Market movers today
Today, we get Danish foreign exchange reserve figures for April, which may well attract some attention, as the Danish krone has been trading relatively weak in April and not far from where Danmarks Nationalbank intervened in December.
In the UK, we monitor the Bank of England meeting, but we do not think the BoE will change its policy. Besides the Bank of England meeting, we also have local elections in the UK today. While this is normally not something we follow closely, it is interesting in the light of the Brexit extension and the upcoming European elections. Most polls suggest the Conservatives may suffer a heavy defeat, losing many seats, which would likely put further pressure on May to resign as party leader. We should know more about the results tomorrow morning.
In Scandi, we get Swedish and Norwegian PMI manufacturing (see page 2).
Selected market news
Most of Europe was off yesterday due to Labour Day and therefore markets centred on key events taking place in the US.
As expected, the Fed left the target range unchanged at 2.25-2.50% and overall there were no major changes to the policy signals (Powell said the IOER rate cut was a technical adjustment and not an expression of an easing bias, see more below). On one hand, the Fed said economic growth and the labour market remain strong but on the other, hand inflation is running below the 2% target
The Fed caught the market by surprise by cutting the Interest on Excess Reserves (IOER) by 5bp to 2.35% from 2.45% but Powell stressed during the press conference that this should not be interpreted as the beginning of an easing cycle. The Effective Fed Funds rate (EFFR) has risen to 2.45% since Easter due to a decline in the supply of bank reserves and was thus only 5bp below the top end of the Fed’s target range. The quickest way for the Fed to return the EFFR closer to the mid-point is to cut the IOER. There had been speculation in the market that the Fed could make this move at the June meeting, but the market was not priced for a cut to come at the May meeting – the May Fed Funds futures have traded around 2.42%.
ISM manufacturing dropped sharply to 52.8 from 55.3 in April. All the important subcomponents fell as well (employment, new orders, etc.). The ISM has been quite high for some time and, as we have highlighted, the US manufacturing sector is not immune to what happens overseas. So it is natural that the ISM had to go down eventually, although the decline is bigger than we had anticipated. That said, remember the service sector is more important for the overall economy.
