G10 Macro Rates Monthly View
With Shayne Dunlap, Co-Portfolio Manager
Charge of the Heavy Brigade, the Central Bank's are coming (again!)
After the August market flush, September started with a reversal in the direction of yields, and profit taking prior to the mid-month Federal Reserve meeting. A weaker jobs number in the non-farm payroll (NFP) report was offset by the strong wage growth, personal spending and robust housing starts.
The Federal Reserve delivered the expected 25bp cut, bringing the total of cuts to 50bps this year. The divide between committee members further intensified, with two members (Esther George and Boston Fed President, Eric Rosengren) dissenting in favour of no cut and one member (James Bullard) dissenting in favour of 50bps cut, and then in their forecast of future moves (Dot Plot).
The Fed’s forecast indicates no further cuts in 2019 and 2020, which has disappointed financial markets, which had been pricing up to three further cuts before the meeting. As a result, the initial reaction was for equities to sell-off and yield curve to flatten. However, Chair Powell managed to calm the markets by emphasising that they stand ready to cut more aggressively if the economic picture deteriorates.
The week before, the European Central Bank (ECB) had cut its deposit rate by 10bp to -50bp and announced QE at EUR +20bn per month from November and in perpetuity. Mario Draghi, President of the European Central Bank tried to sound very dovish, however the market took the announcement of the extensive package as ECB going ‘all-in’ with not much ammunition left. Draghi kept reiterating the importance of fiscal policy, most explicitly, and with some exasperation, by saying ‘A more active Fiscal Policy would help’. In addition, and somewhat disingenuously, he said there was a ‘broad consensus’ of opinions within the Governing Council. This was dispelled by the German ECB member Sabine Lautenschläger resigning (in protest) the following week.
Next was the turn of the Bank of Japan (BoJ), whose meeting did not produce any big surprises for the markets, but Governor Mr Haruhiko Kuroda stressed the importance of a steep yield curve and announced that the BoJ will assess their tools and progress going into the October meeting. After the last assessment in 2016, the BoJ introduced yield curve control (YCC). Kuroda tried to showcase the power the BoJ has over the yield curve by unexpectedly cutting the amount of JGBs purchased at the following rinban (buying) operation and steepened the curve.
The Bank of England (BoE) meeting did not deliver any surprises: rates were left unchanged with the most interesting line stating that prolonged BrExit uncertainty will likely push inflation and growth lower – a clear hint to a cut. This was later confirmed by comments by renowned BoE “hawk” Michael Saunders. Who has all but thrown in the towel (along with many UK spectators), and strongly hinted at cuts to come regardless of the October BrExit deadline of a hard/soft exit or extension.
In line with the Fed and the ECB, the Reserve Bank of Australia and the Reserve Bank of New Zealand also lowered interest rates by 25bps, both to record low levels of 0.75% and 1.00% respectively. However, against the motorway traffic of central bank dovishness, the Norges Bank raised rates by 25bp on solid domestic demand and inflation pressures.
Despite all this heavy hitting by Central Bank's, Trump still managed to steal the limelight by being exposed via a “spy” for requesting a foreign state to dig up dirt on Democrat presidential candidate Joe Biden. This has the potential to generate an impeachment indictment whether by Trump's abuse of power or an attempted cover up. One suspects a story that will not go away – despite a low probability it will lead to a conviction. Running in parallel was a warming of trade negotiations between US and China, giving hope to the US soy and hog farmers, along with an imminent trade deal between US and Japan.
We begin October thinking that the rates markets, although not stable, are no longer in “panic” mode and with the additional Central Bank cuts, the focus will continue to turn on fiscal solutions to make a meaningful positive shift to the economic outlook. Rates have rallied, curves have flattened. Both are exhibiting exhaustion and that a floor is in place for the time being.
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