Markets

Yesterday, global investors adapted positions in the wake of the Fed’s policy decision on Wednesday. Fed Chair Powell indicated that the Fed delivered enough preventive monetary stimulus after two rate cuts this summer. However, the dots showed that the FOMC is highly divided on the next steps of monetary policy. On Wednesday, US yields jumped sharply higher as the Fed’s guidance contrasted with market expectations for substantial additional easing this and next year. Yesterday, markets retraced a (small) part of this move. US data (jobless claims and Philly Fed outlook) were OK but were ignored. Tensions on the US money market continued to play on the background. The Fed yesterday conducted a $75 bln repo operation, the third consecutive day it added liquidity to the market. The NY Fed plans to do another $75 bln operation today. US yields ended the day 1.2 bp to 2.5 bp lower, the front end of the curve (2y) slightly outperforming. German yields moved less than 1 bp. in a daily perspective. On the FX market, the (trade-weighted) dollar reversed the post-Fed spike higher to close at 98.27. EUR/USD also reversed the post-Fed decline, but lost part of its intraday gain to close only marginally higher at 1.1041 (from 1.1030). USD/JPY finished at 108.03 (from 108.45), but part of this move was strength after the BOJ policy decision.

Overnight, Asian equity markets mostly showed small gains. The limited reduction in Chinese lending rates (cf infra) maybe was slightly disappointing for risk assets. The yuan gained modest ground (USD/CNY 7.0860 area). The BOJ reduced its bond buying in an attempt to steepen the yield curve. Japanese yields rose temporary but the gain could not be sustained. USD/JPY lost some further ground (107.85 area). EUR/USD also profits from global USD softness (1.1055) area. AUD/USD is again trading below 0.68 as markets see a growing chance of an additional rate cut this year.

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Later today, eco calendar is thin, except for the EC September consumer confidence. Fed governors Williams, Rosengren and Kaplan will speak. Markets might look for any comments after this week Fed meeting. Investors will look for any headlines from the Sino-US trade talks that will continue in Washington today. The discussions are said to focus on China buying more US agriculture products. It might indicate that both parties are aiming for a limited, partial deal. Indications of a trade truce might be slightly supportive for risky assets. However, the tensions on the US money markets and the potential spill-over effects to other markets will also keep investors’ attention. Core bonds apparently found a new equilibrium after the ECB and Fed decision. We expect more technical trading. The dollar is losing some momentum. Positive headlines from the US-China trade talks might be a modest euro supportive. The 1.1100/10 area is a first important resistance.

Yesterday, sterling lost temporary ground as the BoE warned on the negative impact of a protracted period of uncertainty due to Brexit, but the UK currency reversed the losses soon. Even more, sterling jumped higher late yesterday after comments from EU’s Juncker that he thinks that a deal can be reached before 31 October. Over the previous days, investors already reduced sterling shorts. This trend might continue today.

News Headlines

The Central Bank of China (PBOC) marginally lowered the one-year benchmark lending rate (Loan Prime Rate) by 5 bp to 4.20%. The 5-y LPR was left unchanged at 4.85%. The move can be considered as being part of a PBOC’s aim to provide selective support to the economy, but the impact is likely to be limited.

Core inflation in Japan (excluding fresh food prices, including oil products) slowed to 0.5% Y/Y in August, the lowest level since July 2017. Core inflation was 0.6% in July. Headline inflation also declined to 0.3% Y/Y from 0.5%. Falling energy prices and cuts in cellphone charges reinforced the trend of limited price increases. Yesterday, BOJ Governor Kuroda indicated the BOJ will review developments on growth and inflation at its next policy meeting on October 31.

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