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Will It Be Deal Or No Deal In Buenos Aires?

Market movers today

The G20 meeting kicks off in Buenos Aires today. Focus will be on signals from the US and Chinese officials ahead of the ever important Trump-Jinping meeting tomorrow, which will aim at resolving the trade dispute between the two countries. We look for a ceasefire – see US-China trade – Five reasons why we still see a 60% chance of ceasefire , 29 November. Also in focus are statements by world leaders on the role of Saudi Arabia’s crown prince in the killing of journalist Jamal Khashoggi and renewed tensions between Russia and Ukraine.

In relation to economic releases, the November flash inflation numbers are due today in the euro area. In October, core inflation finally took off and rose to 1.1% y/y and headline inflation remained above the ECB’s target, coming in at 2.2 % y/y in October – the highest rate since 2013. However, headline inflation was driven mainly by rising energy prices and as oil prices in EUR terms have fallen from EUR63 to EUR55 per barrel since the beginning of November, we expect this print to come in at 2.0% y/y and for the core to remain at the current level.

Selected market news

After the apparent new rhetoric from Fed Chair Jerome Powell on Wednesday night (see Danske Daily , 28 November), the market was eager to scrutinise the FOMC minutes . The minutes left little doubt that we should expect a December rate hike, indicating that another interest rate hike would be warranted fairly soon. This was hardly a surprise for the market as a December hike is almost fully priced in. More importantly, the FOMC minutes also said that meeting participants emphasised ‘that the stance of policy should be importantly guided by incoming data and their implications for the economic outlook [and that] monetary policy was not on a pre-set course’. The overall impression is similar to that after Powell yesterday, i.e. that the FOMC has become slightly more data dependent and that a change in language is the next step. However, given our view on the US economy, we see no reason to change our call for two more rates hikes in H1 and possibly a third hike in H2 on top of the widely expected hike this December.

Finally, Powell noted the upward trend in the effective Fed funds rate relative to the IOER rate and suggested that ‘fairly soon’ might be appropriate to implement another technical adjustment in the rate relative to the top of the target range for the federal funds rate. The FOMC also discussed a more fundamental change of the policy framework including moving away from targeting the federal funds rate to, e.g. the OBFR (Overnight Bank Funding Rate), which would be more appropriate in a situation with abundant excess reserves. For more, see this (subscription only) FT article . After the steepening of the yield curve for 2s10s yesterday, we saw a flattening tendency last night as 10Y US treasury yields briefly touched 3%, whereas the 2Y point barely moved. Just as it was difficult to break above 3% in October, it also seems difficult to break below 3% in the 10Y Treasury yield.

FOMC minutes initially lifted risk appetite, but as trade concerns ahead of the G20 meeting took over before close, the major US indices all ended the day marginally lower. Note that Asian markets are in the green this morning.

Danske Bank
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