If one had to summarize the past 12 hours of trading and newsflow, it would be just one word: "chaos", interspersed with lots of fake news. Or, as Reuters put it, "markets were bombarded from all sides by denials and counter-denials on both the U.S.-China trade talks and the countdown to Brexit, by Turkey’s military push into Syria and by a blizzard of weak data stretching from Japan to France."
Exhausted traders have been shellshocked and the market remains tense, awaiting today’s highly anticipated trade talks, after a relentless barrage of contradictory overnight headlines that whipsawed futures and global markets back and forth and did little to help nerves, and we saw just how little conviction there is in markets with the wild swings seen across risk assets in both G10 and EM. After a very choppy Asia session, quiet has descended in London but we expect volatility to pick-up as headlines emerge on the latest status of talks.
The irony: S&P500 futures are now almost exactly where they closed on Wednesday yet anyone who ignored the overnight session missed the following (via RanSquawk):
- US and China made no progress on key trade issues in two days of deputy-level talks, sources said, and added the China trade team is now planning to leave Washington on Thursday, a day earlier than previously thought. Chinese delegation refused to talk about IP, sources stated. Further, sources noted that Chinese side had not made headway in persuading US negotiators to consider a freeze on tariff increases. (SCMP) It was later confirmed by Fox’ Lawrence, citing a Chinese trade source, that China trade delegation will leave after one day of talks, adding that no progress was made in US-China Deputy Level talks and the US will not suspend or roll back tariffs. (Twitter)
- CNBC’s Tausche initially reported that China talks will still go through Friday, citing a Senior Administration source, "We are not aware of a change in the Vice Premier’s travel plans at this time” and there's a dinner planned for the delegation Thursday evening in Washington. However, the source later stated, "Friday is an "open question." One possibility that [Vice Finance Minister] Liao Min stays and [Vice Premier] Liu leaves. A Thursday departure also possible”, via CNBC’s Tausche. Fox’s Lawrence later added that the US team may find out today that Chinese delegation are cutting trade talks short.
- US is reportedly weighing a currency pact with China as part of a partial trade deal which could also see a tariff increase next week suspended, according to sources. (Bloomberg) The NYT reported shortly after that US President Trump administration will soon issue licenses allowing some American companies to supply non-sensitive goods to the Chinese telecom giant Huawei, according to source. (NYT) However, the FT later reported that the Trump Administration is reportedly weighing options that would increase inspections on parcels from China in an attempt to crack down on shipments of contraband, according to sources. (FT)
- US Commerce Secretary Ross said China trade practices have gotten worse, US prefers not to impose tariffs but tariffs are forcing China to pay attention. US VP Pence said US will demand China open market in trade talks.
- China's MOFCOM urges the US to stop unreasonable pressure on Chinese companies, including Huawei.
- The final salvo - so far - came shortly after 6am, when Fox Business' Edward Lawrence said that "the Chinese delegation worked late into the evening. They went back and forth on if they are staying or not for Friday talks. The sense is that the moves this week with the Entity list and VISA restrictions soured the atmosphere. They could still stay depends on today."
The latest: the Chinese delegation worked late into the evening. They went back and forth on if they are staying or not for Friday talks. The sense is that the moves this week with the Entity list and VISA restrictions soured the atmosphere. They could still stay depends on today— Edward Lawrence (@EdwardLawrence) October 10, 2019
One way to summarize the above is with the help of this handy chart, which visualizes the key headline catalysts behind the chaos as we enter today's decisive first (and maybe final) day of trade talks.
Looking at individual markets, Asia enjoyed a broadly positive finish but European stocks then spent their opening dithering as the more serious action took place in the currency markets, where the euro suddenly popped to a two-week high above $1.10 versus the dollar, which in turn slumped sharply, weaker across the board, partly due to market chatter about a currency pact with China to stop devaluation - but there was plenty else too.
The Financial Times reported that the ECB had restarted its bond-buying program last month despite objections of its own officials, a further sign of how the move has reopened divisions within the institution. "The view on the currency story could be swinging here,” said Saxo Bank’s head of European currency strategy, John Hardy, “And the market is sensing that euro-dollar is the pressure point."
In FX, the the main mover overnight was a rally in China’s offshore yuan, which strengthened to its best levels in more than two weeks after a Bloomberg report that said U.S. and Chinese officials were reviving a currency pact first mooted earlier this year that stops further tariff hikes in return for commitments to hold the yuan stable.
European market activity stood in stark contrast to the high-volatility Asian session which was rocked by conflicting trade reports. Bunds, Treasuries and Gilts drift sideways at lower levels; peripheral yields trade marginally tighter to core as curves bear flatten after brushing off weak industrial production data, especially from France. UK assets ignored data that suggested the nation will avoid a recession this year as eyes remains fixed on Brexit developments. European equities held within Wednesday’s trading range as miners and auto sectors outperformed. USD trades on the backfoot, DXY trades just shy of this week’s lows.
And then there is of course the start of today's trade negotiations. Top U.S. and Chinese delegations were scheduled to meet in Washington on Thursday and Friday to try to end a bruising 15-month-old trade war. Without significant progress, U.S. President Donald Trump is set to hike the tariff rate on $250 billion worth of Chinese goods to 30% from 25% next Tuesday.
“Barring any surprise today, it looks like their talks are breaking down. The tariff (rate) will be hiked. The ituation looks dire,” said Norihiro Fujito, chief investment strategist at Mitsubishi UFJ Morgan Stanley Securities.
However, as Reuters notes, China is unlikely to be willing to make an easy compromise with a U.S. president who seems increasingly vulnerable to domestic political pressure as opposition Democrats seek to impeach him. Democratic presidential contender Joe Biden called for the impeachment of Trump for the first time in a deepening partisan fight over a congressional investigation of the Republican president.
“Mr. Trump’s recent impeachment risk has turned the timetable against him,” Chi Lo, senior economist at BNP Paribas Asset in Hong Kong, wrote in a report to clients. “While China is not eager to reach a trade deal, Mr. Trump is, however, under pressure to get at least a temporary deal done to help his re-election bid before his impeachment risk rises and the U.S. economy weakens further,” Chi said.
In rates, Treasuries yield slipped back after having risen to 1.594% on Wednesday, pressured partly by this week’s heavy bond supply. The 10-year Treasuries yield dipped to one basis point to 1.5836% after sliding as low as 1.54% earlier, although the ECB chatter helped push euro zone yields slightly higher. The price of front-end Fed funds rate futures has been gained on increasing bets on more rate cuts by the U.S. Federal Reserve. The November contract is almost fully pricing in a 0.25% point cut on Oct. 30.
In commodities, oil prices also dipped on wariness over U.S.-China talks. Brent crude futures fell 0.15% to $58.23 a barrel while U.S. West Texas Intermediate crude lost 0.11% to $52.53 per barrel. Copper rose as much as 1.1% to $5,749 a tonne, however, after falling 0.3%. It looked set to be its best day in a month.
Expected data include inflation and jobless claims. Delta Air Lines is reporting earnings.
- S&P 500 futures down 0.1% to 2,916.25
- STOXX Europe 600 down 0.01% to 380.26
- MXAP up 0.07% to 155.48
- MXAPJ up 0.1% to 497.23
- Nikkei up 0.5% to 21,551.98
- Topix down 0.02% to 1,581.42
- Hang Seng Index up 0.1% to 25,707.93
- Shanghai Composite up 0.8% to 2,947.71
- Sensex down 0.8% to 37,892.26
- Australia S&P/ASX 200 up 0.01% to 6,547.08
- Kospi down 0.9% to 2,028.15
- German 10Y yield rose 0.6 bps to -0.542%
- Euro up 0.4% to $1.1014
- Italian 10Y yield rose 2.5 bps to 0.529%
- Spanish 10Y yield rose 0.8 bps to 0.159%
- Brent futures down 0.2% to $58.23/bbl
- Gold spot up 0.2% to $1,507.94
- U.S. Dollar Index down 0.3% to 98.81
Top Overnight News
- Chinese and American negotiators are set to start meeting again in Washington on Thursday in the latest round of their so-far fruitless talks to strike a trade deal. If no agreement is reached, the already slowing global economy will face another hurdle, with the U.S. set to raise tariffs on China on Oct. 15 and then on the European Union on Oct. 18
- The currency accord, which the U.S. said had been agreed to earlier this year before trade talks broke down, would be part of what the White House considers to be a first-phase agreement with Beijing. It would be followed by more negotiations on core issues like intellectual property and forced technology transfers, people familiar with the discussions said
- China’s trade practices have deteriorated and U.S. tariffs are forcing China to heed American grievances, U.S. Secretary of Commerce Wilbur Ross said in a speech in Sydney
- Officials at the Sept. 17-18 Federal Open Market Committee meeting talked about two options -- surrounding the 2% inflation goal in a range, or trying to hit that number on average over time with so-called makeup strategies -- promising to offset persistent undershooting of the Fed’s 2% target by allowing prices to run above that for a period of time, or vice versa
- U.K.’s Johnson will meet Ireland’s Varadkar for crucial talks over lunch as the U.K. and European Union seek a way through the Brexit impasse with time running out to reach a deal. While neither side is brimming with optimism, Ireland’s government said an agreement was “not impossible,” though wide gaps remain.
- Swiss officials are going to extremes in the canton of Zug to avoid getting penalized by the world’s lowest interest rate. To minimize the amount of cash on hand that would get hit with a charge, Zug’s treasury postponed recouping nearly a billion francs in capital gains tax revenue from the federal government.
- Italy sold $7 billion of bonds, more than double an initial estimate, in its first offering of U.S. dollar-denominated securities since 2010
- It’s the biggest event of the year for the City of London, and firms are taking no chances before the Brexit deadline as they ban holidays, beef up access to liquidity and prepare to execute contingency planning.
- President Donald Trump pressed then-Secretary of State Rex Tillerson to help persuade the Justice Department to drop a criminal case against an Iranian-Turkish gold trader who was a client of Rudy Giuliani, according to three people familiar with the 2017 meeting in the Oval Office. Tillerson refused, arguing it would constitute interference in an ongoing investigation of the trader, Reza Zarrab, according to the people
Asian equities traded with cautious gains in what was a volatile session amid a plethora of positive/negative trade headlines and source reports. The initial pessimism from the SCMP article saw the E-mini S&P futures drop almost 40 points, although the index future recovered most of its losses after being swayed on journalists’ updates on Twitter, but the notable upside stemmed from sources which suggested US is mulling a currency pact which would also see a suspension to next week’s planned tariffs on China. Finally, the FT report, which placed an additional obstacle in trade talks, saw US equity futures pause just under the levels seen at the beginning of the session. Back to Asia-Pac, ASX 200 (U/C) was initially cushioned by gold miners amid firmer prices in the yellow metal at the Australia cash open, whilst Nikkei 225 (+0.5%) swung between gains and losses in tandem with the JPY. Elsewhere, Hang Seng (+0.1%) and Shanghai Comp (+0.8%) opened flat but drifted into positive territory (albeit off highs) as the NYT reported (citing sources) that the Trump Admin is willing to let some US firms deal with Huawei, thus signalling that US is seemingly willing to make some concessions ahead of trade talks.
Top Asian News
- Family Office Advisers See Interest in Leaving Hong Kong
- Japan Tech Bellwether Slashes Outlook Below Lowest Estimate
- Singapore’s Temasek Said to Rule Out Aramco IPO Investment
- Indonesia Finds One-Fifth of Palm Oil Plantations Are Illegal
Major European bourses mixed, as the market digests a plethora of mixed US/China trade headlines during AsiaPac hours, ahead of principal level talks between the two sides today that resulted in tumultuous back and forth trade overnight. A bout of selling at the European open coincided with some comments out of China MOFCOM (condemning the US for smearing China over treatment of Uighars and for putting pressure on Chinese companies incl. Huawei), although the move quickly pared and although now higher, Indices are still well within overnight ranges. The CAC 40 (+0.5%) is an outperformer, with better than expected earnings from LVMH (+4.1%) and Christian Dior (+3.5%) propping up the index and pulling other luxury names such as Kering (3.2%) higher. Conversely, the FTSE 100 (unch.) is lagging on sterling strength on account of the broadly weaker buck. Looking ahead, though trade developments will likely continue to be the crucial driver of sentiment today, traders will also be watching US CPI, a slate of Central Bank speak from Fed’s Kashkari, Daly, Mester and Bostic and ECB’s Lane for any more clues as to the next move from two of the world’s most important central banks. In terms of the sectors, the picture is mixed; Consumer Discretionary (+1.0%) is the outperformer on aforementioned outperformance in luxury names. The defensive Utilities (-0.5%), Health Care (-0.6%) and Consumer Staples (-0.7%) sectors are the underperformers, while Tech (-0.1%) and Industrials (-0.1%) are also lower. In terms of other individual movers, Lafargeholcim (+2.0%) opened higher after Co. reportedly decided not to bid for Bayer’s USD 3bln Mortar Business, news which saw the latter’s share price fall substantially. Phillips (-8.0%) sunk after earnings underwhelmed. BHP Billiton (+1.5%) shares were supported on the news that Standard Life Aberdeen (+0.9%) own a 4.9% stake in the Co. and are reportedly urging them to suspend membership of groups which engage in obstructive lobbying for the broad fuel industry.
Top European News
- U.K. Economy Set to Avoid Imminent Recession Despite Poor August
- Swiss Get Creative to Dodge the ‘Big Pain’ from Negative Rates
- Buyer of Thomas Cook Shops Aims to Thrive Without Airline Costs
- Capital-Rich U.K. Banks Offer Spain-Like Spreads Amid Brexit Fog
In FX, USD - The Greenback is softer across the board following FOMC minutes that revealed a bit more polarisation beyond the official divergent dissentions, but a higher recession risk via statistical models that warranted and justified the second insurance cut. Moreover, the Fed remains ready to respond to further threats and headwinds with Chair Powell signalling balance sheet expansion in separate comments, albeit for reserve rather than monetary policy purposes. Ahead, the first weekly claims update post-NFP, while headline inflation data follows weak PPI, as the DXY slips back below 99.000 to test the water under the 21 DMA (98.780) within a 99.073-98.653 range.
- NZD/AUD/EUR/CHF/GBP - The major beneficiaries of general US Dollar weakness and probably some anticipation or at least hope that out of the mass of conflicting reports on US-China trade talks some form of progress emerges towards a deal. The Kiwi is forming a base above 0.6300 ahead of NZ manufacturing PMI, the Aussie appears more buoyant around 0.6750 and the Euro has finally cleared stiff resistance to breach 1.1000 on the way through a Fib retracement at 1.1021, with 1.1050 next on the radar before another Fib at 1.1055. Elsewhere, the Franc is approaching 0.9900 again, but lagging behind the single currency with the cross elevated between 1.0940-00 parameters and a hefty 1.1 bn Eur/Chf option expiry at the base looks safe for now, if not over the NY cut. Meanwhile, Sterling remains prone to breaking Brexit headlines awaiting PM Johnson’s meeting with his Irish counterpart at midday, but also digested a data deluge that was soft overall albeit not as bad as some feared perhaps. Thus, Cable has survived another scrape with 1.2200 and stops on a break of 0.9000 in Eur/Gbp did not trigger too much further upside.
- CAD/JPY - The Loonie and Yen have been subject to US-China trade news congestion and knock-on swings in risk sentiment, but both gleaning traction from the aforementioned Buck underperformance, as Usd/Cad retreats to 1.3300 from 1.3345 and Usd/Jpy pares back between 107.75-04 bounds and decent expiry interest spanning 107.00, 107.35-50 and 107.70 (1.2 bn, 1.5 bn and 1.3 bn respectively).
- SEK/NOK/CNH/TRY - Somewhat mixed fortunes for the Scandi Crowns as Eur/Sek reverses sharply from new decade highs circa 10.9325 to almost 10.8300 on the back of firmer than forecast Swedish inflation data, but Eur/Nok meanders within 10.0880-10.0480 ‘extremes’ after inconclusive Norwegian CPI prints. Similarly, Usd/Cnh is on the soft side and not far from a 7.1000 low on the US-China trade hype in contrast to Usd/Try edging closer to 5.9000 as Turkey’s Syria mission continues amidst mounting international condemnation.
In commodities, the crude complex is slightly lower on Thursday morning, although price action for now largely mirrors that in the equity market, following similarly choppy moves on the mixed trade headlines overnight. In terms of supply updates; Ecuador’s Petroecuador declared a force majeure on exports yesterday after local unrest resulted in the closure of oil fields. The country exported roughly 0.315mln BPD of crude oil in September 2019; ING point out that nearly half of it went to the US West Coast and as such a lack of oil supplies from Ecuador could create some shortages at the West Coast in the short term. Additionally, Shell lifted a force majeure on Bonny Light exports from Nigeria (in place since 13 September), bringing around 0.150mln BPD back online. However, crude markets remain seemingly fixated on demand side factors for now, with the outcome of today’s principal level talks between the US and China likely the key determinant of near-term direction, although traders will also be eyeing OPEC’s Monthly Oil Report at 12.45 BST. In terms of levels; technicians will be eyeing support at USD 51.40/bbl (yesterday’s low) and USD 51.00/bbl (low of the 3rd) and resistance at USD 53.70/bbl (yesterday’s high) and USD 54.00/bbl (high of the 7th) for WTI Nov’ 19 futures. For Brent Nov’ 19 futures, recent highs at the USD 59.35/bbl and USD 59.70 levels may provide some resistance, while Wednesday’s USD 57.40/bbl low may provide some support. Over in the metals complex; price action in Gold has calmed down after the overnight action, with the precious metal currently range bound between the USD 1509/oz and USD 1515/oz levels, well of last night’s USD 1522/oz highs. ING note strong demand for the yellow metal; “Gold ETF investments increased by 0.2mOz yesterday, the seventeenth consecutive day of increases in gold ETF holdings”, the bank notes. Demand for safe-haven gold continues to be strong, they argue, due to the uncertainty over the US-China trade talks, increasing possibilities of another Fed rate cut and geopolitical tensions in the Middle East including the recent clashes between Turkey and Syria. Copper, which also saw choppy action overnight, is higher, after breaking above its USD 2.59/lb 50DMA.
US Event Calendar
- 8:30am: US CPI MoM, est. 0.1%, prior 0.1%; US CPI YoY, est. 1.8%, prior 1.7%
- US CPI Ex Food and Energy YoY, est. 2.4%, prior 2.4%;
- US CPI Core Index SA, est. 264.7, prior 264.2; US CPI Ex Food and Energy MoM, est. 0.2%, prior 0.3%
- 8:30am: Real Avg Weekly Earnings YoY, prior 1.16%; Real Avg Hourly Earning YoY, prior 1.5%
- 8:30am: Initial Jobless Claims, est. 220,000, prior 219,000; Continuing Claims, est. 1.65m, prior 1.65m
- 9:45am: Bloomberg Consumer Comfort, prior 62
DB's Jim Reid concludes the overnight wrap
Discovering music in the 1980s led me to be full prey to the marketing devises in the industry. When a new single was released on day one you would be able to buy the 7 inch vinyl single. Then a week later the 12 inch mix would come out with perhaps a new song on it forcing you buy again. Then maybe a week later a cassette single with a live track on it would be released. Oh and don’t forget the picture disc version. Having learnt from this, today we launch the podcast of the 2019 Long-Term Study “The History and Future of Debt”. To find out how to access this click here . It’s on most major podcast providers. This follows the video presentation with the link available on the front cover of the original report here . At the moment we don’t have another format unless I release it as a musical. Watch this space.
The soundtrack to the rest of the year might be dictated by what happens today at the resumption of US/China trade talks in Washington. The negotiations take place with just 5 days left before the planned increase in tariffs which will raise duties from 25% to 30% on $250bn worth of Chinese goods. Ahead of the talks, markets advanced yesterday on optimism that some sort of a small deal might be agreed, with Bloomberg reporting that China is open to a “partial trade deal” in spite of the technology company blacklist. The report said they would accept this on the condition that President Trump doesn’t impose any more tariffs, while Beijing would make “non-core concessions” such as further agricultural purchases. Meanwhile, further positive newsflow came from the FT, which reported that China had offered to increase their purchases of soy beans from 20m tonnes to 30m and to consider changes to non-tariff barriers that have inhibited US agriculture exports in the past. So the mood music is more positive again even if expectations have been dialled back in recent days. The fact that trade-sensitive stocks led equity gains yesterday reflected that, with the Philadelphia semiconductor index up +1.74% while the NASDAQ rose +1.02%. Technology stocks led the S&P 500, which closed +0.91%.
The major US indexes did close off their highs however, as late breaking headlines that Chinese officials have lowered their expectations for progress this week caused a mild selloff into the New York close. Meanwhile, we also saw a flurry of trade headlines overnight which have continued to spark volatility, as initially the SCMP reported that China officially plans to cut their visit to DC short by a day, leaving today instead of Friday, as the two sides made no progress in deputy-level trade talks. This caused S&P 500 futures to drop as much as -1.22%. However, the White House subsequently refuted the SCMP report and Bloomberg reported that Chinese Vice Premier Liu He is still scheduled to depart Friday evening, and dinner is on for the delegation tonight in DC. We’ve also seen reports suggesting that the US was prepared to accept a previously-negotiated deal on currency coordination, which would allow them to delay next week's planned tariff increases while still having a deal to sign. Elsewhere, the New York Times reported that President Trump will soon issue licenses allowing US companies to supply non-sensitive goods to Huawei while the US Commerce Secretary Wilbur Ross, who spoke overnight in Sydney, said that China’s trade practices have “gotten worse” and the tariffs are “forcing China to pay attention,” and added that “It’s very hard to forecast,” the likelihood that the two sides would even reach a partial agreement before saying, “We would like a deal. They would like a deal. We’ll see what happens.”. After whipsawing through the various conflicting headlines, futures on the S&P 500 are currently trading -0.24%.
Like with S&P futures, Asian markets have also been a bit all over the place but have recovered after initial losses. The Nikkei (+0.19%), Hang Seng (+0.18%) and Shanghai Comp (+0.19%) are now all up while the Kospi (-0.95%) is down. As for FX, most currencies are trading strong against the greenback this morning with the US dollar index down (-0.12%). The Chinese onshore yuan is up +0.25% at 7.1150. 10y UST yields are down -1.2bps this morning after seeing similar volatility through the Asian session to equity markets. In commodities, WTI oil prices are down -0.21% while spot gold prices are up +0.21%. As for overnight data releases, Japan’s September PPI came in unchanged month over month and in line with consensus. One additional overnight story to note is that the FT has just published an article suggesting that the ECB council overruled the advice of their monetary policy committee in restarting QE at their last meeting. This further shows the splits at the ECB and will give the new President Lagarde an interesting backdrop as she soon starts her tenure.
Back to yesterday and in Europe, the STOXX 600 was up +0.42% and the DAX advanced +1.04%. Elsewhere Treasuries sold off, with 10yrs +4.8bps while the 2s10s curve steepened +1.4bps. In a day where geopolitical turmoil dominated the headlines, Turkish assets suffered after the country’s military began an offensive against Kurdish fighters in northeastern Syria. The action involves the Turkish military moving against Kurdish and alleged Islamic State forces along the Turkish-Syrian border who had previously been partners with the US against Islamic State, but who the Turkish government views as a security threat. The move follows President Trump’s announcement that US troops would be withdrawn from Syria. Although many Republicans in Washington have criticised the President’s decision, and fear it could lead to the return of Islamic State, Trump reiterated his stance yesterday, saying in a tweet that “USA should never have been in Middle East”. The Turkish lira weakened -0.52%, while the BIST 100 equity index closed down -2.17%, its worst day since mid-August.
Over to the Brexit saga now, and with just one week to go until the crucial EU council summit on 17th October, we saw sterling rally yesterday before fading back after the Times of London reported that the EU were willing to make a concession that would allow the Northern Irish Assembly to leave a new backstop if a ‘double majority’ of both the unionist and the nationalist community were to agree. In return, the EU want the customs border to be in the Irish Sea, similar to the Northern-Ireland only backstop that they’ve previously proposed. However, the DUP swiftly rejected any such idea, with their Brexit spokesman Sammy Wilson calling them “worse than Mrs May’s deal”.
We also heard from the BBC’s political editor Laura Kuensssberg that the government would be calling MPs to Westminster for a special sitting of Parliament on Saturday 19 October, after the EU Council summit. For context, MPs meeting on a Saturday in the UK is pretty exceptional - the last time they did was in 1982 for the Falklands War. The date is also important as it’s the deadline for MPs to approve a deal under the Benn Act that could allow the government to avoid having to request an extension to Article 50. As it stands, things don’t look too strong on that front, with the EU’s chief Brexit negotiator, Michel Barnier, saying to the EU Parliament yesterday that the UK’s proposals were “not something we can accept”. He’ll be meeting Brexit Secretary Stephen Barclay for further talks today, with PM Johnson meeting Irish PM Varadkar in Northwest England. Meanwhile, the Sun’s Tom Newton Dunn tweeted overnight that Jeremy Corbyn is now ready to grant Boris Johnson a general election on Tuesday November 26.
Staying with Europe, another remarkable yield milestone was reached yesterday as Greece sold €487.5m worth of three-month bills at a negative yield of -0.02%. It feels like a long time ago now since we were talking about the country’s survival in the Euro, though Greece does still have the highest debt-to-GDP ratio of any EU country. Greek assets rallied in response, with the FTSE/Athex Banks index up +1.72%, while ten-year bonds rallied to close -2.1bps. It was a contrast to the rest of the European sovereign bond market, where 10yr bunds (+4.5bps), OATs (+4.0bps) and BTPs (+2.6bps) all sold off.
Over to the Fed, where the minutes from the September policy meeting had several interesting snippets, though nothing immediately market-moving. Per Powell’s signal on Tuesday, the minutes indicated that “participants agreed that developments in money markets (…) implied that the Committee should soon discuss the appropriate level of reserve balances.” That likely clears the way for an announcement for renewed balance sheet growth at this month’s meeting. It’s also noteworthy that Simon Potter, the ex-head of the NY Fed Markets Group and an expert on money markets, attended at least part of the meeting, despite being ousted from his position in June. Several participants also wanted to consider a standing repo facility, which could be an option at some point in the future.
Apart from the technical details, the minutes also showed that several participants wanted the committee to clarify when easing will end, which should heighten attention on the next few policy statements for any signal that the rate cutting cycle is over. The discussion of the economic outlook has already been overtaken by the incoming data, which has already deteriorated since the meeting. Several members wanted to keep rates on hold and one member called for a 50bps cut, all of which we already knew. Finally, there was some discussion regarding the Fed’s ongoing policy review, and “most participants were open to the possibility that the dual-mandate objectives of maximum employment and stable prices could be best served by strategies that deliver inflation rates that over time are, on average, equal to the Committee’s longer-run objective of 2 percent." That suggests fairly broad support for some form of make-up strategy or price level target, which underlies our economists’ call for three more rate cuts over the next four months. Officials also discussed raising the inflation target or making the 2% target into a floor, though we don’t really envision either of these policies being implemented.
Staying with central bankers, we earlier got comments from ECB Vice President de Guindos in an MNI interview, who said that “although we can reduce interest rates further, the side effects of monetary policy are becoming more and more evident and more and more tangible.” He also said that forward guidance was the “core element of the package” last month.
There was little in the way of data yesterday, but the JOLTS survey saw job openings fall to a 17-month low in August of 7.05m. This was also the 3rd straight month that the number of job openings had fallen and reiterates that a lot of the forward indicators of employment are softening. Wholesale inventories for August were also revised down 0.2pp to 0.2% mom, which pushed down the Atlanta Fed’s nowcast model to 1.7% for Q3 growth, from 1.8%.
Looking to the day ahead, in addition to the resumption of the US-China trade talks we’ll get the ECB’s account of their September policy meeting, following which there were a number of public dissenters to the policy decisions. There’ll be a number of Fed speakers, including Daly, Bullard, Mester and Bostic. Meanwhile, data releases include August industrial production figures for France, the UK and Italy, Germany’s trade balance for August, and the August monthly GDP figures for the UK. From the US, there’ll also be September’s CPI release as well as weekly initial jobless claims.