Markets
After the Fed policy meeting yesterday and the Bank of Japan this morning, attention shifted to the Bank of England today. The Bank of England acknowledged the economy fared a bit better than projected in the August Monetary Policy report. Private consumption continued to recover and is now around its start-of-the-year level in aggregate. Investment intentions among companies remained very weak however. Q3 GDP is expected to be a little less weak than estimated in August but would still be 7% lower compared to 2019Q4. The BoE especially sounds worried about the labour market with great uncertainty lingering after the generous job support schemes started unwinding beginning of the month. The central bank sees risks of a longer period of elevated unemployment. It is also concerned about the pick-up in coronavirus cases in some parts of the world, including the UK, which could weigh on activity. Brexit also returned to the discussion table in September. The August forecasts assumed a ‘comprehensive free trade agreement’ with the EU but that looks like a distant dream currently. Although the BoE hasn’t expressed a particular view on the negotiations, it did mention the process as a factor that it will take into account for the wider forecast discussion ahead of the November meeting. Despite these looming risks (Covid-19 flare-up, impact on labour market from unwinding job schemes, Brexit), the BoE unanimously left policy rates stable at 0.1% and didn’t alter the size of the £745bn big bond buying package. However, the tone of the minutes suggest more easing to come probably in November, along with new growth and inflation forecasts. That could even include cutting rates below zero. The BoE gave its clearest signal yet it might introduce negative rates after saying it will work together with regulatory authorities on how to implement them. The front end of the UK yield curve tumbled more than 5 bps as markets adjusted their rate-setting expectations accordingly. Much of the recent bear flattening is now undone. Investors sent the pound higher over the past few days but are now forced to rethink their steps. The pound sterling obviously takes a hit, with EUR/GBP jumping from the 0.91 barrier towards 0.915 at the time of writing. Cable tests the 1.29 despite a dollar on the back foot.
Dollar strength in the wake of the Fed meeting dwindled already today even as sentiment remained outright risk-off (Wall Street tumbles as much as 3%). The greenback’s attempt during Asian dealings to steam ahead met resistance pretty soon, confirming our view there hasn’t changed a lot for the USD from a fundamental point of view. Rates will be extremely low for a very long time. EUR/USD bounced off support near the 1.175 area and is currently arm wrestling with 1.18. The pair closed at 1.1816 yesterday. USD/JPY extended risk-off driven declines (yen gains), trading at 104.57 and nearing key support at 104.19 (July low). Core bonds profit from the negative risk environment with USTs outperforming the German Bund. Any bear steepening post-Fed (slight repositioning after Powell refrained from stepping up the bond-buying programme) is more than offset today as yields tank 1 bp (2-yr) to 4.7 bps (30-yr). The German yield curve bull flattens with yield changes varying from -1.3 bps (2-yr) to -2 bps (30-yr). Peripheral spreads widen marginally to Germany’s 10y yield. Portugal underperforms (+2 bps).
News Headlines
The ECB announced that EMU banks may exclude central bank exposures from the leverage ratio until 27 June 2021. Such assets include coins and banknotes as well as deposits held at the central bank. Based on end-March 2020 data, this exclusion would raise the aggregate leverage ratio of 5.36% by about 0.3 percentage points. The 3% leverage ratio requirement will become binding on 28 June 2021 but banks are already required to disclose their current leverage ratio.
