Thursday, 12 December 2019

P. 1

Rates: From Powell to Lagarde.

The Fed confirmed the end of its mid-cycle adjustment by staying put. Powell rallied a strong majority around keeping policy rates unchanged through 2020. He wants to see a persistent increase in inflation before hiking rates, unlike the anticipating action in 2017. Focus turns to ECB’s Lagarde now. She’ll stress the need for fiscal policy to take over from monetary policy.

Currencies: Dollar suffers as Fed’s Powell wants inflation overshoot.

Yesterday, the dollar lost further ground as the Fed indicated that policy can stay accommodative for long, as it wants inflation to move substantially and persistently above 2%. EUR/USD did break beyond the 1.11 resistance. ECB’s Lagarde calling for a bigger role of fiscal policy might support the relative outperformance of the euro against the dollar today.

Calendar

• US equities ticked up (up to 0.44%) and ended within a whiff of record highs as

the Fed maintained a dovish stance yesterday. Asian equities are mostly climbing higher. South Korea outperforms (+1.5%).

• The Fed stood pat and left interest rates unchanged. The central bank pointed to a strong labour market and consumer spending, but asserted an accommodative policy path with rates projected to stay firm through 2020.

• The Brazilian central bank slashed its policy rate for a fourth consecutive meeting from 5% to a record low of 4.5%. The central bank conveyed its policy path will be data dependent, leaving the door open for additional easing.

• Israel is heading to its third national election in less than a year on 2 March as conservative prime minister Netanyahu and his main rival centrist Gatz failed to steer the previous two ballots into a new governing coalition.

• Japan’s machinery orders, a leading indicator of capital spending plans, fell for a fourth straight month in October by -6% (M/M) as the economy continues to struggle following a triple punch of slowing demand, a tax hike and a typhoon.

• Argentine’s new economy minister Guzman pledged to hold constructive talks with Argentinian bondholders in a bid to delay the fragile nation’s debt payments aiming to revive the recession-hit economy.

• The final ECB meeting of the year and UK elections are key today. Investors will watch Lagarde’s style and tone. UK votes will determine whether Johnson, who is ahead according to surveys, gets the mandate to “deliver Brexit”.

Headlines

S&PEurostoxx 50NikkeiOilCRB

Gold2 yr US10 yr US

2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP

Thursday, 12 December 2019

P. 2

From Powell to Lagarde

Core bonds gained ground yesterday, both ahead and after the FOMC meeting. US Treasuries outperformed German Bunds. The post-FOMC gains were rather small though. US yields declined by 3.6 bps (2-yr) to 4.9 bps (10-yr) with the belly of the curve outperforming the wings. The German yield curve bull flattened with yield losing 0.3 bps (2-yr) to 2.6 bps (30-yr).The US central bank kept policy rates as expected unchanged following three consecutive 25 bps rate cuts, marking the end of the mid-cycle policy adjustments. The press statement was nearly an exact copy from last month with one exception: the explicit mentioning of global developments and muted inflation pressures as something to monitor for the economic outlook. The Fed dropped a reference that uncertainties around the outlook remain. Fed Chair Powell reinforced this message by saying that “both the economy and monetary policy right now are in a good place”. Powell confirmed that the bar for hiking rates is probably higher than the one to cut in case of unexpected weakness. He wants to see “a significant move up in inflation that’s also persistent”, strengthening the idea of allowing for a temporary inflation overshoot to compensate for years of sub-target inflation.

The new Summary of Economic Projections showed unchanged GDP and PCE inflation forecasts compared with September. The economy is forecast to grow by 2.2%, 2%, 1.9% and 1.8% respectively in the 2019-2022 period with core PCE inflation rising from 1.6% to 2% over the same period. The fresh dot plot shows strong consensus for keeping policy rates steady through next year (13/17). Four other governors anticipate the restart of a normalization process. Median rate projections show 1 rate hike in both 2021 and 2022, but it was a close call. If only one governor switches to a more hawkish position, the dots would have showed an additional hike in 2021 or 2022. Finally, Powell floated the idea of buying slightly longer-dated Treasury securities (rather than the short term Bills) if needed to keep repo markets functioning around the turn of the year. Most Asian stock markets eke out gains this morning in line with WS yesterday. China underperforms. Core bonds tread water. Attention shifts from the Fed to the ECB today with ECB Lagarde’s inaugural meeting. We expect her to focus on the ECB’s upcoming policy review and make clear that fiscal policy should take over from monetary policy. We expect that message to firm this Summer’s bottom below European bond yields. The German 10-yr yield in October broke above -0.41% resistance, improving the technical picture. Targets of this double bottom formation are -0.25% and -0.13%. The 38% retracement level of the Oct-Aug decline stands at -0.24%. The US 10-yr yield trades in the upper half of the 1.43%-1.94% sideways trading channel. First tests to take out 1.94% failed. First support kicks in around 1.7%. We expect more sideways action.

Rates

US yield -1d2 1.61 -0.045 1.65 -0.0510 1.79 -0.0530 2.24 -0.04

DE yield -1d2 -0.64 -0.015 -0.58 -0.0210 -0.32 -0.0330 0.21 -0.03

Af

German 10-yr yield: break above -0.41% opens new range capped by -0.13% and floored by previous resistance.

US 10-yr yield: trade and data cause volatility in upper half of trading range. Short term support around 1.7%.

Thursday, 12 December 2019

P. 3

Powell’s inflation guidance weighs on the dollar, propelling EUR/USD

north of 1.11.

EUR/GBP: sterling traders counting down to outcome of UK election.

Dollar eases on Fed’s soft inflation rhetoric Yesterday, the dollar traded with a tentative negative bias as investors awaited the Fed decision. The Fed, as expected, left the target range for the Fed funds rate unchanged. However, the dollar took a hit as Fed chair Powell stressed he wants a significant and persistent move up in inflation before considering any tightening. US yields and the dollar declined on this clear hint that Fed policy will stay accommodative for long. EUR/USD broke beyond the 1.11 resistance to close at 1.1130 (from 1.1092). USD/JPY closed at 108.55 (from 108.72).

This morning, Asian equities are trading mixed with Australia and China underperforming. Investors are pondering the impact of a weaker dollar for individual markets and look forward to the US decision whether or not to raise import tariffs on Chinese goods. The yuan strengthens slightly (USD/CNY 7.03). The Aussie dollar (AUD/USD 0.6880) maintains yesterday’s post-Fed gain. So does EUR/USD (1.1140 area). USD/JPY is holding in the 108.60 area.

Today, eco data including EMU production and US PPI/jobless claims will probably be second tier for trading. The focus will be on the UK election, the ECB policy decision and the US deliberation whether or not to hike import tariffs on Chinese goods. The outcome of the UK election will only be available tomorrow morning. The US decision on tariffs remains a binary risk. On the ECB policy meeting, Christine Lagarde can only maintain a soft tone. Even so, if she stresses the need for cooperation with fiscal policy, it might contrast a bit with yesterday’s Fed guidance, stressing the need for an inflation overshoot. This might be a tentative EUR positive/USD negative.

EUR/USD this week quite easily reversed the post-payrolls downtick. The pair yesterday cleared the 1.11 barrier as the Fed put the bar for any tightening very high. The ST technical picture is improving. 1.1179 and 1.1250 are next ST resistance levels. We continue to join the EUR/USD upside momentum. Yesterday, sterling soon reversed an early loss after a poll suggested a smaller majority for the Conservative party. EUR/GBP rebounded slightly late in the session, but this was mainly EUR/USD driven. Today, sterling traders probably will keep side-lined as they await the election outcome. In a first reaction, a solid Conservative majority still might support some kind of sterling ‘sugar rally’.

Currencies

R2 1.1533 -1dR1 1.1448EUR/USD 1.1130 0.0038S1 1.0864S2 1.0778

R2 0.93067 -1dR1 0.91EUR/GBP 0.8435 0.0003S1 0.8500S2 0.8314

Thursday, 12 December 2019

P. 4

Thursday, 12 December Consensus Previous US 14:30 PPI Final Demand MoM/YoY (Nov) 0.20%/1.30% 0.40%/1.10% 14:30 PPI Ex Food and Energy MoM/YoY (Nov) 0.20%/1.70% 0.30%/1.60% 14:30 PPI Ex Food, Energy, Trade MoM/YoY (Nov) 0.20%/-- 0.10%/1.50% 14:30 Initial Jobless Claims 214k 203k 14:30 Continuing Claims 1678k 1693k Japan 00:50 Core Machine Orders MoM/YoY (Oct) -0.6%A/-6.1%A -2.90%/5.10% 03:00 Tokyo Avg Office Vacancies (Nov) 1.56A 1.63 UK 01:01 RICS House Price Balance (Nov) -12%A -60%R EMU 11:00 Industrial Production SA MoM/WDA YoY (Oct) -0.5%/-2.4% 0.10%/-1.70% 13:45 ECB Deposit Facility Rate -0.50% -0.50% Italy 10:00 Unemployment Rate Quarterly (3Q) 9.80% 9.90% Sweden 09:30 Unemployment Rate SA (Nov) -- 6.60% Switzerland 09:30 SNB Policy Rate -0.75% -0.75% Events 12DEC UK holds general elections 12-13DEC EU leaders gather in Brussels to discuss EU budget 14:30 ECB's Lagarde Speaks in Frankfurt After Policy Decision 19:00 US to Sell 30-Year Bonds

Calendar

Thursday, 12 December 2019

P. 5

10-year Close -1d 2-year Close -1d Stocks Close -1dUS 1.79 -0.05 US 1.61 -0.04 DOW 27911.3 29.58DE -0.32 -0.03 DE -0.64 -0.01 NASDAQ 8654.051 37.87BE -0.03 -0.02 BE -0.64 0.00 NIKKEI 23424.81 32.95UK 0.77 -0.03 UK 0.58 -0.02 DAX 13146.74 76.02

JP -0.01 -0.02 JP -0.12 -0.01 DJ euro-50 3687.45 15.67

IRS EUR USD GBP EUR -1d -2d USD -1d -2d3y -0.30 1.60 0.83 Eonia -0.4590 0.00005y -0.21 1.61 0.88 Euribor-1 -0.4560 -0.0080 Libor-1 1.7356 0.000010y 0.08 1.72 0.97 Euribor-3 -0.3930 0.0000 Libor-3 1.8873 0.0000

Euribor-6 -0.3380 -0.0050 Libor-6 1.8786 0.0000

Currencies Close -1d Currencies Close -1d Commodities Close -1d

EUR/USD 1.1130 0.0038 EUR/JPY 120.83 0.23 CRB 181.49 -0.67USD/JPY 108.56 -0.16 EUR/GBP 0.8435 0.0003 Gold 1475.00 6.90GBP/USD 1.3196 0.0040 EUR/CHF 1.0941 0.0021 Brent 63.72 -0.62AUD/USD 0.6876 0.0067 EUR/SEK 10.4621 -0.0748USD/CAD 1.3174 -0.0056 EUR/NOK 10.1416 -0.0361

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