- Rates: Fed doesn’t live up to market expectations
The Federal Reserve delivered a ‘dovish hike’ yesterday: a policy rate hike of 25 bps but a lower median rate forecast for 2019 with 25 bps. Investors clearly hoped for more, pushing US Treasuries substantially higher with the US yield curve bull flattening. Today’s risk sentiment will be dominated by the Fed aftermath with the US 10-yr yield testing key support. - Currencies: Markets flunk the Fed
Markets expected the Fed to at least sugarcoat its 25bps rate hike but got disappointed. The Fed’s rather upbeat assessment and determination to continue policy normalization at only a slightly slower pace sent equity markets and US yields tumbling. We expect risk-off sentiment to spur further market repositioning today.
The Sunrise Headlines
- Wall Street wasn’t impressed by yesterday’s FOMC outcome. The Fed’s dovish shift remains too hawkish for the street. Main indices turned +1% gains into -1.5% losses. Asian indices record smaller losses apart from Japan (yen strength).
- The Fed hiked its policy rate to 2.25%-2.5%, but now expects 2 instead of 3 rate hikes next year. More gradual rate hikes will be necessary given US economic strength, but the FOMC warns for possible dark clouds ahead.
- The Bank of Japan kept its policy rate, yield curve-control program and asset purchases unchanged this morning with limited changes in the statement. They reaffirmed their economic recovery view in light of rising global uncertainties.
- The PBOC eased policy this morning by announcing a targeted medium term lending facility which looks a lot like the ECB’s TLTRO’s: lower-cost liquidity for up to 3 years for banks willing to lend more to SME’s.
- New Zealand GDP rose by 0.3% Q/Q in Q3, down from 1% in Q2 and below 0.6% forecasts. It’s the weakest pace in almost five years. NZD weakness and US strength pulled NZD/USD to the low 0.67s.
- The US Senate passed a short-term spending bill to avoid a near-term partial government shutdown. The bill keeps the government running until early February. The House is expected to pass the bill today.
- Today’s economic calendar contains central bank meetings in Sweden, the UK and the Czech Republic. UK retail sales, Philly Fed Business Outlook and weekly jobless claims spice the agenda.
Currencies: Markets Flunk The Fed
Markets flunk the Fed
Cautious risk-on prevailed on markets going ahead of a keenly awaited Fed policy meeting yesterday. Global equity markets trended higher while the EC’s decision not to start the excessive debt procedure against Italy, spurred euro buying. USD stayed in the defensive. Markets hoped for the Fed to sugarcoat its 25bp rate hike, but got dissapointed. The Fed has its December dots hinting at 2 more hikes in 2019 instead of 3 in September and left hiking expectations for 2020 (+1) and 2021 (flat) unchanged. The central bank continues its balance sheet roll-off at the current $50bn/m pace. Growth and inflation forecasts were brought down only marginally. The numbers fit the Fed’s forward guidance (of “some further gradual increases” while “monitoring global economic and financial developments”) and the tone it struck during the press conference. Powell admitted there some mood of angst about growth but said the outlook hasn’t fundamentally changed. The economy doesn’t need policy to be accommodative. His rather upbeat assessment was perceived too hawkish by markets, who called for a much softer normalization path going forward. Risk-off returned. US equities and yields slumped, the dollar strengthened to EUR/USD 1.138 (down from an intray high at 1.144). USD/JPY remained relativily stable close to 112.4 but slips below the 112-handle during Asian trading hours. Risk off also flushes Asian markets. Japan underperforms on the back of a stronger yen despite the BoJ leaving rates unchanged and leaving the door open for more easing if needed. China is considering a new round of “substantial” tax cuts and the PBOC announced a sort of TLTRO’s. Today’s economic calendar is thin and in any case of secondary importance as sentiment dominates. We expect further repositioning during European dealings in the aftermath of yesterday’s Fed meeting. US yields are heavily testing key support levels. A sustained break is in theory dollar negative. However, the current risk off sentiment traditionally favours USD over the euro. We expect EUR/USD volatility within the established trading range. EUR/USD 1.15 should be a very tough nut to crack.
EUR/GBP trended higher yesterday as the euro was well bid. The pair closed at 0.902, up from 0.899. Today’s focus will be on the Bank of England. No major surprises are expected, but we will watch for Carney’s comments on the brexit stalemate. As the British Parliament’s recess kicks off today, the pound might enter calmer waters. Nevertheless, we remain cautious on sterling exposure
EUR/USD: risk-off to provide dollar new support?
