Market movers today
August kicks off with a wave of PMI data across the globe. Given the frozen escalation of the China-US trade war and softening central banks, we are unlikely to see big changes in European figures reflecting the sentiment in manufacturing with PMIs remaining in negative territory. The US manufacturing PMI data (both ISM and Markit) could still hover just above 50.0.
Bank of England (BoE) will announce its decision on policy rate at 13:00 CEST, followed by the inflation report, which could reveal above-target inflation. In line with unanimous Bloomberg consensus, we expect the rate to stay unchanged at 0.75%, while BoE’s tonality could become more dovish ahead of increasing uncertainty ahead of ‘hard’ Brexit in the environment of economic slowdown and given the possibility of a technical recession.
US initial jobless claims are due out this afternoon. The figure is likely to show a marginal increase in inflow of people receiving unemployment benefits, while the most recent number could still be under the 12-month average.
Selected market news
The Asian and US markets fell and the crude oil price slid on risk sell off and a rallying USD after the Federal Reserve cut its Fed funds target range by 25bp to the range 2.00-2.25% (8-2 vote in favour), as expected. A bit surprisingly, the Fed also decided to end its balance sheet reduction, a couple of months earlier than scheduled, but the decision is not a game changer. Based on the statement and the press conference, there are mainly three reasons for easing: (1) higher (trade) uncertainty, (2) slower global growth and (3) inflation remains below 2%. See our FOMC review – ‘Mid-cycle adjustment’ without pre-commitment , 1 August 2019.
As it was one of the meetings without updated dots, focus was on the statement and the press conference. In line with our expectation, the Fed repeated in the statement that it ‘will act as appropriate to sustain the expansion’, which we interpret as an easing bias suggesting more cuts may come. However, it is also clear that Powell & co will not pre-commit to more cuts, which left markets disappointed and was slightly to the hawkish side for us.
In our view, the Fed will still deliver two more cuts during the autumn (in September and December), as data would probably warrant it and the Fed does not want to disappoint markets too much. Given the Fed’s data dependency and focus on trade talks, it has become more difficult to predict monetary policy, which is more ad hoc than previously.
In FX, the broad USD rallied on markets pricing out rate cut probability mass in the front-end of the curve. Consequently, EUR/USD set a two-year low below 1.1100. We would not be surprised to see USD strength persist further into August, as high carry/low FX vol make long USD FX attractive from a broader portfolio perspective.
China’s Caixin PMI for July surprised positively. The manufacturing index came in at 49.9 (Bloomberg consensus 49.5), climbing from 49.4 a month earlier.
