Friday, August 23, 2019

Capital Markets: Powell, The Fed and Jackson Hole

From Marc to Market:
Overview: Powell speech at Jackson Hole stands before the weekend. Equities in Asia and Europe are finishing the week on a firm tone. Most markets in the Asia Pacific region closed higher today, and the MSCI Asia Pacific Index snapped a four-week slide. European bourses are edging higher, and the Dow Jones Stoxx 600 is poised to end its three-week air pocket. US shares are higher in European trading and barring a reversal in the North American session, the S&P 500 will finish stronger for the first time in four weeks. Benchmark 10-year yields are higher, and some suspect the poor reception of Germany's 30-year zero-coupon bond earlier this week marked at least a temporary extreme. The US 10-year yield has risen nine basis points this week, which if sustained, would be the largest weekly gain since March. The US dollar is mostly firmer against the major currencies, though the Scandis and Antipodeans are resisting the pull. Sterling, which shot up yesterday on what we suspect is misplaced optimism regarding Brexit and reached its best level since late July (~$1.2275), is paring those gains today. It is finding support near the top of its previous range (~$1.22). Among emerging markets, Egypt and Sri Lanka joined the rate-cutting party with 125 bp cut (to 14.25%) and a 50 bp cut (to 8%) respectively.

Asia Pacific
The PBOC continues to set the dollar reference rate lower than the models suggest.
It has slowed by not reversed the yuan's weakness. The onshore yuan (CNY) fell for six consecutive sessions coming into today. The dollar made a new high just shy of CNY7.10 before reversing lower. Many, including ourselves, suggest CNY7.10 was around the magnitude of the adjustment anticipated. There is a medium-term lending operation that matures Saturday, and this would give the PBOC an opportunity to cut rates. However, officials do not seem to be in much of a hurry. Elsewhere, a cut in subsidies for the alternative energy vehicles is seen cutting into lithium demand and another disruption to the auto sector. The knock-on effect of new emission standards is one of the factors that have weighed on the German auto industry.

Japan reported July CPI figures. Price pressures are stable, but well below the 2% target the BOJ has dramatically expanded its balance sheet in trying to achieve. The headline rate eased to 0.5% from 0.7%, but the core rate, for which only fresh food prices are excluded, and is the measure the BOJ targets, was stable at 0.6%. Excluding both fresh food and energy, Japan's CPI was steady at 0.6%. Under the yield curve control policy, the 10-year yield should not fall beyond minus 20 bp, but the yield has been less than that for the second consecutive week.

The dollar has been trapped in a about a 15 tick range on either side of JPY106.55.
It has not traded above JPY106.70 this week or below about JPY106.15. There is a $765 mln option at JPY106.25 (yesterday's low) that will be cut today. If the greenback finishes today above JPY106.40 (roughly last week's close), it will be the first back-to-back weekly gain since April. Thin markets seemed to have allowed the Australian dollar to briefly slip to a marginal new low for the week (~$0.6745) before recovering to little changed but higher on the day levels. Still, the Aussie closed near $0.6770 last week, and unless this area is re-taken, it will record its sixth consecutive weekly decline. The New Zealand dollar fell to new three-year lows yesterday (~$0.6360) but is coming back a little firmer following comments by the Reserve Bank of New Zealand Governor Orr who suggested that after the surprise 50 bp rate cut, the central bank can be patient. The market continues to lean toward another cut not at the September 25 meeting but the one after than November 13, which is also the last one until February 2020.

Market participants heard what they wanted to yesterday regarding Brexit.
UK Prime Minister Johnson visited Germany and France in recent days. He came bearing no new ideas besides rejecting the backstop for the Irish border. Merkel and Macron were good hosts. In essence, they said fine, you don't like the backstop. Give us a realistic alternative. Meanwhile, some of the Tory's who support the idea that no deal is better than the Withdrawal Agreement that had been negotiated for 18 months, warned that Johnson has to do more than simply jettison or modify the backstop to secure their support. At the end of the day, the risks of a no-deal Brexit remain elevated, and apparently the base case for many. Separately Trump and Johnson will reportedly breakfast together at the G7 meeting this weekend....