Markets
The recent risk on rally stalled yesterday and all looked set for a similar trading picture today given the lack of important data due. However, China injected markets with a dose of trade optimism this morning. It said that China and the US agreed to remove tariffs in phases as negotiations (after the partial trade deal) progress. Chinese media later said the Agricultural ministry and customs administration are studying the removal of curbs on US poultry. Stock markets are colored in green. The US yield curve shifts higher with changes varying from 4.4 bps (2-yr) to 6.3 bps (10-yr). The German yield curve bear steepens quite strongly. Yields are up 2 bps at the short end and more than 7 bps at longer tenors. Peripheral spreads are mixed: Greece (-3 bps) outperforms but Italy (+6 bps) is suffering from downbeat EC growth and debt forecasts on the country. EUR/USD started trading pretty well, heading for the 1.11 area again after extensively testing the 1.1065/75 support. The upleg did not hold though, likely the result of the European Commission painting a not-so-great picture of the European economy (see headline below). But at the moment, the aforementioned key support is doing its job. The Japanese yen is today’s obvious loser in FX markets. USD/JPY jumped above the 109 area (109.18 at the time of writing) after touching an intraday low around 108.6.
All eyes of sterling investors were on the Bank of England today. Carney kept policy rates unchanged at 0.75%, as expected. It did not do so unanimously however. Two out of the seven members voted for a rate cut, one of them being the most hawkish member of the committee, Saunders. The votes for a 25 bps cut were inspired by risks to the economic outlook due to international trade tensions and fear for entrenched Brexit uncertainty. While the BoE acknowledged both (extensively) in its monetary policy report, it held on to its hiking bias nevertheless. The BoE welcomed the progress made in Brexit, more specifically the British parliament approving the Withdrawal Agreement Bill in principle. They now assume an “orderly transition to a deep free trade agreement“. Under such circumstances and based on a lower or even stable policy rate, inflation is expected to be slightly above target at the end of the policy horizon, hence the central bank’s perceived need for gradual rate hikes to keep inflation near 2%. The BoE did marginally revise GDP projections downwardly with risks tilted to the same direction but expects excess demand to pick up towards the end of the three year horizon which should push growth to 2% in 2022. Markets clearly paid more attention to the dissenters in today’s vote rather than anything else. The first votes for a looser policy since 2016 makes markets question the BoE’s hiking intentions going forward. The implied probability of a rate cut rose after today’s decision. EUR/GBP advanced to 0.864 from 0.861 this morning. Cable slipped towards 1.28.
News Headlines
The Czech National Bank kept its policy rate unchanged at 2%. Two out of seven governors voted in favour of a 25 bps rate increase. The central bank kept its 2019 GDP forecast unchanged at 2.6%, while cutting 2020 from 2.9% to 2.4%. Inflation is expected to run above the 2%-inflation target through Q1 2021, but the overall balance of risks to the central bank’s forecast is anti-inflationary. “The situation abroad, which may be negatively reflected in the open Czech economy with a lag” represents a “major risk”. EUR/CZK trades broadly unchanged around 25.50
The EC cut its EMU growth and inflation outlook. The European economy is now in its seventh consecutive year of growth (1.1% expected) and is forecasted to continue expanding in 2020 (1.2%) and 2021 (1.2%). Labour markets remain strong and unemployment continues to fall. However, the external environment has become much less supportive and uncertainty is running high. As a result, the European economy looks to be heading towards a protracted period of more subdued growth and muted inflation.
