Big Fed Week Takes Off

Market movers today

While the data front still looks thin today, a crucial week for markets takes off. This week, the Fed can either hold back or push markets closer to a H2 cyclical recovery. In the positive outcome, we see plenty of potential upside left in the CAD, AUD, NZD and Scandies against the USD. EUR/USD is also set to benefit but likely with a lower beta.

Preliminary EU harmonised inflation data for July from Spain is due out today. Bloomberg consensus expects a sharp deceleration to -1.2% m/m from -0.1% m/m previously.

The Dallas Fed manufacturing outlook level of general business activity for July is due to be published today. The index is likely to rebound from the current three-year low level as trade war escalation has stopped for now. Previously, businesses in Texas pointed to tariffs, and specifically trade talks with China, as a contributing factor to the prevailing uncertainty.

Selected market news

Stock markets slid in Japan, but headed up in Australia. The oil price, US futures and the USD were steady after the S&P 500 and Nasdaq Composite reached new all-time highs last Friday.

The JPY strengthened further. The Bank of Japan (BoJ) finishes a two-day policy meeting on Tuesday morning. The global slowdown has taken its toll on the Japanese manufacturing sector but domestic demand has fared okay. As long as USD/JPY keeps a safe distance from 100, we expect the BoJ to stand pat and hold on to the remaining few easing tools it has left. With the October VAT tax hike closing in, it might come in handy later on.

The BoJ might extend its forward guidance and promise low rates beyond spring 2020 (in the wordings now), in order to signal its readiness to do something if needed. However, the market reaction is likely to be negligible if the extension just goes further into 2020. At this meeting, we also get an update on the BoJ’s expectations for the economy. We are likely to see yet another downward revision of the inflation outlook for the fiscal year 2019 here.

US Treasury Secretary Mnuchin and the US Trade Representative Lighthizer fly to Shanghai today for the first high-level negotiations after these stopped in May. US President Trump mentioned China might want to wait until after the 2020 US presidential elections as the Chinese authorities would prefer to make a deal with a Democrat.

Last Friday, the Bank of Russia (CBR) delivered a 25bp cut to the key rate, lowering it to 7.25% in line with our expectations, Bloomberg and Reuters consensus. The decision was RUB-neutral despite a moderately dovish statement. We see that under the current conditions, a September 25bp cut is still very likely. Now the focus will be on September’s press conference and whether the CBR could possibly cut twice later this year.

Danske Bank
Danske Bankhttp://www.danskebank.com/danskeresearch
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