Overall risk sentiment remained the key driver for trading today as investors await tonight’s Fed policy meeting. The European session started off in a constructive setting though that didn’t last very long. The OECD projected a grim economic picture going forward. It expects growth to contract the most since WWII (see headline below for details), thereby drawing conclusions similar to those of many other international institutions such as the World Bank earlier this week. The OECD’s release wasn’t really surprising though obviously wasn’t really supporting investor sentiment either. The sentiment deterioration bottomed around noon however, as could be seen in European stocks erasing a 1% intraday decline and turning slightly green again as first US investors joined dealings. US CPI later came in slightly lower than expected with the core measure declining from 1.4% y/y to 1.2% (-0.1% m/m) and the headline figure balancing on the edge of deflation (0.1% y/y, -0.1% m/m). The market impact was negligible. If anything, it only adds to the overall conviction that the Fed won’t (have to) raise rates anytime soon. The US yield curve bull flattens ahead of the Fed meeting later today. Yields go up to 3.5 bps lower (10-yr) as markets brace for dire growth and inflation projections, which will provide the rationale for the Fed to keep rates low over the policy horizon. The actual attention will likely focus on hints, if any, on yield curve control. We’re keen to hear whether the debate within the FOMC has already started and how soon yield caps could be implemented. In any case we do not expect them to be introduced already today. German Bunds grind higher with the long end of the curve outperforming even as the country reopened its August 2050 Bund for a tap offering. Germany raised 6bn at a price of MS+2.5 bps. Yields decline 2.5 bps (30-yr). Peripheral spreads are mixed with Greece (-8 bps) outperforming. Portugal (+5 bps) lags.
The USD remained in the defensive today, losing against most major peers including the Japanese yen even as the initial risk sentiment wasn’t too bad. The latter suggests the dollar might have some cold feet going into the Fed and facing the possibility of very limited interest rate support for the foreseeable future. EUR/USD aimed for the 1.14 but fell short of an actual test eventually. The pair rose from 1.134 to 1.138 at the time of writing. The trade-weighted dollar, DXY, extended recent declines and went for a test of the 96 area. A break didn’t occur (yet?) however. USD/JPY dipped further below 108. At 107.3 currently, the currency pair re-entered the narrow sideways trading range established since mid-April. EUR/GBP went nowhere today. The pair oscillated around 0.89 in an extremely narrow range with moves following the intraday change in the overall risk climate. Dollar weakness triggers a more significant move in cable though. GBP/USD rises from 1.273 to just shy of 1.28, testing the 76.4% resistance.
‘By the end of the 2021, the loss of global income exceeds that of any previous recession over the last 100 years outside wartime with dire long-lasting consequences for people, firms and governments’, the OECD said. It predicts the global economy to contract by 6.0% this year before rebounding 5.2% next year. In case of the second wave of contagion this year, the OECD sees the global economy contracting 7.6% with only a rebound of 2.8% next year. In this context, the OECD said that ‘ultra-accommodative monetary policies and higher public debt are necessary and will be accepted as long as economic activity and inflation are depressed, and unemployment is high’.
Inflation in Brazil posted the steepest decline in monthly inflation since 1998. Consumer prices declined 0.38% M/M in May bringing the yearly inflation to 1.9% from 2.4%. Inflation is now well below the central bank’s inflation target of 4% with a margin of deviation of 1.5%% either side. Next week, the Banco Central de Brasil will hold a regular policy meeting. Low inflation reinforces market expectations for a substantial further rate cut from current level of 3.0%. Even so, so, the real preserved most of its recent gains against the dollar (USD/BRL 4.87 area).