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[PODCAST] EU Open Rundown 21st March 2019

  • Fed kept the Funds Target Rate unchanged as expected, dot plot now looks for no hikes in 2019 and one in 2020, intends to slow the balance sheet run off in May before ending in September
  • Asian equity markets eventually traded mostly higher in the aftermath of a dovish FOMC, although gains in major US indices were later pared due to underlying growth and trade concerns
  • UK PM May confirmed she sent a letter to EU’s Tusk in which she requested an Article 50 extension to 30th June and said the Brexit delay is personally regrettable
  • Looking ahead, highlights include, UK Retail Sales, US Initial Jobless Claims, Leading Index & Philly Fed, EZ Consumer Confidence, Japanese CPI, European Council Meeting (21/22 March), BoE, SNB & Norges Bank Rate Decisions, Supply from France & Spain
  • Earnings: HeidelbergCement, Enel & Nike

 

FOMC

- Fed kept the Funds Target Rate unchanged at 2.25%-2.50% via unanimous decision as expected and intends to slow the balance sheet run off in May which will end in September, provided economy and money market conditions evolve as expected.

- Fed dot plots showed median forecast is for no hikes in 2019 and one in 2020 with median view of Fed Fund Rate for end-2019 at 2.4% (Prev. 2.9%,) end-2020 at 2.6% (Prev. 3.1%), end-2021 at 2.6% (Prev. 3.1%,) in longer run 2.8% (vs. prev. 2.8%).

- Fed saw weaker near-term economic growth and tamer inflation vs. December in which it stated growth has slowed from solid rate in Q4 and that inflation is seen lower on a 12-month basis largely as a result of lower energy prices. Furthermore, its forecasts for the longer run were for GDP Growth 1.9% vs. prev. 1.9%, jobless rate 4.3% vs. prev. 4.4%, PCE Price Index 2.0% vs. prev. 2.0%.

- Fed said it is to slow reduction of holdings beginning in May by reducing the cap on monthly redemptions from USD 30bln to USD 15bln and conclude runoff in September, while it is to continue to reinvest agency debt and MBS debt into treasuries starting in Oct. and with a maximum amount of USD 20bln/month. Fed also said it is to hold asset portfolio roughly constant for a time with gradual increases in some liabilities offset by declines in reserves and will provide more details in May.

- Fed's Powell said it could be some time before the outlook calls for a change in policy and that the policy rate is in the range of neutral, while he suggested that data doesn't send a direction in which Fed policy should move. Powell also commented that the Fed will soon turn to decision on composition of balance sheet, that the balance sheet may still be above what is needed for efficient policy in September and will make additional changes to balance sheet plans if needed. 

ASIA-PAC

Asian equity markets eventually traded mostly higher in the aftermath of a dovish FOMC, which immediately supported risk sentiment, although the gains in the major US indices were later pared due to underlying growth and trade concerns. ASX 200 (Unch) was subdued as financials tracked the underperformance of their US counterparts post-FOMC and with a broad subdued tone across most sectors aside from commodity-related names. Elsewhere, Hang Seng (+0.2%) and Shanghai Comp. (+0.9%) remained afloat with CITIC Securities suggesting increased possibility of a PBoC rate cut following the dovish Fed stance, although gains were capped amid lingering trade uncertainty as US President Trump recently suggested tariffs on China will be kept in place for a "substantial" amount of time after a trade agreement is struck to ensure Beijing holds up its end of the bargain. As a reminder, Japanese and Indian markets were shut for Vernal Equinox and Holi respectively.

PBoC skipped open market operations for a net neutral daily position. (Newswires) PBoC set CNY mid-point at 6.6850 (Prev. 6.7101); strongest fix since July 2018.

US President Trump said the China trade deal has to be a "great deal" and that the US will never catch up if it isn't. Furthermore, Trump said tariffs against China will be kept in place for a "substantial" amount of time after a trade agreement is struck to ensure Beijing holds up its end of the bargain. (Newswires)

UK/EU

UK PM May confirmed she sent a letter to EU’s Tusk in which she requested an Article 50 extension to 30th June and said the Brexit delay is personally regrettable. PM May added it is now up to MPs to decide and that she is not prepared to delay Brexit beyond 30 June, while she also reiterated that she does not want second referendum. (Newswires)

ERG Member Francois said the ERG will not vote for PM May's deal under any circumstance. (Newswires)

 

German Finance Ministry said February tax revenue fell 1.6% Y/Y, while it added German growth is likely to remain subdued through H1 and that Brexit and trade disputes are dampening expectations. (Newswires)

FX

In FX markets, the greenback suffered in the wake of the dovish-FOMC with the DXY below the 96.00 level to the benefit of most its major counterparts and EM currencies alike, with EUR/USD lifted above several key MA levels to reclaim the 1.1400 handle before hitting resistance just shy of 1.1450. GBP/USD whipsawed as markets tuned into Brexit developments after PM May requested an Article 50 extension to June 30th and with EU's Tusk suggesting approval of the short extension was conditional on parliament supporting the Brexit deal next week. In addition, the rumour mill was rife with speculation heading into PM May’s press statement that she could suggest a defeat next week may lead to a general election or could even set out a timetable for her resignation, although these failed to materialize as PM May remained true to form in her defiance of the naysayers and reiterated calls for MPs to support her Brexit deal. Elsewhere, antipodeans were active overnight with AUD/USD underpinned after mixed jobs data in which Employment Change missed estimates but was accompanied by a surprise decline in the Unemployment Rate to a near 8-year low of 4.9% from 5.0%, while NZD/USD ignored varied GDP figures for Q4 and revisited post-FOMC highs.  

Australian Employment Change (Feb) 4.6K vs. Exp. 14.0K (Prev. 39.1K). (Newswires) Australian Unemployment Rate (Feb) 4.9% vs. Exp. 5.0% (Prev. 5.0%); lowest since June 2011. Australian Participation Rate (Feb) 65.6% vs. Exp. 65.7% (Prev. 65.7%)

New Zealand GDP (Q4) Q/Q 0.6% vs. Exp. 0.6% (Prev. 0.3%). (Newswires) New Zealand GDP (Q4) Y/Y 2.3% vs. Exp. 2.5% (Prev. 2.6%); matches weakest growth since 2015.

COMMODITIES

Commodities were underpinned by a softer greenback in the aftermath of a dovish Fed which lifted WTI crude futures back above the USD 60/bbl level and although price action quietened during Asia trade, oil still remains at its best levels in over 4 months. This also follows several supportive factors including OPEC commentary and bullish inventory data with the headline DoE crude stockpiles at a surprise draw of 9.6mln bbls. Elsewhere, gold and copper prices were also underpinned with the Fed being the main driver,

US EPA is likely to use partial waivers in upcoming round of small refinery exemptions covering 2018, marking a shift in policy and is aimed at balancing competition according to sources. (Newswires) 

GEOPOLITICS

North Korean Leader Kim Jung Un is said to be seeking a meeting with Russia. (Newswires)

US

Treasury yields dropped to a 14-month low after a dovish Fed signalled no further hikes in 2019 (just one rate hike is seen on the forecast horizon vs three previously), while also confirming a halt to its balance sheet run-off, starting May ending September, with maturing MBS coupons to be reinvested into Treasury holdings. The Fed intends to have the balance sheet primarily consisting of Tsys after it has concluded BSN, and Powell sees the size at just over USD 3.5trln (around 17% of GDP vs around 25% at its peak). Yields on 2-year notes fell beneath 2.40% (the effective FFR rate in recent weeks), while yields on 10s fell to a 14-month low above 2.5%. Curve spreads were mixed after the Fed, with shorter spreads flattening (2s5s and 2s10s came in by around 1bps), while the 2s30s and 5s30s bull steepened by around 2.5bps and 4bps respectively. US T-note futures (M9) settled 20+ ticks higher at 123-13.

White House Economic Adviser Hassett sees 2019 GDP at 3.0%. (Newswires)

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