Market movers today

Today focus will turn to one of the few central banks still looking for rate hikes, Norges Bank. We expect Norges Bank to hike rates by 25bp, see page 2 and Reading the Markets – Norway, 16 September 2019.

On the global front markets will digest the message from the Fed yesterday (see FOMC Review – Fed cut with no quick fix to tight liquidity conditions , 18 September 2019) but also keep an eye on the rising tensions between Saudi Arabia and Iran.

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More central banks are up during the day. We look for the Swiss National Bank (SNB) to keep policy rates unchanged at -0.75% despite the ECB cut last week: in light of the move higher in Swiss (and euro) rates after the ECB amid a higher EUR/CHF, we do not see a need for the SNB to test unchartered territory on rates at present. Further, the Bank of England will announce rates but we expect it to stay on hold.

In the US, the Philadelphia Fed index will give more clues to the state of US manufacturing. In general US data has had a more positive tilt lately.

Selected market news

As expected, the Fed last night cut its target range for the Fed funds rate by 25bp to 1.75-2.00%; the interest on excess reserves was lowered by 30bp to 1.80%. Crucially, the Fed still did not want to pre-commit to more easing. As a guide to future Fed decisions, Powell hinted to monitor (1) political/trade uncertainty, (2) global data and (3) US inflation. Thus the outcome of trade negotiations in early October will be key for the Fed’s next decision. We continue to expect a cut at each of the next four Fed meetings, which are not fully priced by the market that looks for around three more into 2020.

During the press conference, Powell faced several questions on the issue of the recent USD liquidity squeeze (more on page 2). The market was left disappointed, however, as the Fed seems surprised about the recent turmoil and expects it to be temporary. In our view, the factors behind this week’s funding pressure are not extraordinary and will likely return in December. The market notably seems concerned that the Fed will be fine with a reactive approach to this. Equities dropped on the Fed announcement but later recovered with S&P slightly up on the day; the Asia session was also mixed. The 2Y Treasury yield rose to 1.76% and the curve flattened. EUR/USD dropped half a big figure but remains above 1.10.

With a 7-2 vote, the Bank of Japan (BoJ) this morning kept its Quantitative and Qualitative Easing (QQE) with yield curve control and forward guidance unchanged. Thus, the BoJ remains in wait-and-see mode but recognises that risks from overseas economies continue to increase and now judges that it is becoming necessary to pay closer attention to the possibility that the momentum towards achieving the price stability target will be lost. If the outlook sours further and fosters JPY strengthening, the BoJ could take action in October by cutting the policy rate further into negative as the first line of defence. USD/JPY fell below 108 as markets had seen some chance of BoJ easing already today.

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