Market movers today
Markets will keep an eye on the EU summit in Brussels where focus remains on the Brexit negotiations. Furthermore, migration and reforms to deepen the EMU – where progress during the June summit was miniscule – will also be on the agenda today.
A range of second tier data is also due out, with the US Philly Fed index for October and UK retail sales data for September, which markets tend to pay attention to, despite it being a relatively poor indicator of private consumption developments. In the Scandi countries, Swedish Valueguard property prices and unemployment for September are being released (see next page).
Selected market news
Overall, we do not think there was any major news in the FOMC minutes, see below. Yet, subsequent price action suggests speculation of a somewhat softer rhetoric, with US yields edging higher, thereby contributing to a further stall in the risk rebound. Less impressive earnings reports and renewed focus on the US’s hawkish stance towards China have also contributed to sending most major Asian equity indices into the ‘red’ this morning.
As expected, the FOMC minutes revealed a central bank on track to deliver rate hikes until the ‘neutral’ 3% is reached (probably in June 2019 after hikes in both December-18 and March-19). After that, monetary policy will be more ‘stop and go’ depending on how the economy and markets are doing, but ‘a substantial majority’ expect policy to turn contractionary. There were no discussions about the target for the balance sheet (i.e. when QT ends) or the future monetary policy framework (although a couple of FOMC members thought it would be good ‘ to hold a periodic and systematic review of’ the monetary policy framework). The minutes showed that ‘ almost all’ considered it appropriate to remove the phrase stating policy ‘ remains accommodative’ , because the removal would not signal a policy change while waiting would give a false sense of the certainty as to the actual level of the neutral rate. Finally, the minutes did not give any indications that the board had been influenced by the recent critique from President Trump.
As expected, there was no withdrawal agreement at yesterday’s Brexit working dinner (negotiations broke down on Sunday). The EU leaders also said that the possible extraordinary EU summit in November is cancelled due to the lack of progress but sources say that it might come back into play if negotiations progress over the coming weeks. The tone was positive though and it did not end like the Salzburg meeting. At the moment, it seems likely that we will have to wait for the EU summit in December before a deal can be signed (and we cannot rule out that we have to wait until January). Our base case is still a decent Brexit, where the UK leaves on orderly terms.
Late last night, US Treasury released its semi-annual currency manipulation report. As expected, China was not labelled a currency manipulator, as it still does not meet the criteria (despite Trump claiming it). Still, the report included very hawkish language against China. It is difficult to see a solution to the trade war/strategic conflict in the short term, as the US economy is strong and China does not want to negotiate under pressure and also seems to be preparing for a long fight. Due to monetary policy divergence, we expect CNY to weaken further and forecast USD/CNY in 7.20 in 12M.
