After a couple of big daily falls US equities are up 0.8-1.2% but, as we’ve seen, anything can happen in the last few hours of the trading session. US bonds have rallied a little ahead of the US FOMC announcement tomorrow. Most currencies are little changed overnight. CAD is softer as oil prices continue to fall, while the NZD has sustained the gains it saw in local trading yesterday.
Ahead of the Fed’s monetary policy announcement tomorrow, the WSJ published an editorial headed “Time for a Fed pause”, arguing the case for the Fed not to hike rates so soon again. “What to do? The right answer is to ignore the politics, inside and outside the Fed, and follow the signals that suggest a prudent pause in raising rates at this week’s meeting”. President Trump tweeted “I hope the people over at the Fed will read today’s Wall Street Journal Editorial before they make yet another mistake…. Feel the market… Good luck!”.
We have sympathy with the view that the Fed should pause, considering the backdrop of slower global growth and tentative evidence of this spilling over into the US economy, alongside a weaker inflationary dynamic and poor market sentiment. However, the Fed has already guided the market towards expecting another hike and it doesn’t want to be seen to be bowing to pressure from the government or simply reacting to a weaker equity market. So the market prices a high chance of another rate hike tomorrow, but continues to price out rate hikes further out. US Treasury yields are down about 3bps cross the curve, with the 10-year rate down to 2.83%.
Yesterday, President Xi spoke in Beijing at a conference marking the 40th anniversary of China’s reform programme. He lauded the accomplishments achieved over the period and, in a Trump-like manner, highlighted the “absolute correctness” of the party leadership. The speech was clearly directed at a domestic audience. He sounded defiant in expressing that “No one is in the position to dictate to the Chinese people what should and should not be done” and while there was no mention of the trade war with the US, notably he reaffirmed China’s pursuit of “indigenous innovation” in “core technologies.” There was nothing in the speech to assuage market fears about the ongoing US-China trade war or any new policies that might support the economy. However, we should see China release its 2019 growth strategy plans later this week.
In economic data, Germany’s IFO business climate index slipped by slightly more than expected to a 2-year low. Previously, new emissions-testing rules that drove a slump in autos production was blamed for the pothole in the economy in Q3, but without any recovery in activity indicators, weaker growth looks to have more fundamental undertones, such as the slower global economy. US housing starts and permits were stronger than expected, although the former were driven by the more volatile multi-family dwellings.
In currency markets, the NZD and AUD rallied alongside CNH yesterday afternoon ahead of President Xi’s speech, perhaps hopeful for some fresh policies. The NZD was supported by the ANZ business outlook survey, which showed businesses were less pessimistic and activity indicators a little stronger. The NZD has managed to hold onto those gains and trades this morning at 0.6850, after reaching as high as 0.6880 late last night. There was no market reaction to the GDT dairy auction, which showed prices rising for the second consecutive auction, breaking the multi-month run of price declines. The AUD hasn’t held onto yesterday’s gains and is back down to 0.7170, seeing NZD/AUD up to 0.9550.
With not much currency action elsewhere, the NZD is higher on the all the crosses for the day. CAD has been the biggest mover, to the downside, as oil prices continue to fall, down in the order of 4-5%, with WTI currently at $47.40 and Brent at $57.30. NZD/CAD is up over 1% to 0.9230.
GBP and EUR are up slightly for the day despite focus on a “no-deal” Brexit. The EU is preparing for the possibility of a no-deal Brexit, with more detailed plans expected to be published later this week. An EU official said that if the UK fails to ratify the withdrawal agreement by 29 March, it will take unilateral steps to protect its interests, putting in place a bare minimum of emergency measures. The UK Cabinet spent a 3-hour meeting debating the merits or otherwise of a no-deal outcome and agreed to begin implementing its no-deal plans “in full”, even though the priority is to get PM May’s deal through Parliament.
In the day ahead, NZ’s current account balance is expected to head deeper into deficit territory while tonight sees the release of UK and Canada CPI figures and US existing home sales. We expect fairly quiet trading conditions ahead of the FOMC release at 8am NZ time tomorrow.
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