Markets
European bond markets started on a solid footing, catching up with yesterday’s gains in US Treasuries. The latter outperformed on Wednesday evening as an initial attempt to grind lower after the FOMC failed miserably. The Fed cut its policy rate for third straight meeting, but signaled an end to its mid-cycle adjustment. FOMC Chair Powell suggested that the next move would more probably be an additional rate cut rather than a rate hike though. Core bonds received a second push in the back on headlines that Chinese officials cast doubt over the likelihood of a long-term trade deal with US President Trump. The news pushed stock markets below opening levels. Main European and US bourses trade up to 1% lower. US President Trump in the afternoon did confirm that he and his Chinese counterpart are still willing to sign a phase one trade deal, but are looking for a new site after Chile cancelled the mid-November APEC-Summit. EMU Q3 GDP beat forecasts (0.2% Q/Q vs 0.1% Q/Q), but the October Chicago PMI turned out to be the unusual market-driver from the eco data front. The indicator crashed from 47.1 to 43.2 in October while consensus expected a modest increase to 48 and reinforced general risk aversion. The Chicago PMI hit the lowest level since mid-2009, bar a one-off in December 2015 (42.1). Details showed business barometer, new orders, employment, inventories and production all pointing to contraction. Chicago is home to the Boeing headquarters, which might have something to do with the awful print. Later today, US House Democrats will vote on kickstarting the public phase of an impeachment inquiry against US President Trump. The German yield curve bull flattened at the time of writing with yields dropping 2.6 bps (2-yr) to 7.4 bps (30-yr). US yields trade 5 bps (2-yr) to 7 bps (10-yr) lower. 10-yr yield spreads vs Germany widen up to 3 bps.
Moves on FX markets showed reflected general risk aversion as well. USD/JPY over the past two weeks tried to take out the 109-resistance area. Failure to do so backfired today even if the BoJ made its forward guidance more dovish this morning. USD/JPY falls to the low 108-area. EUR/USD’s post-FOMC rally already petered out with the pair changing hands just below 1.1150. Sterling had a surprisingly strong run today. EUR/GBP slowly drifted from 0.8640 to the low 0.86-area.
News Headlines
US consumer spending, which accounts for more than two-thirds of US economic activity, gained 0.2% in September as households stepped up purchases of motor vehicles and spent more on healthcare. Personal income decelerated to 0.3% in September, partly due to GM workers losing income. This could cast doubts on consumers’ ability to underpin the economy amid a deepening slump in business investment.
The euro zone economy expanded 0.2% (q/q) in Q3, defying expectations (consensus at 0.1% q/q) that ongoing trade tensions and Brexit uncertainty would drag on the bloc’s economy. The single currency’s economy appears to be showing some resilience in the face of the industrial slump that has battered Germany, the bloc’s largest economy. In a worrying sign for incoming ECB president Lagarde, inflation slipped further from the goal of below but close to 2%, to 0.7% (y/y). Core inflation showed an unexpected pickup to 1.1% (y/y) while unemployment remained stable at 7.5% in September.
Hong Kong’s economy contracted sharply by 3.2% (q/q) in Q3, sliding into recession for the first time in since the aftermath of the global financial crisis. Protracted US-China trade tensions and five months of protests have battered the Chinese-ruled city’s retail and tourism sector. With no sign of demonstrations abating , the economic debate now is focused on how long the downturn will last.
