Global Central Banks Still at Center Stage

 Global Central Banks Still at Center Stage

  • Comments from Yellen seemed to give fuel to the backup in US yields, even though she really said nothing new
  • Norway’s Norges Bank kept rates steady at 0.75%, as expected, but the krone rallied in the aftermath
  • September German factory orders were much lower than expected
  • The European Commission issued new economic forecasts; these are noteworthy, as the ECB will issue its own set of forecasts at its December 3 meeting
  • Bank of England decision is due out shortly
  • Malaysia kept rates steady, as expected; Czech National Bank expected to do the same

Price action:  The dollar is mostly stronger against the majors.  The Norwegian krone and the Kiwi are outperforming, with the former up nearly 1% after the Norges Bank left rates steady and said a rate cut wasn’t discussed.  The Swiss franc and the yen are underperforming.  The euro is trading flat near $1.0850, while sterling is trading flat just below $1.54 ahead of the BOE decision.  Dollar/yen is trading higher, near 122 currently and the highest since August 24.  EM currencies are mostly softer.  ZAR and BRL are outperforming, while RUB, MYR, and TWD are underperforming.  MSCI Asia Pacific fell 0.2%, with the Nikkei up 1.0%.  China markets were higher, with the Shanghai Composite up 1.8% and the Shenzen Composite up 0.2%.  The Dow Jones Euro Stoxx 600 is up 0.2% near midday, while S&P futures are pointing to a lower open.  The 10-year UST yield is flat near 2.22%, while European bond markets are mostly firmer.  The 2-year US-German differential is now at 114 bp, the highest since 2006.  Commodity prices are mostly lower, though oil is flat.

  • Yesterday, comments from Yellen seemed to give fuel to the backup in US yields, even though she really said nothing new.  Yes, the December 16 FOMC meeting is live, but only if the data supports it.  Friday’s jobs report will be very important.  Yesterday, ADP reported 182k new jobs, slightly more than the consensus 180k.  This is certainly consistent with the consensus reading for NFP of 182k currently.
  • The US rates market continues to support the dollar ahead of this Friday’s jobs report.  The 2-year UST yield has risen to 0.83%, now higher than the peak right before the September 17 FOMC meeting.  The 2-year US-German differential has risen to 114 bp, the highest since October 2006.
  • Norway’s Norges Bank kept rates steady at 0.75%, as expected, but the krone rallied in the aftermath.  Perhaps it was a bit of a relief rally, as Governor Olsen said the bank didn’t discuss a rate cut today.  We felt another move today was unlikely after it cut the deposit rate in September unexpectedly and lowered the anticipated repo path.  From the statement, “The effects of the fall in oil prices and decline in oil investment are gradually becoming evident, especially in regions closely linked to the oil industry.”  However, the bank also noted that, “the krone exchange rate has been weaker than projected, and a more expansionary fiscal policy will contribute to fueling demand for goods and services.”  EUR/NOK fell nearly 1% after the meeting, still tracking close to the 50-day MA resistance, but unable to break below.
  • Meanwhile, Sweden reported September IP up 2.0% m/m vs. -0.5% expected, as well as September industrial orders up 22.3% m/m.  Yet deflationary risks persist and the Riksbank is still in easing mode, with many still looking for further stimulus ahead.  The next policy meeting is December 15.  With Sweden’s Riksbank having recently extended its bond purchase program, and the ECB signaling its willingness to ease further, the Norges Bank will likely continue to feel pressure to ease monetary policy.  Its next meeting is December 17.
  • September German factory orders were much lower than expected.  Orders fell -1.7% m/m vs. +1.0% consensus.  This marked the third consecutive m/m decline, and orders fell -1.0% y/y. The weakness in the data came mostly from foreign orders, while domestic held up well.  This brought the 3-month average y/y reading to -0.1%, the first negative print since May 2013.  Eurozone retail sales came in at -0.1% m/m vs. 0.2% expected.
  • Meanwhile, the European Commission issued new economic forecasts.  It cut the Eurozone growth forecast for next year to 1.8%, down from its previous forecast of 1.9% in May.  At the same time, the EC upgraded its growth forecast to 1.6% from 1.5% previously.  Officials said that while the recovery is progressing largely as expected, they warned that it was unevenly spread across the Eurozone as major challenges loom next year.  The 2016 inflation forecast was lowered to 1% from 1.5% previously.
  • All of these forecasts are noteworthy, as the ECB will issue its own set of forecasts at its December 3 meeting.  As we have noted, however, recent data and forecasts do not impart any sense of urgency that the ECB needs to announce imminently.
  • Bank of England decision is due out shortly, along with the minutes and the quarterly inflation report at the same time.  The BOE appears several months at least from raising interest rates.  There had been one dissent at the past two meetings, and there seemed to be a greater risk of someone joining the dissent than McCafferty giving up his call for an immediate hike.  Still, the forecasts contained in the inflation report will illustrate why this will remain a minority for some time.
  • The BOE is still widely expected to be the second major central bank to hike rates after the Federal Reserve.  This anticipation should help sterling outperform most other major currencies on the divergence hypothesis.  However, the perceived gap between the Fed’s move and the BOE’s move can be several months and therein lies sterling’s vulnerability.
  • Reports suggest that the Turkish government and the Kurds are moving towards a peace deal. We had outlined this possibility in our report Turkish Elections Surprise.  The PKK, the militarized part of the Kurdish movement, stated that it would be on the side of a “democratic political solution.”  But given how much the situation had escalated, leading to various deaths and attacks, it’s unclear whether the two sides will find enough common ground.
  • During the North American session, the US reports October Challenger job cuts, weekly jobless claims, and Q3 nonfarm productivity and unit labor costs.  The Fed speech calendar is heavy again, with Harker, Dudley, Fischer Lockhart, and Tarullo all speaking.  Ex-Fed Chair Bernanke also gives the keynote address at an IMF conference.
    Elsewhere, Canada reports October Ivey PMI and it is expected at 54.0 vs. 53.7 in September.  October jobs data will be reported Friday.  We cannot rule out further BOC easing if the data continue to come in soft.
  • Malaysia central bank met and kept rates steady at 3.25%, as expected.  Inflation has been falling recently.  Although the central bank does not have an explicit inflation target, it has kept rates steady at 3.25% since July 2014.  Malaysia reports September trade data on Friday.  If data continue to soften, we think the central bank will lean more dovish in the coming months.
  • Czech central bank meets and is expected to keep rates steady at 0.05%.  The central bank has sounded more concerned about deflation risks lately, and we cannot rule out a dovish extension of its forward guidance (which currently promises steady policy until “at least” H2 2016).  Earlier in the day, Czech retail sales for September came out much higher than expected at 7.0% y/y vs 4.0% forecast and 4.4% in August.  On Friday, it reports September trade (CZK17 bln expected), industrial (3.5% y/y expected), and construction output.