The developing story on corona and the semi-annual testimony of Fed Chair Powell before Congress had most potential to guide markets yesterday. There were few data in Europe and the US. The direct impact of corona on markets is easing, but markets still assume that central bankers will be even more cautious to tighten monetary policy. Chair Powell said the that Fed is closely monitoring corona and its impact for the economy. For now it doesn’t change the script for Fed policy. Regarding the measures to address potential stress on the money markets, the Fed intends to gradually move away from the use of repo transactions. It also intends to slow asset purchases (T-bills) but will allow the balance sheet to growth in line with trend demand for Fed liabilities. The balanced/guarded approach of the Fed (and other central banks) continues to support equities. The three major US indices all touched intraday record levels early in the session, but ceded modest ground later. US yields rose about 3 bp across the curve, but yields mostly remain in the lower part of recent trading ranges. The German yield curve bear steepened with the 2-y little changed and the 30-y rising 2.7 bp. Italy attracted a record amount of bids for a new 16-y bond (printed at BTPS + 5bp). On the FX market EUR/USD stayed in the defensive with trading was confined to a rather tight intraday range. The pair tested the 1.09 area, but the 1.0879 2019 low survived.
There are again very few data with market moving potential in Europe and in the US. Fed’s Powel will hold the second part of its semi-annual testimony before the Senate, but it is highly unlikely he will break new ground. Germany will sell € 4 bln of 2030 Bonds. The US will also sell 10-y Notes ($ 27 bln). The Riksbank will hold a regular policy meeting, after leaving negative policy rates behind at the December meeting.
This morning, Asian markets are mostly trading in positive territory. The Reserve Bank of New Zealand left its policy rate unchanged at 1.0%. The bank was rather optimistic on growth going forward and doesn’t see a need for further rate cuts this year. NZD/USD jumped from the low 0.64 area to the mid 0.64 area. US equity futures show modest gains, but the pace of the rally might be slowing a bit. US yields keep a cautious upward bias, but remain at relatively low levels if compared to the risk rebound in other markets. For now, we don’t see a trigger for a big leap higher in core/US yields. The US 10-y auction might be a wild card today. Tomorrow, the US CPI is worth looking at. On the FX markets, the established trends remain in place. EUR/USD remains captured in a gradual, but protracted downtrend. The 1.0879 2019 remains the next key reference. A break would further deteriorate the technical picture. USD/JPY is holding a tight range just below 110. Euro weakness also filters through into the EUR/GBP cross rate. The pair currently hovers in the 0.8420 area. There are no UK data today. The debate on the access of UK financial firms to the UK market is causing quite some noise, but for now the negative impact on sterling is limited.
New Zealand’s central (RBNZ) bank stood pat today, leaving the cash rate unchanged at 1% as expected. Markets were taken by surprise by the upbeat tone and outlook of the communiqué, signalling it’s done easing for the time being. The RBNZ cheered a recovery in the housing market, a pickup in inflation and falling unemployment. In spite of that, the central bank flagged the coronavirus could hamper the economy but expects any impact to be limited. Consequently, the RBNZ trimmed growth for Q1/2020 but raised its projections for full-year growth.
Russian authorities will meet with crude producers today to discuss OPEC+’s push for deeper output cuts of 600K b/d. OPEC and its allies aim to offset the negative effect of the coronavirus on energy demand as China and other Asian countries already curbed demand.