US MARKET WRAP – FOMC Voters Kaplan And Kashkari Stick To Script With Geopolitical Tensions Largely Ignored

Spain’s IBEX underperformed in Europe, while Spanish bonds widened vs. core paper in the wake of the Catalan referendum held yesterday. Markets largely ignored the Las Vegas gun attack and ramping up of Washington-Pyongyang rhetoric that was evident over the weekend.

Fedspeak dominated the headlines this afternoon. 2017 voter, and dove, Neel Kashkari noted that he “favours not raising rates until core inflation is at 2%” and that the “Fed should proceed with caution before tightening further.” He also noted that “Fed hikes are likely driving down inflation expectations.” On inflation, Kashkari posited that “the only explanation that would potentially call for further policy tightening is the transitory factor explanation. But the longer low inflation persists (here and around the world), the more tenuous that story becomes.”

Fellow 2017 voter Robert Kaplan offered little new, as he reiterated that that the recent hurricanes will cause weakness in Q3 US GDP growth. He also noted that “there is not a lot of slack left in the US labour market,” and expects that slack will continue to be taken out of the labour market. Looking forwards he suggested that the Fed has “room to raise rates but not as much as people might think,” and that the Fed “are going to have to look hard to decide if we should raise rates in December.” He also stressed that any removal of accommodation should be “gradual.”  This argument seemingly centred on inflation, as the President of the Dallas Fed opined that “cyclical inflation pressures are building, but structurally there are headwinds,” and as a result he noted that it “would not be surprising to see muted inflation.”

On the US economic front a strong ISM manufacturing PMI print garnered the headlines, with a particularly strong prices paid sub-index present (although this was attributed to the recent Hurricanes that have hit the US, and ISM expect the impact to be felt for 3-6 months). Elsewhere the latest US construction spending data printed pretty much in line with consensus, although the prior reading experienced a notable downward revision.

The ECB's chief economist Peter Praet took to the wires this afternoon, stating that the “ECB will re-calibrate its instruments accordingly in the Autumn, with a view to delivering the monetary policy impulse that is still necessary to secure a sustained adjustment in the path of inflation.” Praet also noted that “the economy has yet to make sufficient progress towards a sustained adjustment in the path of inflation to levels that are consistent with the Governing Council’s aim.” However, Praet was keen to stress that “when the normalisation of monetary policy comes it has to be prudent.” He also highlighted that “inflation is very slow in eurozone, but it is coming.”

The US dollar begun the week on the front foot against the major currencies ex-JPY, with EUR, GBP and CHF underperforming. The commodity currencies managed to reverse their early losses against the greenback as oil recovered from lows and in front of the RBA decision overnight. The JPY was the best performer amongst the majors.

US stock indices printed fresh intraday highs, but the NASDAQ closed off best levels. Materials and healthcare were the strongest sectors, while consumer staples lost out. The S&P 500 closed up 0.39% at 2,529.20, the NASDAQ 100 closed up 0.04% at 5,981.92, and the Dow closed up 0.69% at 22,558.97.

Treasuries finished just off best levels, in a low volume US afternoon. High yield issuance was noted today, although the more noted activity came from Mexico, Abu Dhabi and Jordan, with all 3 nations issuing USD denominated 30-year paper. US Dec’17 10y T-note futures settled at 125.08, down 2 ticks, with CME Fed Fund futures now pricing a circa 75% chance of a 25bps FOMC hike by year end.

Oil traded lower as we broke through some moving averages across the energy complex, while the IEA suggested that “OECD industry stocks will fall substantially this year, their forecasts point to stock builds in 2018.” The early run higher for the USD also weighed on the space. These factors outweighed supportive fundamentals including an expected short-term outage at Libya’s (largest) Sharara oil field and Russian oil output remaining steady in September, which represents 2017 ytd lows. Oil finished off of worst levels, as WTI crude futures settled at USD 50.58/bbl, down USD 1.09, while Brent crude futures settled at USD 56.12/bbl, down USD 0.67.

02 Oct 2017 - 21:00- Fixed IncomeBank Speaker- Source: RANsquawk

Subscribe Now to RANsquawk

Click here for a 1 week free trial

RANsquawk provides audio news and commentary for over 15,000professional traders and brokers worldwide. Services include: