Market Movers Today
- Today we have a busy schedule ahead of us. The FOMC meeting tonight (at 19:00 CET) is today's highlight, where we expect another 25bp . Also today, the first estimate of GDP growth in Q3 is due out , which we expect to come out at 1.8% q/q AR. US growth has peaked, as investments are struggling in the current environment and private consumption is not growing as fast as previously.
- In euro markets, focus turns to ECB's tiering system taking effect today . So far, markets are showing little to no signs of a tiering premium. Tomorrow's STR fixing will shed more light on this. Also, ECB could start buying bonds as part of its resumption of the APP of EUR20bn/ month , with settlement for Friday.
- Overnight, Bank of Japan will hold its policy rate meeting . We expect the Bank of Japan (BoJ) to keep the policy rate and yield curve control unchanged, however, we see them making great efforts to highlight its willingness to act if needed. Markets price around 40% probability of a cut. Preview: No reason to deviate from cautious approach , 25 October.
- Chinese official PMI are due over night (Caixin during night to Friday). We expect the official PMI manufacturing to land at a flat reading at 49.8.
Selected Market News
Asian stock markets stepped into red territory on mixed trading following the American S&P 500 index ahead of today's Fed's rate decision, while oil slid and the USD remained steady. While investors have fully priced in a cut by the Fed, economists are evenly divided on whether the Fed will cut or stay on hold. Despite abating political risk, US data remains fragile. We expect a divided Fed will cut again without showing pre-commitment.
Reuters report on recent developments in the China-US trade war saga added to sentiment sourness: a US administration official said an interim trade agreement between Washington and Beijing might not be completed in time for signing in Chile next month as expected.
In line with our long-held view Brexit has been extended (new Brexit Day is 31 January 2020) and a general election is called (Election Day 12 December). In our view, the election is an EU referendum in disguise. PM Johnson will campaign on his "Get Brexit Done" platform arguing the public should give him the mandate to implement his Brexit deal. LibDems, SNP, Plaid Cymru and Greens are likely to campaign for a second EU referendum. We may soon get to the Brexit end game, unless we get a (very?) hung parliament without a clear/stable majority, like we did in 2017.
Overall, the tail risk of a no deal Brexit has declined substantially and investors have priced out a lot of negativity in GBP. We have sketched out our thinking including our view on EUR/GBP reaction in our Brexit Monitor published this morning, see Brexit Monitor: Election is an EU referendum in disguise - difficult to predict the outcome from polls , 30 October.
Scandi
In Norway, retail trade is fighting relatively strong structural headwinds at the moment and is growing much slower than services consumption. Nevertheless, we expect modest retail trade growth of 0.3% m/m in September.
Fixed Income Markets
In euro markets, focus turns to ECB’s tiering system taking effect today. So far, the OIS forward markets have showed little to no signs of a tiering premium (2bp). Tomorrow’s €STR fixing will shed more light on this. However, in the bond market we have seen reporates for BTPS moving some 8-10bp higher. Also Spanish repo rates have moved a few bps higher. But all in all nothing dramatic. ECB could also start buying bonds (settlement Friday) as part of its resumption of the APP of EUR20bn/ month. For more on tiering, see Government Bonds Weekly - We recommend buying 30Y BTP vs swaps, 25 October.
The Italian debt office is in the market selling in the 2025 and 2030 BTPs. There is support to Italy from month-end extensions (see November EGB-index extensions – Austria and Belgium subtract, 24 October) and with QE kicking off we expect good demand. However, political risks have admittedly moved higher in Italy and we have the uncertainty of tiering on BTPs. We continue to stay long 10Y and 30Y BTPs vs Germany/swaps. See Government Bonds Weekly - We recommend buying 30Y BTP vs swaps, 25 October. The German Finanzagentur will tap the 5y Bobl.
We also have Norway in the market tapping the usual 10Y NGB. Yesterday, we saw good demand for City of Oslo and we NGBs have traded more expensive asset swapped over the autumn on healthy foreign demand. The weak NOK might attract extra demand today. See Norges Bank set to sell NOK2bn in NGB NST481, 1.75%, ’29, 29 October.
FX Markets
We see downside risks to EUR/USD in the area of 50pips at today’s FOMC meeting if Fed delivers another 25bp cut without no pre-commitment to further cuts. The market is about fully priced for a 25bp cut today and is priced for another 8bp cut in December and 6bp cut in January.
The substantial re-pricing of the Riksbank that took place (from +9bp to +21bp for the December meeting) without follow through in EUR/SEK illustrates the poor underlying SEK sentiment: not even the strong signal of leaving negative rates seems to convince investors of an imminent reversal in EUR/SEK. In FX Strategy: SEK not out of the woods yet, 29 October, we look further into the current SEK headwinds.
Yesterday, EUR/NOK reached new record highs as uncharted territory above 10.30 was briefly visited. While oil and gas prices were under pressure and Norwegian equities again underperformed peers, the size of the sudden weakening of the NOK was difficult to explain. Our feeling is poor liquidity has been an important contributing factor for the move. For now we prefer to stay side-lined but our fundamental predisposition is to position for a stronger NOK – especially vs SEK. After a long period with a thin domestic data calendar we now enter a period of several important releases in evaluating the state of the Norwegian economy. Generally, we are more upbeat than consensus on the state of the mainland economy which might limit the downside in NOK from here as long as the Fed or trade talks do not suddenly trigger a broader sell-off in equity markets.
Near term and during election campaigning we regard GBP a tad vulnerable given the recent pricing out of no-deal Brexit risk. The snap election was however largely expected and, as such, should not provoke a major GBP reaction. We expect EUR/GBP to trade in the 0.85-0.90 range ahead election day and thus envisage some GBP downside from current spot levels.
Key Figures And Events
