September’s economic data in the US, despite the softer than anticipated job gain on Friday, largely aligned with the risk sentiment improvement which has been reinforced today with few goodwill gestures from both US and China. After Bolton’s departure, which spread hopes for easing of trade tensions, the announcement of a 2-week delay by President Trump on the next US tariffs increase on China, along with the news that China is considering US farm imports , and has released an exemption list of its own tariffs on US imports, have been tonic for markets.
As trade jitters recede, global stock markets maintain buoyancy, oil prices faced a $3 dive, while safe haven assets such as Swissy and Yen decline, whilst trade-sensitive currencies such as Australian Dollar and New Zealand Dollar posted sharp rally during September. The mixed market is a result of slight reversal away from the so far enduring risk-on phase, into a more neutral stance.
Now, with ECB out of the way, the big question is whether this improved sentiment will be sustained next week as it will be a “Massive” week with four central banks reporting, i.e. FED, BoJ, SNB and BoE.
Hence, next week’s agenda could clarify whether the optimism will continue or whether the market will revert back to the risk-on mode as this might be just a small distress rally for the already overstressed markets.
Markets lately are acting ahead of news. They had priced in today’s ECB’s deposit rate cut by 10 bp before hand, while they are also pricing in accommodation from the FOMC this week. However, expectations for more aggressive actions have been pared and that’s taken some of the bullish momentum out of sovereign bonds.
After the ECB signalled the restart of QE today, with asset purchases at EUR 20 bln per month from November, for “as long as necessary to reinforce the accommodative impact of its policy rates, and to end shortly before it starts raising the key ECB interest rates”, the next in focus is FED.
By taking into account Powell’s words last Friday, the FOMC is not expected to proceed into an aggressive easing policy next week despite the continuous pressure from President Trump.
Fed’s Powell more precisely repeated that the Fed is very committed to the symmetric 2% inflation goal in order to keep inflation from moving lower and becoming embedded in expectations. A number of factors have contributed to a low neutral rate, including demand for safe assets with an aging population. And given low inflation, interest rates will remain low. That leaves very little room to cut rates further, which mandates implementing other tools. In setting policy, there’s a diverse perspective given the broad scope of the FOMC. Powell said political factors play “absolutely” no role in decision making.
Nevertheless Fed is not forecasting or expecting a US recession, nor a global downturn, said Powell. The labor market is still tightening at the margin, according to many measures. The consumer is in good shape.
Hence, the fact that the chair doesn’t seem too concerned about a recession in the States, or for the world, suggests the FOMC is not going to be aggressive easing policy. The market is expecting a rate cut up to 25bp, despite the recent upbeat domestic economic data and thawing of the US-China trade cold war having pulled the proverbial rug out from under market hopes for a 50 bp cut ahead of more easing ahead. Moreover, we view it as a good bet that Chair Powell will reiterate that this is an insurance move, a “mid-cycle adjustment,” and not the start of an easing cycle.
In the risk-front, we cannot say that things have changed significantly as this week’s events and any news on the trade-front could change the mood music rapidly. On the US-China trade front, we have many times heard upbeat rhetoric in the many previous rounds of the so far fruitless trade discussions.
Therefore the improvement of risk appetite looks extremely delicate, as it could be easily reverted this week by a single tweet.
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