Markets
Investors braced for a series of important data today. Europe spearheaded with France printing slightly better than expected Q3 GDP growth figures early this morning. The EC’s economic confidence in the euro zone continued its long, drawn out decline in October, data showed a bit later. The indicator fell to 100.8 vs. 101.7 in September and 101.1 expected. Attention shifted to the US in the early afternoon. According to the ADP institute, the US labour market created 125 000 new jobs in October while markets anticipated a 110 000 increase. The September figure was revised down by 42 000 however (93 000). The release was quickly followed by US GDP figures. Q3 growth slowed less than expected: from 2.0% q/q annualized to 1.9% (1.6% was expected). Details confirmed Joe Sixpack as the backbone of the US economy. Personal consumption moderated from a stellar 4.6% q/q annualized in Q2 but printed at a still solid 2.9% in Q3. Government consumption slowed to 2% (from 4.8% in Q2). Fixed investment (-1.5%), net exports and inventories (both marginally negative) were a drag on growth. US yields rose and the dollar strengthened in a knee-jerk reaction but gains were only temporary and limited anyway. Markets don’t want to front run the Fed later today. A third consecutive rate cut is completely discounted but markets aren’t positioned for the end of the Fed’s “mid-cycle adjustment”, which is exactly what we expect Powell to announce. The US yield curve currently bull flattens with yield changes varying between -1.8 bps (2-yr) to -3.6 bps (30-yr). German yields are little changed. Peripheral spreads changes vary; Greece (-3 bps) outperforms, Italy (+ 3 bps) is today’s laggard. EUR/USD awaits the Fed in the low 1.11 area (unchanged) as is USD/JPY (108.9). A report that Chile cancels the APEC summit because of civil unrest briefly caused shivers down the spine. The US and China were expected to seal the mini trade deal in Santiago.
Silence fell over the UK in the wake of parliament approving snap elections yesterday. Brexit is likely to be the central theme during the election campaign but the exiting process itself will turn to the background over the coming weeks. We expect the pound to be rangebound in the runup to December 12 as investors weigh prospects of a new Tory majority – and a potential Brexit breakthrough – against a hung parliament – which would be a chill reminder of May’s political gamble backfiring in 2017. As for today, markets aren’t very troubled by general election fears. Sterling is filling bids unchanged near EUR/GBP 0.863/4 after some intraday volatility. Cable is trading near opening levels of around 1.287.
News Headlines
South African Finance Minister Mboweni forecasts a wider budget deficit and a growing debt level. This fiscal year’s deficit is expected to rise to 5.9% from 4.5 of GDP previously expected. The deterioration of the budget is due to a combination of rising costs of government bailouts, a poor economic growth and falling tax revenues.
The US Treasury in its quarterly refunding statement kept its auctions of nominal coupon and floating rate debt unchanged. At the same time, the Treasury indicated that it is considering the issuance of new debt instruments including a 50-y and 20-y bond and a 1-y SOFR linked floating rate note. The Treasury also said it is monitoring the Fed’s recently announced Treasury bill purchases, intended to address liquidity shortages in the money market.
The Bank of Canada as expected left its policy rate unchanged at 1.75%. In its policy statement, the BOC gave more weight to the potential impact of the global slowdown. It also lowered the growth forecast for 2020 (1.7% from 1.9%) and for 2021 (1.8% from 2.0%). The BOC also mentioned the strength of the Canadian dollar despite recent decline in commodity prices. USD/CAD jumped from the 1.3085 area to the 1.3145 area.
