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US Futures, Bond Yields Drop As Traders Ask “Now What”

Courtesy of ZeroHedge View original post here.

S&P equity futures slipped, trading in a tight range around 3,000 despite gains in Europe which helped nudge the MSCI world index higher on Thursday, after the Fed's second interest rate cut and hint that QE4 is coming, while Japan and others kept their limited remaining powder dry. 

In the aftermath of the Fed's hawkish rate cut, we saw a barrage of central bank announcements, including:

  • The Bank of Japan maintained all policy settings as expected with rates kept at -0.10% and 10yr JGB yield target at around 0%, while it maintained forward guidance to keep current extremely low rates for extended period at least through Spring 2020. It also signalled it could add stimulus as early as next month but some traders had expected a move on Thursday after the Fed’s rate cut.
  • Brazil Central Bank cut the Selic Rate by 50bps to 5.50% as expected via unanimous decision, while it added that it sees inflation risks in both directions and reiterated the economic situation calls for stimulative rates.
  • SNB left rates unchanged at -0.75%, did not alter their assessment of the CHF from ‘highly valued’ and remain willing to intervene. SNB significantly cut their forecasts for both growth and inflation relating to 2019 and 2020. The bank also improved their tiering system for Swiss Banks. In reaction to the decision the CHF appreciated vs. EUR as some calls for a rate cut were unwound. Officials said the global low-rate environment has “become more entrenched and could persist for some time yet.” They will exempt 25 times min reserves from Nov. 1, up from 20 currently, and review the level monthly
  • The Bank of England concluded the trifecta of "unchangeds" by keeping rates on hold, while warning that uncertainty over Brexit could lead to disinflationary pressures so no need to hike.
  • Norway’s central bank stood out and broke further away from the pack, delivering its fourth interest-rate increase in a year in an effort to cool an economy stoked by oil investments. The bank hiked rates by 25bp to 1.5%, the bank have left their 2019 and 2020 rate paths unchanged and cut 2021 and 2022 path slightly. Bank’s assessment of the outlook and risk balance sees rates remainin unchanged in the period ahead, with Governor Olsen ascribing a 40% chance to a hike. In reaction to the hike the NOK strengthened against the EUR, before retracing to now being softer against the EUR on the implication that this is likely to be the last hike of the cycle.

Thursday’s barrage of monetary policy decisions came just as the OECD cut its world growth forecast to just 2.9% from 3.2%, now expecting the lowest growth in a decade, as intensifying trade conflicts take a toll on confidence and investment.

Looking at markets, Europe's Stoxx 600 index pushed higher, led by banks, as a new round of TLTRO loans kicked in despite disappointing uptake with just €3.4BN allotted in TLTRO3.

MSCI’s broadest index of Asia-Pacific shares had ended down 0.5% as a 1% fall in Hong Kong and 1.1% drop in India offset 0.4% gains on Japan’s Nikkei and from China’s bluechip stocks. Asia’s equity benchmark erased earlier gains and was little changed following three days of losses. Markets performances were mixed in the region. Japan was the best-performer Thursday, with the Topix rallying as much as 1.2% before paring some gains after the Bank of Japan’s decision to keep its monetary stimulus unchanged. Hong Kong’s Hang Seng Index fell for a fourth day, led by AIA Group Ltd. and Hang Seng Bank Ltd. Elsewhere, India stocks were set for a third day of losses this week, as slowing economic growth and a simmering shadow banking crisis gave little impetus for investors to buy riskier assets.

“Strains to the macro backdrop should ease in the coming months as other central banks (ECB, BoJ) edge toward renewed monetary easing,” Simon Ballard, a macro strategist at First Abu Dhabi Bank, wrote in a note. New dovish pressures may also come from “a particularly disorderly Brexit, further oil market disruptions or a sharp decline in market liquidity,” he said.

In contrast to Europe’s upward shuffle, U.S. stock futures were pointing to modest 0.1%-0.2% falls for Wall Street later. The S&P 500 had reversed losses and ended broadly flat on Wednesday after Fed chief Jerome Powell said he did not see an imminent recession or think the Fed will adopt negative rates. The Fed had cut interest rates to 1.75%-2.00% in a 7-3 vote but made a point of saying U.S. labour market remains strong.

With central banks now in the rearview mirror, traders will turn their attention to signs that last week’s show of goodwill between the U.S. and China is gaining momentum as trade deputies meet Thursday and Friday in Washington ahead of higher-level meetings in mid-October. Meanwhile, the geopolitical situation in the Middle East remains in turmoil after Saudi Arabia blamed Iran for last Saturday’s attack on its oil installations.

In this vein, China's Ambassador to US tweeted that it is extremely dangerous and irresponsible to base America’s policy on alarmism and label China as a strategic rival and adversary, while adding the decoupling of the two countries in trade and industrial development goes against globalization and suggested to decouple from China is to decouple from opportunities.

In rates, Treasuries advanced steady while European government bonds slipped. Two-year U.S. yields initially inched up to 1.75% before sliding, while Europe’s key 10-year German Bund yield was up around 2 basis points albeit still below highs hit last week and at a mind-boggling -0.49%. “This is not ‘QE4ever’ as we’ve heard it called,” analysts at RBC said of the Fed’s decision and signals. “We shouldn’t go too far in putting on QE-like trades”.

In FX trading, the Bloomberg Dollar Spot Index fell Thursday as the dollar weakened against most of its G-10 peers while Yen bulls took the currency as far as 107.79 to the U.S. dollar before it settled at 108.06 for a gain of 0.4% on the day. The move against the Aussie dollar had been as large as 1%. “There were large yen-buying orders before the BOJ, and that just carried through,” said Tohru Sasaki, head of Japan markets research at J.P. Morgan Securities in Tokyo.

The Norwegian krone also rallied after the Norges Bank hiked interest rates, but lost traction after a signal it was the last increase of the year. Elsewhere in the currency market, the Aussie fell 0.6% to $0.6790 after data showed the nation’s jobless rate rose slightly to 5.3% in August, bolstering expectations for the central bank to cut rates.

Among commodities, oil held gains amid contrasting reports about whether Saudi Arabia asked Iraq for crude to supply its domestic refineries. Gold advanced and Australia’s dollar slumped after the unemployment rate rose.

Today's data include jobless claims and existing home sales. Darden is among companies reporting earnings.

Market Snapshot

  • S&P 500 futures down 0.2% to 3,003.25
  • STOXX Europe 600 up 0.3% to 390.57
  • MXAP down 0.06% to 158.82
  • MXAPJ down 0.5% to 508.93
  • Nikkei up 0.4% to 22,044.45
  • Topix up 0.6% to 1,615.66
  • Hang Seng Index down 1.1% to 26,468.95
  • Shanghai Composite up 0.5% to 2,999.28
  • Sensex down 1.3% to 36,088.61
  • Australia S&P/ASX 200 up 0.5% to 6,717.48
  • Kospi up 0.5% to 2,080.35
  • Gold spot up 0.3% to $1,497.91
  • U.S. Dollar Index down 0.2% to 98.32
  • German 10Y yield rose 1.7 bps to -0.493%
  • Euro up 0.3% to $1.1061
  • Italian 10Y yield fell 4.5 bps to 0.536%
  • Spanish 10Y yield rose 0.9 bps to 0.237%
  • Brent futures up 0.8% to $64.12/bbl

Top Headline News

  • The Swiss National Bank offered banks some relief from negative interest rates, saying it would exempt more of their reserves from the cost of the policy. On Thursday, officials said the global low-rate environment has “become more entrenched and could persist for some time yet.” They will exempt 25 times min reserves from Nov. 1, up from 20 currently, and review the level monthly
  • Norway’s central bank broke further away from the pack, delivering its fourth interest-rate increase in a year in an effort to cool an economy stoked by oil investments
  • The Bank of Japan will review its assessment of prices and the economy at its October meeting, spurring speculation it may ease further then, but stopped short of following the Federal Reserve in adding to its monetary stimulus immediately
  • Should a traumatic no-deal Brexit force the Bank of England to slash interest rates in the months ahead, at least one investor will be laughing. Money-market traders have quietly accumulated more than 1 million derivative contracts that will pay off if the U.K. central bank cuts rates by 50 basis points by September next year
  • Brexit from afar is looking like a disaster about to happen. One European official, watching the situation up close, compared it to two cars driving at high speed toward each other with each expecting the other to swerve out of the way first

Asian equity markets traded mixed as the region digested the fallout from the FOMC. Nonetheless, most of the overnight markets began positively with broad gains seen in the ASX 200 (+0.6%) aside from metal miners after gold prices retreated post-FOMC, while Nikkei 225 (+0.4%) initially coat-tailed on the gains in USD/JPY but then pulled back from highs after a reversal in the currency. Elsewhere, Hang Seng (-1.0%) was subdued and Shanghai Comp. (+0.4%.) traded choppy despite a firm liquidity effort by the PBoC and the HKMA lowering rates by 25bps in lockstep with the Fed, with underperformance Hong Kong led by energy names and as real estate continued to suffer from the political unrest, which resulted to the cancellation of National Day fireworks and China upping its security from its capital to the border with Hong Kong. Finally, 10yr JGBs are higher in a continuation of this week’s rebound with prices only briefly pausing for the BoJ policy announcement which proved to be uneventful, as the central maintained all policy settings as widely expected.

Top Asian News

  • BOJ to Review Prices and Economy After Standing Pat for Now
  • Japan Banks Welcome BOJ Inaction, Warn Against Future Rate Cuts
  • Japan Delays Export of Key Chipmaking Material to South Korea
  • Indonesia Cuts Rate for Third Month in Row to Bolster Growth

Major European bourses are modestly higher (Euro Stoxx 50 +0.3%), as markets digest yesterday’s Fed rate cut and navigate a flurry of G10 central bank activity, which has already seen the SNB hold rates and Norges hike by 25bps in European hours, with BoE ahead. Periphery bourses are the slight out performers, seemingly unperturbed by recent developments on the political front in both Spain and Italy. Sectors are broadly in the green, apart from the more defensive utilities and consumer staples sectors. Leading the gains is financials, with higher yields post-FOMC providing support; indeed Lloyds-TSB Group (+2.4%), Deutsche Bank (+1.3%), Société Générale (+2.8%) and Credit Suisse (+1.7%) are the best performers in their respective bourses. Swiss banks were, however, unreactive to the SNB decision, in spite of their decision to raise the exemption threshold for the banking sector from the current 20x to 25x level on 1st November; although, CapEco make the point that SNB’s tiering system was already a more generous system when compared to that announced by the ECB last week, so the most recent tweaks might not make all that much difference. In terms of other individual movers; Next (-4.0%) sunk after the Co. reported results that underwhelmed some expectations; while, United Utilities (-1.5%) are under pressure after the Co. was downgraded at Jeffries. Finally, John Wood Group (+2.2%) caught a bid being upgraded to outperform at Credit Suisse this morning.

Top European News

  • SNB Bows to Pressure From Banks for Relief From Negative Rate
  • Norway Delivers Rate Hike Most Economists Weren’t Expecting
  • U.K. Retail Sales Decline in August as Online Sales Fall
  • U.K. Report to Back Venture Capital Investments for Pensions

In FX, there were somewhat contrasting and perhaps even perverse moves in the Franc and Norwegian Krona given respective September policy decisions from the SNB and Norges Bank, as the former stood pat and latter delivered another 25 bp tightening having refrained from flagging this month specifically at the previous meeting in July. However, it seems that the devil was in the detail as a lower rate path and mainly external downside risks to the outlook implied no further normalisation, while the Bank’s Crown forecasts were also shaved from June’s levels and Governor Olsen subsequently assigned less than even odds to higher rates. Hence, having breached near term support at 9.8300, but stopping short of the 100 DMA (9.8080), Eur/Nok has rebounded towards pre-Norges Bank and intraday highs circa 9.9000 whereas Eur/Chf and Usd/Chf have extended post-SNB declines to almost 1.0950 and 0.9900 vs 1.1000+ and 0.9980+ at one stage. For its part, the SNB signalled unchanged rates for the forecast horizon and set even more generous exemption terms for Swiss banks in mitigation of NIRP that remains vital alongside direct currency intervention given that the Franc is still deemed highly valued.

  • JPY/EUR – The BoJ maintained current YYC parameters and guidance, as widely expected, but Governor Kuroda intimated that October’s policy deliberations could be more important as the impact of the global economic slowdown and Central Bank actions will be subject to closer scrutiny. However, the Yen has rebounded sharply from lows seen after the Fed’s ‘hawkish’ cut when Usd/Jpy rallied to around 108.45 and back above 108.00 as the DXY pares its gains to 98.275 vs 98.625 at the other extreme. Similarly, the single has regrouped and unwound its underperformance vs the Dollar to reclaim 1.1050 status, but the headline pair may now be stymied by hefty option expiries layered between 1.1000 and 1.1120-30 and totalling 8.3 bn.
  • GBP/CAD/NZD – All narrowly mixed against the Greenback, as the Pound continues to face stiff resistance around 1.2500 and failed to glean much direction from mixed UK retail sales data ahead of the BoE, or support via reports that written proposals to alter the WA have been sent to the EU. Elsewhere, the Loonie has bounced from just under 1.3300 with some traction from rebounding crude prices and the Kiwi is keeping tabs on the 0.6300 handle following firmer than expected NZ Q2 GDP data overnight.
  • AUD – The clear G10 laggard, as Aud/Usd loses grip of 0.6800 and Aud/Nzd recoils from 1.0800+ to lows of 1.0750 in wake of a worrying Aussie jobs report that ups the ante for RBA easing next month.
  • EM – In keeping with Sterling, the Rand has one eye on the SARB for any surprises, with Usd/Zar straddling 14.7000 and anticipating no change in rates, but looking for inspiration from the accompanying statements and guidance – for a more detailed preview of the event and BoE at noon please check out the Research Suite.

In commodities, crude markets initially took their cue from risk sentiment, but moved higher on a WSJ report that Saudi Arabia had reached out to Iraq for 20mln barrels of crude to plug gaps in its own production, potential indication the recent Saudi attacks are having an impact on their supply. Elsewhere on the geopolitical front; US Secretary of State Pompeo has called the Saudi attack “an act of war”, comments which seem to contrast somewhat with US President Trump’s decision yesterday to respond with tariffs rather than the military option. However, overnight US President did impress that “if the US has to do something it will without hesitation” but framed his decision not to strike Iran as a sign of strength. Elsewhere, Gold has firmed somewhat and has tested the USD 1500/oz handle at best, which it briefly lost yesterday post-FOMC. Meanwhile, Copper futures are uneventful just above potential support around the USD 2.6/lb level. Saudi Arabia reportedly reached out to Iraq for 20mln barrels of crude, WSJ reports citing sources; Aramco was seeking diesel, gasoline, and fuel oil for domestic use, and to preserve crude for exports

US Event Calendar

  • 8:30am: Current Account Balance, est. $127.4b deficit, prior $130.4b deficit
  • 8:30am: Philadelphia Fed Business Outlook, est. 10.5, prior 16.8
  • 8:30am: Initial Jobless Claims, est. 213,000, prior 204,000; Continuing Claims, est. 1.67m, prior 1.67m
  • 9:45am: Bloomberg Consumer Comfort, prior 63.2
  • 10am: Leading Index, est. -0.1%, prior 0.5%
  • 10am: Existing Home Sales, est. 5.38m, prior 5.42m; MoM, est. -0.74%, prior 2.5%

DB's Jim Reid concludes the overnight wrap

Thankfully there were a few less pages to read from the FOMC statement last night. As expected the fed funds rate was cut by 25bps albeit with a 7-3 split (two in favour of no change and one in favour of a 50bp cut) with the IOER cut by 30bps however the dots were the main talking point initially. Indeed, the signal is a somewhat divided committee. The median dot shows no further cuts in the remainder of 2019 or 2020. However, 7 of the 17 dots favour one more 25bp cut this year, albeit no-one expects more than a 25bp cut. There are also 8 dots in 2020 which favour a fed funds rate 25bps below where it is now. What is interesting however is that there are 5 dots which are 25bps above the current rate for this year and 7 above the current rate for 2020. In fact, one of those in 2020 is 50bps above the current rate. So, one way of summing that up is that the doves aren’t particularly dovish and there is a clear group of hawks on the committee. The sharp sell-off across rates immediately following the statement certainly reflected that.

As for the statement itself, there was very little change. The reference to “muted inflation pressures” was kept despite CPI strengthening in recent weeks while the only real change of note was the reference to household spending rising at a “strong pace”. The summary of economic projections was a wash with the exception of 2019 growth being upgraded to 2.2%. As for Powell’s press conference, unlike previous meetings there weren’t all that many talking points. The general feeling was that Powell was very considered and balanced in his responses with a broad aim of not wanting to guide the market. That was particularly the case when going out of the way not to repeat the mid-cycle adjustment language. Our economists summed it up by saying that Powell reinforced the message that the Fed that continues to see a favourable baseline outlook, albeit one buffeted by significant downside risks from weak global growth and trade policy uncertainty. They continue to expect 75bps more of rate cuts through Q1 next year with a possible announcement also of a resumption of balance sheet growth next month. See their summary note here .

In terms of what markets did, treasury yields had been falling for much of the day leading into the meeting but by the time Powell was finished speaking had pretty much reversed. That was particularly the case at the short-end where 2y yields ended +3.7bps higher at 1.762% having traded as low as 1.660% seconds before the statement and dot plot was released. With 10y yields (-0.5bps) not quite fully reversing, that meant the 2s10s curve, which was as ‘steep’ as 9.0bps, flattened to 3.0bps. This morning it’s trading at similar levels. There’s also just over 2 cuts still priced in by the end of this year.

Meanwhile equity markets were initially much weaker seemingly in reaction to the dots, however recovered as Powell spoke. The S&P 500 ended +0.03% – a rare albeit modest gain on a Fed meeting day – however did trade as low as -0.91% intraday while the NASDAQ ended -0.11%. The fact that Powell sounded fairly upbeat about the domestic economy, all things considered, but also hinted that the Fed will react to weaker data probably explained the turnaround for equities. Banks (+0.66%) notably outperformed, with the short-end rates selloff and Powell’s pushback on negative rates helping. Elsewhere the USD index rose +0.31%, HY credit were little changed and Gold fell -0.49%.

So, with the Fed out of the way the baton passed to the BoJ this morning where as expected there was no change in policy. However the BoJ did call for a re-examination – specifically of prices and the economy – at next month’s meeting, specifically noting that “recently, slowdowns in overseas economies have continued to be observed and their downside risks seem to be increasing, the Bank judges that it is becoming necessary to pay closer attention to the possibility that the momentum toward achieving the price stability target will be lost. Taking this situation into account, the Bank will reexamine economic and price developments at the next MPM”. That raises the possibility then of further easing. Kuroda’s press conference is due shortly.

The yen has strengthened +0.56% following the statement while 10yr JGBs are down -2.9bps to -0.225%. The Nikkei is up +0.54% but pared earlier gains while equity markets elsewhere in Asia are mixed with the Kospi (+0.38%) up, Shanghai Comp flat and Hang Seng down -1.24%. Elsewhere, futures on the S&P 500 are trading down -0.28%.

Just in case you were craving a bit more central bank action, completing the relay today we’ve also got policy meetings here in the UK, along with Switzerland, Norway and South Africa. For the BoE, the consensus is for no policy change – a view shared also by our economists. Our colleagues do expect the committee to highlight two things however. The first is a deteriorating external outlook and the second is the rise in domestic risks. Overall though it’s hard to see any major departures from the MPC’s August stance. Don’t expect much excitement at those other central bank meetings today either, with no policy changes expected.

Back to yesterday, where prior to the FOMC meeting, as planned the Fed injected more liquidity into the overnight repo market, totalling $75bn. That full take-up of the repo facility saw the overnight GC repo rates trade around 2.175% which is obviously a long way from the 10% levels seen on Tuesday. So funding stresses have alleviated although not quite to a stage where the Fed feels completely comfortable. Another operation is planned for today for up to $75bn.

Meanwhile, the other big mover and shaker this week – the oil complex – was weaker for much of the day before WTI and Brent closed down -2.07% and -1.47% respectively. That reflected the various talk out of Saudi Arabia that crude exports would continue as normal. President Trump also weighed in by saying that sanctions on Iran would be ramped up, specifically tweeting that “I have just instructed the Secretary of the Treasury to substantially increase sanctions on the country of Iran”. Late afternoon Bloomberg headlines also hit the screens suggesting that Saudi Arabia called the attacks on the weekend ‘unquestionably’ sponsored by Iran.

Away from markets and geopolitics, the data very much played second fiddle with strong housing market numbers in the US being the highlight. Indeed housing starts rose a better than expected +12.3% mom (vs. +5.0% expected) and building permits rose +7.7% mom (vs. -1.3% expected). The latter included a fairly notable gain in single-family permits which tend to be less volatile. Here in the Europe the final August core CPI reading for the Euro Area was unrevised at +0.9% yoy, however in the UK the August inflation data broadly disappointed with core CPI in particular falling four-tenths to +1.5% yoy (vs. +1.8% expected). However, with real income growth at healthy levels still, that data is food for thought for the BoE. For completeness the STOXX 600 ended +0.02% yesterday and 10y Bunds were -3.6bps lower ahead of the Fed.

To the day ahead now, where, as noted above, next up in the central bank policy meeting queue is the BoE, SNB, Norges Bank and SARB. Datawise we’ve also got August retail sales data for the UK while in the US this afternoon we’ve got the Q2 current account balance, September Philly Fed business outlook, weekly jobless claims, August leading index and August existing home sales. Away from that the OECD is due to publish its interim economic outlook, while over at the ECB we’re due to hear from Coeure and Lautenschlaeger.


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