- European equities traded down today, but are off the intra-day lows, showing currently losses of 0.30%. US equities show marginal losses, as the initial dive on the tax reform headlines is reversed.
- Republicans unveiled plans to slash the corporate tax rate to 20%, without cutting the top rate for the richest Americans as part of a sweeping overhaul of the tax code as they seek to secure a first major legislative victory for President Donald Trump
- Traders are painting the Bank of England’s tightening cycle with the ‘one and done’ brush after the central bank finally raised overnight borrowing costs for the first time in more than a decade. UK gilts prices rallied sharply. The decline in yields means the policy sensitive two-year gilt yield is drifting below the new base rate of 0.5%.
- The BoE warned Brexit was having a "noticeable impact" on the UK’s economic outlook in its monetary policy release earlier this afternoon, as it increased interest rates for the first time in a decade, with "considerable risks" for how households, businesses and financial markets respond to Britain’s withdrawal from the trading bloc
- Germany’s labour market continued tightening in October, leaving the country’s jobless rate (5.6%) at the lowest level since its reunification in 1991. The number of unemployed Germans decreased by 11,000, a decline of 1,000 more than economists had forecast.
Rates
UK gilts only game in bond markets today.
Global core bonds had a sideways oriented session in the absence of new valuable information and ahead of tomorrow’s US payrolls that kept many investors sidelined. During the European session, the EMU PMI business sentiment for October was nearly unchanged compared to the preliminary figures and German unemployment fell further, but did so in line with expectations. During the US session, initial claims were somewhat lower than expected and productivity somewhat higher, but they were as often ignored. At the time of closure of our report, some headlines on the tax plan roll over the screens. In an initial reaction, US Treasuries go marginally higher, but have ceded in the meantime part of the "minimal" gains. At the time of writing, changes on the German yield curve are insignificant range (0-0.6 bp). The US yield curve flattens somewhat further with yield declines varying between 1.2 bp (2-yr) and 2.9 bps (10-30-yr).
The calmness in the core bond markets wasn’t duplicated in the UK bond space. The BoE meeting triggered a large decline of UK yields across the curve. The BoE, as expected, raised the bank rate by 25 bps to 0.50%, the first rate hike in more than 10 years. However, more importantly for markets, it was likely the most dovish hike that was delivered by the BoE. Indeed, the statement no longer said that rates might have to rise faster than markets discount. This means that in the next 2-3 years rates are expected to be increased only 2 times to bring the bank rate in 2020 at 1%. The statement also said that the next rate hike is not imminent and few hikes are enough to bring inflation close to the objective in a 3-yr horizon.
On intra-EMU bond markets, 10-yr yield spreads versus Germany are little changed with Greece again the noticeable exception, as it still profits from rumours about a big rate swap that should enhance liquidity (-20 bps).
Currencies
USD awaits new Fed-chair, tax bill and payrolls
Today, the dollar showed no clear trend. The EMU and US eco data were OK but hardly affected FX trading. Markets awaited to nomination of the new Fed-chairman and were looking for concrete details on the US tax reform bill. EUR/USD hovered in the mid 1.16 area. USD/JPY tried to regain the 114 area. Even so, the dollar hardly profited from the Fed keeping the door open for a December rate hike.
Overnight, Asian equities outside Japan trade with modest losses. The US equity rally showed some signs of fatigue. This weighed on Asian indices and on US yields. It prevented the dollar to return to the recent highs against the euro and yen. USD/JPY returned below the 114 handle, while EUR/USD traded again in the mid 1.16 area.
The EMU Manufacturing PMI was revised marginally lower from 58.6 to 58.5. Even so, the report still indicates above-trend EMU growth at the start of the fourth quarter. German unemployment data gave a similar signal. As usual the data had no impact on the euro. In technical trading, EUR/USD hovered up and down around the 1.1650 pivot. USD/JPY struggled to regain the 114 barrier. Yesterday’s Fed statement kept the door open for a December rate hike. However, it didn’t changed the USD trading dynamics today.
The early morning US data didn’t bring any high profile news. Jobless claims declined slightly more than expected to 229K (from 234K). Q3 productivity (3.0%) and unit labour costs (0.5%) were slightly higher than expected. The impact on the dollar remained very limited. At the time of writing, the first fragmented details of the GOP tax plan are rolling on the screens. (FX) markets are not impressed. US bond yields, the dollar and US equities are all ceding modest ground. EUR/USD trades in the 1.1675 area. USD/JPY trades around 113.65.
BoE hikes, but sterling tumbles on soft BoE assessment
Over the previous days, sterling had a strong run as investors didn’t want to be positioned short sterling in the run-up to the first BoE rate hike in more than 10 year. However, the sterling rally slowed in the run-up to the BoE decision this morning. The BoE voted 7-2 to raise the base rate by 0.25% to 0.50%. However, the policy assessment was very dovish. The BOE assumes that inflation will return close to the 2% policy horizon by the end of the 3-year forecasting horizon. In order to meet the target, the BOE assumes that only two additional rate hikes are needed till the end of 2020. Of course, several risk factors can change the main BoE scenario, but the main scenario only sees very limited interest rate support for sterling in the short-to-medium term. UK yields nosedived and sterling was heavily sold upon the BoE policy announcement. EUR/GBP jumped from the low 0.88 area and filled offers in the 0.89 area. Cable fell off a cliff. The pair trades currently in the low 1.31 area. The BoE continues to give more weight to supporting growth in times of (Brexit-related) uncertainty rather than to reducing inflation when setting its policy balance. This is a structural negative for sterling.
