Markets
Core bonds slightly gained ground as investors took a cautious approach going into today’s only but potentially market moving event: the Fed-meeting. As a 25bp rate hike is largely (if not completely) anticipated, markets are likely to focus on Powell’s press conference and the new dot plot. US Treasuries edged higher during European dealings, triggering some modest bull flattening with yields decreasing up to 1.5 bp at the longer end of the curve. After opening higher, the German Bund hovered around opening levels. The yield curve exhibits a pattern similar to the US as yield drop 1 bp (10yr) to 2 bps (30yr). Across the EMU-spectrum Italy outperformed. BTP’s opened lower on Di Maio threatening not to support the budget proposal but rallied after Finance minister Tria expressed government commitment to reduce the country’s troubling debt ratio. Peripheral yield spreads vs. Germany narrow by 1 bp (Greece) to 5 bps (Italy).
Over the previous days, the dollar developed a rather lackluster trading pattern even as US yields were on an upward trajectory and as the Fed was/is widely expected to continue its path of gradual tightening in the foreseeable future. Today, FX traders understandably settled in a wait-and-see modus. The eco calendar was thin and the focus was on this evening’s Fed decision. Even so, the dollar was in a (slightly) better shape than during previous days. EUR/USD drifted back south in the 1.17 big figure (currently 1.1730 area). Positive headlines from Italy this time didn’t help the euro. USD/JPY is again testing recent top in the 113 area. We don’t make too much out of this thin, pre-Fed trading. Or is it a harbinger of more USD gains if the Fed maintains a positive view on the economy and if it doesn’t call an end to its rate hike cycle yet? At least our base scenario assumes the Fed to keep a positive assessment this evening.
Sterling showed a mixed to fairly constructive picture today. The UK currency held stable against the dollar but gained further ground against the euro. For now, it looks that the bad news from last week’s EU summit has been digested and that enough bad news is discounted. CBI September retail data also indicated that sales momentum remained reasonably strong. EUR/GBP is further reversing Friday’s jump. The pair is trading in the 0.8920 area. Cable (1.3160) is losing a few ticks but the dollar is trading with an overall positive bias.
News Headlines
According to the ECB, an escalation of a global trade war between the US and its major trading partners would hurt the US most. It results in lower US net export, US firms would invest less and unemployment would increase. On the contrary, China would gain by exporting more to the countries where US goods are subject to tariffs.
The Czech central bank (CNB) has, as expected, increased its policy rate with 25bps to 1.50%. The Czech economy is performing strongly, with 2.4% GDP growth, a record low unemployment rate (3.1%) and an inflation rate of 2.5% in August. Governor Rusnok indicated that another rate hike can’t be ruled out but he remained vague on the timing. This uncertainty is weighing on the koruna.
French consumer confidence dropped this month to its lowest point since April 2016. The number printed 94 today, while consensus expected a stabilization of the 97 August number. French citizens remain worried over their financial stability and standard of living, keeping the indicator below its long-term average of 100.
