Market movers today
We kick off the day with the Riksbank rate decision at 9.30 CET. We look for a rate hike of 25bp, the first one since July 2011. See page 2 for more details.
The Bank of England (BoE) is expected to keep the Bank Rate unchanged and as it is an interim meeting with no Inflation Report, we do not expect any major new signals. The BoE is in a wait-and-see mode to see how the Brexit deal ends up.
The US Philadelphia Fed survey will give some more input on how much the US is slowing into year-end. Industrial indicators have been a bit mixed recently, while the underlying US consumption engine is doing fine still.
Selected market news
As expected, the Fed raised the target range by 25bp to 2.25-2.50% but raised the Interest Rate on Excess Reserves by only 20bp to 2.40%. The policy signal for next year was more hawkish than markets had expected (hoped?) but more dovish than our call. While the statement says that risks are ‘roughly balanced’ and that ‘some further gradual increases’ (the word ‘some’ is new), the median dot signal for next year was revised down from three hikes to two hikes. The Fed now says it will ‘continue to monitor global economic and financial developments’ (referring to the slowdown in Europe and China and the recent increase in financial conditions due partly to the stock market correction).
We have changed our Fed call and now expect two hikes next year instead of three. The timing of rate hikes next year has become more difficult as every meeting from now on is ‘live’, as there will be a press conference after every meeting. With a slightly more concerned Fed, March may be too early, making May (or even June?) more likely. Then the second hike would come during the autumn in September or October. We stick to our view that the Fed will end its hiking cycle next year. Compared to market pricing, our Fed call is still hawkish. We did not get any news on when the Fed will stop shrinking its balance sheet and based on the press conference, it seems unlikely to happen before H2 19 unless something extraordinary happens. See FOMC review Fed to markets: ‘Just a couple of more hikes ‘, 19 December, for more details.
The US dollar gained versus all other major currencies on the FOMC announcement while the US yield curve bull flattened with a strong performance in the long end of the curve: the 10Y US Treasury yield declined around 6p to 2.755% and the 30Y yield dropped nearly 9bp to 2.981% while the 2Y yield increased 0.2bp to 2.646%. US equity markets ended the day lower with the S&P500 index losing 1.54%. The negative sentiment in risk assets reflects that investors had hoped for a more dovish tone from the FOMC, and the sell-off in equity markets continues this morning in Asia with all regional indices trading in negative territory.
The Bank of Japan kept its ‘QQE with yields curve control’ policy unchanged this morning . The board voted 7-2 in favour of maintaining its policy. This was widely expected and there were no noteworthy reactions in either Japanese yields or the yen.
