Markets

The dollar and US yields remained in the defensive in the run-up to tonight’s FOMC meeting. The trade-weighted dollar approaches the low of the past two weeks while the US yield curve bull flattens with yields shedding 0.7 bps (2-yr) to 2.1 bps (30-yr). Powell will definitely strike a dovish tone but we see room for some investor disappointment. Markets have been discounting the possibility of the Fed issuing explicit forward guidance in the wake of the policy review. That could entail i.a. an employment target. We do not expect Powell to announce this already now. Firstly because the new growth projections might hold an upward revision, creating an awkward timing for stronger guidance. Second, with rates already rock-bottom, volatility muted and market-based inflation expectations steady at 2% there are few reasons from a market point of view to use up this last ammo already. (US) stock markets are prone to a (mild) risk-off correction which could in turn support the USD in a daily perspective. Overall we expect the EUR/USD 1.175/195 trading range to stay intact. The impact on US bond yields will probably remain very limited either way as the Fed’s new dot plot will probably still signal no rate hikes in the coming years.

Headline US retails sales advanced by 0.6% m/m, below consensus, while last month’s figure faced a downward revision (0.9% m/m from 1.2% m/m). Core sales disappointed as well. The retail control group sales, excluding food services, car dealers, building-material stores and gasoline stations and used as a proxy for consumption in GDP calculations, even declined by 0.1% m/m. The fizzling out of government support programme (end of July) and the receding effect of pent-up demand effect weighed on retail sales. That’s rather disappointing from a recovery point of view. Today’s other interesting eco release came from the UK. August inflation data slowed significantly, though less than feared. Headline and core CPI printed respectively at 0.2% y/y and 0.9% y/y. The government’s meal discount schemes and a sales tax cut for tourism and hospitality sectors was at play. The low inflation nevertheless adds to the BoE’s worries. The central bank meets tomorrow. Low inflation, the Covid-hit to the economy and rising hard brexit risks, suggests that the BoE will at least signal willingness to ease. Recent comments add to that dovish sentiment with BoE Governor Bailey for example saying that negative policy rates remain an option. The soft inflation and possible implications for the BoE are at odds with today’s remarkable sterling strength. Risk sentiment in theory plays in sterling’s disadvantage as well with main European indices around 0.5% weaker. EUR/GBP nevertheless reverses last week’s technical break through 0.8176/84.

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News Headlines

In his first briefing as new Japanese prime minister, Suga said he’ll focus first on tackling the coronavirus and the country’s economic recovery. Suga added it’s his mission to continue the policies of the Abe government, dubbed Abenomics. He said he’ll put regulatory reforms at the center of his administration and wants to address Japan’s population decline by expanding childcare services, fertility treatments and enhanced paternity leave.

The EU stepped up its plans to fight the climate change by increasing its six-year-old emissions-cutting goal from 40% to 55% by 2030, Commission President Von der Leyen announced during her first state-of-the-union speech today. She also said the EU would issue €225bn euros of green bonds as part of its €750bn large rescue fund. That’s roughly equal to the amount green securities sold globally last year.

Canadian inflation unexpectedly fell -0.1% m/m in August. Yearly measures showed a stabilization at 0.1% . The Bank of Canada’s preferred core measures were broadly in line with consensus and varied between 1.5% y/y (common core CPI) and 1.9% (median core CPI). Elements weighing on price developments were food (-0.8% m/m) and transportation (-0.9%). Clothing (+1.5%) and personal care (+0.6%) were the main contributors.

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