Thursday, 29 November 2018

P. 1

Rates: Powell breaks with October comments, but states the obvious

Fed Powell said that policy rates are close to neutral, breaking with his October view that they were a long way from such level. Markets only discount 1 hike next year, which is too dovish. Powell might have soothed investors’ conscience that the Fed won’t kill the economy by raising rates too much too quickly, but the December dot plot could be a harsh wake-up call.

Currencies: USD declines off recent highs on perceived soft Powell comments

Positive USD momentum halted yesterday. Markets interpreted comments from Fed’s Powell as pointing to a lower Fed rate path in 2019. The jury is still out whether the Fed will indeed act as soft as the market anticipates. Even so, in a ST perspective, the upside of the USD dollar is probably capped. FX markets will continue to monitor the Fed today as several governors will speak in Boston.

Calendar

• US stock markets rallied yesterday after Fed’s Powell signalled policy rates are

close to neutral. The Nasdaq outperformed (+2.95%). Asian equities are trading mixed with China underperforming its peers.

• US Trade Representative Robert Lighthizer said he was examining all available tools to raise US levies on Chinese cars to 40%. Such a move would equal China’s currently applied tariff to US vehicles.

• The Mexican central bank has lowered growth forecasts for 2018 from 2%-2.6% to 2%-2.4%. Growth for 2019 has also been revised downwardly to 1.7%-2.8%. The report comes 3 days before Mexico’s new president Obrador takes office.

• Nancy Pelosi was nominated by a 203-32 vote by the Democratic caucus to become House speaker. A final vote by the full House is scheduled in January. Pelosi already served as speaker from 2007 to 2011.

• An unexpectedly large increase in US crude inventories to a 2018 high sent oil tumbling again yesterday, with Brent crude trading back below $60/b. and WTI crude hovering near the $50-handle.

• Switzerland saw its economy unexpectedly shrink in Q3. Growth fell to -0.2% QoQ vs. 0.4% expected. Q2 growth was revised upwardly to 3.5% on an annual basis but Q3 growth dropped to 2.4% YoY while markets anticipated 2.9%.

• Today’s economic calendar contains German and US inflation data, EMU economic confidence, weekly claims, FOMC Minutes and the ECB’s semi-annual financial stability review. Several ECB/Fed governors are scheduled to speak.

Headlines

S&PEurostoxx 50NikkeiOilCRB

Gold2 yr US10 yr US

2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP

Thursday, 29 November 2018

P. 2

Powell states the obvious, but breaks with earlier view

Fed Chair Powell’s speech to the Economic Club of New York was yesterday’s defining trading moment. One comment popped out in otherwise vague introductionary remarks. The Fed chair declared that the policy rate is closing in on neutral levels. On first sight, this is nothing more than saying out loud what the median FOMC rate projections have been showing all year long. All governors estimate the neutral Fed policy rate to be somewhere between 2.5% and 3.5%. With the Fed Funds target rate at 2%-2.25% and with a December rate hike under way, the policy rate indeed is closing in on neutral levels. However, there’s more to the picture than meets the eye. Yesterday’s Powell comment is in stark contrast with his assessment early October that rates are a long way from neutral levels. In retrospect, we believe that was a slip of the tongue which Powell now tries to correct. However, his quotes get amplified as between now and then markets started doubting the Fed’s projected policy path given risks to the eco outlook stemming from slowing growth abroad and as fiscal stimulus threatens to swing to head wind from tail wind. They put investors’ heart at rest in not having to fear a Fed who’s about to kill the economic expansion by non-stop hiking. The US yield curve steepened with yield changes ranging between -2.4 bps (2-yr) and +2.7 bps (30-yr), the dollar lost ground and US stock markets flourished (+2.3% to +2.95%). Yesterday’s European trading session was one to rapidly forget about. German yields lost up to 0.4 bps across the curve with 10-yr yield spreads narrowing up to 3 bps.

Rate markets now only discount 1 more rate hike in 2019, compared to the Fed’s median projection of 3 additional tightening steps. We think that this market positioning is too dovish. The US labour market is very tight, inflation hit the 2% target and US economic growth remains strong. The Fed might flag some downside risks to the outlook at its December meeting, but with what we know right now, we don’t expect big changes to actual forecasts.

Asian stock markets are mixed overnight with China underperforming on trade talk. Other bourses aren’t as bullish as WS yesterday. The US Note future, steady after Powell’s remarks, gains extraordinary ground. The US 10-yr yield drops below 3.05%. We expect a stronger opening for the Bund. Today’s eco calendar contains EC confidence data, inflation numbers in Germany and the US and FOMC Minutes. Risks for German inflation are on the downside of expectations. Speeches by ECB and Fed members are wildcards. We remain reluctant towards additional core bond gains.

Rates

US yield -1d2 2,81 -0,025 2,83 -0,0310 3,06 0,0030 3,31 0,03

DE yield -1d2 -0,59 0,005 -0,24 0,0010 0,35 0,0030 1,02 0,00

US 10-yr yield drops to lowest level since September, holding just above the 3% mark

September Fed dot plot with median policy rate projection (green) and market expectations (black): too dovish market positioning

Af

Thursday, 29 November 2018

P. 3

USD (trade-weighted): dollar declines of recent peak levels as markets

ponder chance on a Fed pause post Powell

EUR/GBP: uncertainty for sterling persists as UK prepares of

Brexit vote

Perceived soft Powell hammers US dollar USD trading was confined to tight ranges yesterday, as markets awaited a speech of Fed Powell. FX investors apparently didn’t expect a soft assessment from the Fed Chair as the dollar held close to recent highs against the euro and the yen. In a brief recap on monetary policy, he said the policy rate is ‘just below the broad range of estimates of the level that would be neutral for economy’. Markets consider this a soft turn from recent Fed communication when some Fed members suggested the policy rate could go beyond neutral (seen around 3% in the September dots). So, markets saw a rising chance of a pause in the rate hike cycle next year. US yields and the USD nosedived. EUR/USD jumped about a full big figure and closed at 1.1366. The USD/JPY decline was more modest as the hope for less tighter Fed policy also caused a forceful equity rebound. USD/JPY came off 114+ levels and closed at 113.68. Overnight, Asian equities opened in positive territory in the wake of the US rally, but gains are moderate and are evaporating as the session proceeds. Regional markets apparently stay cautious ahead of the meeting between Trump and XI Jinping. Even so, the dollar stays in the defensive. EUR/USD trades in the 1.1385 area. USD/JPY is drifting further south in the 113 big figure (113.25 area). Today, the calendar is well filled with German CPI, US income and spending data (including price deflators). However, in the wake of Powell’s speech the focus will be on the Fed with the publication of the FOMC Minutes and a chorus of Fed members speaking at conference in Boston. To what extent will they confirm the soft market interpretation of the Powell comments? Of late, the USD was in good shape. EUR/USD drifted lower in the 1.1216/1.1651 range. The Powell comments cap recent USD rebound. Some more USD softness might be on the card, but we don’t expect the USD to weaken beyond key technical levels. Interest rate markets are already positioned for a very soft 2019 Fed scenario (about one hike). We still see no reason for EUR/USD to strengthen above the 1.15/1.1621 range top.

Sterling initially rebounded on headlines yesterday of a possible second referendum, but the gain was reversed as the BOE painted highly negative consequences from a disorderly Brexit. Today, the UK money supply and lending data will be published. The focus for sterling trading will remain on Brexit. EUR/GBP will probably remain in a some kind of erratic trading pattern near current weak levels as long as uncertainty on the approval of the Brexit remains as high as it is right now.

Currencies

R2 1,1815 -1dR1 1,1621EUR/USD 1,1366 0,0077S1 1,1187S2 1,1119

R2 0,8997 -1dR1 0,894EUR/GBP 0,8863 0,0002S1 0,8700S2 0,862

Thursday, 29 November 2018

P. 4

Thursday, 29 November Consensus Previous US 14:30 Personal Income (Oct) 0.4% 0.2% 14:30 Personal Spending (Oct) 0.4% 0.4% 14:30 PCE Deflator MoM/YoY (Oct) 0.2%/2.1% 0.1%/2.0% 14:30 PCE Core MoM/YoY (Oct) 0.2%/1.9% 0.2%/2.0% 14:30 Initial Jobless Claims 220k 224k 14:30 Continuing Claims 1663k 1668k 16:00 Pending Home Sales MoM/NSA YoY (Oct) 0.5%/-- 0.5%/-3.4.% 20:00 FOMC Meeting Minutes Japan 00:50 Retail Trade MoM/YoY (Oct) 1.2A%/3.5%A 0.1%R/2.2%R 00:50 Dept. Store, Supermarket Sales (Oct) -0.8%A 0.4% UK 10:30 Net Consumer Credit (Oct) 1.0b 0.8b 10:30 Money Supply M4 MoM/YoY (Oct) --/-- -0.3%/0.9% 10:30 M4 Ex IOFCs 3M Annualised (Oct) -- 1.1% EMU 11:00 Economic Confidence (Nov) 109.1 109.8 11:00 Consumer Confidence (Nov F) -3.9 -3.9 Germany CPI Rhineland-Palatinate MoM/YoY (Nov) --/-- 0.1%/2.6% CPI Baden Wuerttemberg MoM/YoY (Nov) --/-- 0.1%/2.8% 09:00 CPI Saxony MoM/YoY (Nov) --/-- 0.2%/2.5% 09:55 Unemployment Claims Rate SA (Nov) 5.1% 5.1% 10:00 CPI Brandenburg MoM/YoY (Nov) --/-- 0.1%/2.3% 10:00 CPI Hesse MoM/YoY (Nov) --/-- 0.1%/2.2% 10:00 CPI Bavaria MoM/YoY (Nov) --/-- 0.2%/2.8% 10:30 CPI North Rhine Westphalia MoM/YoY (Nov) --/-- 0.1%/2.4% 14:00 CPI MoM/YoY (Nov P) 0.2%/2.4% 0.2%/2.5% 14:00 CPI EU Harmonized MoM/YoY (Nov P) 0.2%/2.3% 0.1%/2.4% France 08:45 GDP QoQ/YoY (3Q P) 0.4%/1.5% 0.4%/1.5% Spain 09:00 CPI EU Harmonised MoM/YoY (Nov P) 0.0%/2.0% 0.7%/2.3% Sweden 09:30 GDP QoQ/WDA YoY (3Q) 0.2%/2.2% 0.8%/2.5% Events 09:00 ECB Vice President Guindos Speaks in Frankfurt 11:00 Italy to Sell Bonds 12:30 ECB Publishes Financial Stability Review 14:30 Powell Greets Students at 15th Annual College Fed Challenge 20:00 Five Fed Presidents Participate in Conference at Boston Fed 21:05 Fed’s Kaplan Speaks at Boston Fed Conference

Calendar

Thursday, 29 November 2018

P. 5

10-year Close -1d 2-year Close -1d Stocks Close -1dUS 3,06 0,00 US 2,81 -0,02 DOW 25366,43 617,70DE 0,35 0,00 DE -0,59 0,00 NASDAQ 7291,592 208,89BE 0,79 0,00 BE -0,54 0,00 NIKKEI 22262,6 85,58UK 1,38 -0,01 UK 0,75 -0,03 DAX 11298,88 -10,23

JP 0,09 -0,02 JP -0,14 -0,01 DJ euro-50 3168,29 1,87

IRS EUR USD GBP EUR -1d -2d USD -1d -2d3y 0,00 2,99 1,23 Eonia -0,3650 -0,00305y 0,31 3,00 1,34 Euribor-1 -0,3680 0,0010 Libor-1 2,3493 0,000010y 0,91 3,09 1,54 Euribor-3 -0,3160 0,0000 Libor-3 2,7060 0,0000

Euribor-6 -0,2560 0,0000 Libor-6 2,8844 0,0000

Currencies Close -1d Currencies Close -1d Commodities Close -1d

EUR/USD 1,1366 0,0077 EUR/JPY 129,21 0,75 CRB 181,22 1,30USD/JPY 113,68 -0,11 EUR/GBP 0,8863 0,0002 Gold 1229,80 9,90GBP/USD 1,2825 0,0078 EUR/CHF 1,1299 0,0019 Brent 58,76 -1,45AUD/USD 0,7306 0,0081 EUR/SEK 10,2725 -0,0108USD/CAD 1,3275 -0,0019 EUR/NOK 9,7278 0,0192

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