Thursday, September 19, 2019

Capital Markets: "Investors Looking for New Focus"

From Marc to Market:
Overview: Central bank activity is still very much the flavor of the day, but investors are looking for the next focus. The Bank of Japan and the Swiss National Bank stood pat, while Indonesia cut for the third consecutive time and the Hong Kong Monetary Authority and Saudi Arabia quickly followed the Fed. Brazil cut its Selic rate yesterday by 50 bp as widely expected. Norway's Norges Bank hiked rates and signaled a near-term pause. Decisions by the Bank of England and the South African Reserve Bank are awaited. Several of the larger market in Asia Pacific, including Japan, China, South Korea, and Australian markets advanced, while Taiwan, India, and most of the small markets eased. Europe's Dow Jones Stoxx 600 is edging higher after eking out a marginal gain yesterday. US stocks rallied to new session highs after the FOMC rate cut and Powell's press conference but are trading heavier now. Benchmark bond yields eased in Asia Pacific, but are firmer 1-2 bp firmer in Europe. The rise in US 10-year yields to 1.90% last week continue to unwind and are now a couple of basis points lower on the day near 1.77%. The dollar has not seen much follow-through buying after yesterday's post-Fed gains and is lower against all the majors but the Australian and New Zealand dollars. The Swiss franc and the Norwegian krone are the strongest, gaining about 0.4% against the dollar in late morning European turnover. Oil prices are firm within yesterday's ranges.

Asia Pacific
The Bank of Japan left policy on hold but unmistakably left the door ajar to lower rates.
It indicated it was re-examining economic and price developments amid increasing downside risks emanating from abroad. It sees these foreign risks as the latest deterrent of stronger price pressures. The sales tax is to be hiked on October 1, and by the next BOJ meeting on October 31, the impact is likely clearer. A lower depo rate may be complemented with a wider range for the 10-year yield under Yield Curve Control.

Australia's jobs data will keep investors looking for a rate cut. The headline growth of nearly 35k jobs, more than twice the increase forecast, is misleading. Full-time positions fell by 15.5k, meaning that part-time positions rose 50k. The participation rate ticked up to 66.2%, but the new entries did not find work and the unemployment rate rose to 5.3% from 5.2%. The Reserve Bank of Australia meets next on October 1. The market is discounting about an 80% chance of a cut, which would bring the cash rate to 75 bp. In New Zealand, Q2 GDP (0.5% for the quarter and 2.1% year-over-year) was a little better than expected, but still slower sequentially ( 0.6% and 2.5% respectively in Q1). The RBNZ meets next week few expect a rate cut. However, a move in November that would bring the cash rate to 75 bp is mostly discounted.

More reports are playing up the likelihood of an interim agreement between the US and China. As evident by the recent surge in food prices in China, the world's second-largest economy is short grains and animal protein. The deal that is rumored is for China to buy more US agriculture products (pork and soy especially) and the US would postpone further tariffs and ease restrictions on Huawei. Recall that the US has delayed the increase of the 25% tariffs to 30% until mid-October from October 1. There is another round of tariffs are due mid-December. These next rounds or tariffs were expected to hit consumer goods, a delay would do more for the US than Chinese households. Such an interim agreement seems more like not harming oneself more rather than material steps that reflect some underling de-escalation. Separately, some market participants were disappointed that the PBOC did not cut its reverse repo rate earlier today, but this keeps the focus on the prime lending rate that will be announced tomorrow. If this rate does not ease, then the disappointment would be reasonable....