financial market volatility gained more prominence. Last time around the ECB used the wording “remain prominent”. Underlying inflationary pressures remain muted, but uncertainty about the outlook is receding. The ECB expects a pick-up towards the end of the year and afterwards, driven by wage growth, the economic expansion and accommodative monetary policy. ECB Draghi answered that the EMU economy has grown above potential for some time when asked whether the EMU output gap was closed, further indicating that inflationary pressure might start showing up. German yields started rising after the inflation comments, adding 0.9 bps (2-yr) to 2.6 bps (10-yr). US yields drop up to 0.4 bps across the curve 10-yr yield spread changes vs Germany are nearly unchanged with Greece outperforming (-6 bps).
The focus for sterling trading turned from Brexit to the BoE today. The BoE, as expected, voted unanimously to keep its policy rate unchanged at 0.75%. The BoE basically maintained its assessment from the August inflation report. A very limited and gradual increase is deemed necessary to bring inflation to the policy target by the end of the policy horizon. There are several sources of (growing) uncertainty (Brexit, EM, trade tensions). However, in a very short-term perspective, UK Q3 growth might even accelerate slightly more than expected (from 0.4% Q/Q to 0.5Q/Q). However, this change in the ST economic momentum doesn’t change the overall assessment for the path of monetary policy going forward. The BOE policy announcement had hardly any impact on sterling trading. EUR/GBP (0.8925 area) gained a few ticks, probably inspired by overall EUR/USD strength. Cable is testing the 1.31 big figure, profiting from a weaker dollar after soft US inflation data.
News Headlines
The Turkish central bank has raised its interest rate from 17.75% to 24%, while consensus was only at 21%. Despite claims from President Erdogan earlier today that he opposes higher rates, the central bank proves to be independent. EUR/TRY dropped from 7.60 towards 7.20.
US inflation eased in August as the CPI (YoY) unexpectedly slows to 2.7%, from the decade high a month earlier (2.9%). Core inflation, without food and energy prices, also slowed down to 2.2% YoY (2.4% in July). The Fed is expected to increase its policy rate later this month, but slowing inflation could affect the outlook for future increase.
A supply squeeze in global oil production could push the oil price to levels well beyond $80 per barrel, said the International Energy Agency. If global producers fail to compensate for the dip in the global oil supply, stemming from the problems in Venezuela and the US sanctions on Iran, the supply squeeze could push prices up.
