Markets:
Yesterday, US president Trump gave markets a mixed message on the status of the trade negotiations with China. The President confirmed recent indications from both US and China officials that a ‘phase one deal could be reached in the near future’. At the same time, the US president kept the threat of substantial additional tariffs if they fail to reach a deal in the near future. Trump in se didn’t bring much concrete news, but his more guarded tone on the trade topic provided a perfect excuse for at least some investors to take profit on the recent ‘reflation trade’. Uncertainty around the escalation in the Hong Kong crisis also weighed on risk sentiment in Asia this morning. European equities decline between 0.2% and 1.5%. US equities show more limited losses. The US yield curve bull steepens with yields declining between 3.5bp and (2-y) and 7.0 bp (30-y). US October CPI inflation (1.8 Y/Y headline, 2.3% Y/Y core) was very close to expectations and had only negligible impact on US bond trading. The German yield curve also flattened. The 2-yr yield rise marginally (0.2 bp). Yields at longer maturities declined up to 6.5 bp (30-y). Intra-EMU spreads versus Germany widen with Italy (+7 bp) and Spain (+6bp) underperforming. Markets are now looking forward to the Fed Powell’s testimony on monetary policy before Congress later today. In the prepared text of the testimony, the Fed Chair repeated its assessment from the 30 October post-FOMC press conference. The Fed will monitor the impact of the three preemptive rate cuts it executed this year. The current stance of monetary policy is likely to be sufficient provided the US economy remains on track with the Fed’s outlook. However, the Fed is aware of noteworthy risks to its economic outlook. The initial market reaction to the testimony text is very limited.
The correction on the reflation trade in the FX markets was again less outspoken than in equities or in yield markets. USD/JPY declined from the 109.15 area this morning and trades currently in the 108.75 area as the yen attracts safe haven flows. EUR/USD recently suffered as US yields rose slightly more in the risk rally than European ones. However, today’s reversal still didn’t help the single currency. EUR/USD hovers in a very tight range close to the 1.10 barrier. In the UK, inflation data mostly came in marginally softer than expected. However, deviations from consensus were small and probably didn’t affect the assessment of the BoE. EUR/GBP held a directionless sideways trading pattern around the 0.8575 pivot.
News Headlines:
UK headline inflation came in at 1.5% y/y, slightly below market expectations of 1.6%. Core inflation holding steady at 1.7% and just below the central bank’s 2% target casts doubt on any downward shift in rate expectations. US CPI offered a bit of a mixed bag as the headline print ticked higher and exceeded expectations at 1.8% y/y whereas the core measure was slightly below the 2.4% consensus at 2.3%. The shortfall of core inflation is was due to a deceleration in rents.
China will lower the minimum capital ratio requirement for some infrastructure investment projects, state television CCTV said on Wednesday, citing a cabinet meeting chaired by premier Li Keqiang. The minimum capital investment ratio for ports and shipping infrastructure projects will be lowered to 20% from 25%, while the ratio for highways, railways, environmental protection and social services infrastructure projects can be decided on a case-to-case basis, with the decrease capped at 5%. In addition, up to 50% of this minimum capital investment can be raised through equity financing, said the statement. Local governments are facing increasing fiscal strains as the tax cuts and the broader economic slowdown reduce their revenues, hampering their ability to carry through on big infrastructure projects. Through the capital ratio cuts China aims to expand effective investment to revive growth.
