19 Jun 2019

No change on US rates

The US Federal Open Market Committee (FOMC) meets today, with its policy decision due at 19:00 this evening, published alongside its forecasts and followed with Chair Jerome Powell delivering his post-meeting press conference at 19:30.

The meeting comes on the back of a period of heightened speculation that the Federal Reserve is gearing up to loosen the stance of policy. At the time of writing, the Fed funds futures strip implied investors were expecting more than two 25bp reductions in the target range before year end, with speculation seemingly centred on when rather than if the next move would occur. In terms of next week’s decision, we expect the FOMC to announce one of ‘no change’ with the target range held at 2.25-2.50%. This also appears to be the expectation within interest rate markets, where a full 25bp reduction in rates is not priced until a later meeting, albeit as soon as July 31st.

 

Trade issues crucial

The heightened expectation of Federal Reserve policy easing ahead has come amidst further grandstanding from President Trump on trade talks, exaggerated by taking Mexico to task on the need to address migration issues with the threat of tariffs on all Mexican imports into the US (subsequently this has been sorted out). However speculation has also been enhanced by concerns that US-China relations might be on a slippery slope, with differences spreading beyond the trade policy space and into the commercial policy sphere. Coupled with a scattering of softer data points (a just 75k non-farm payroll gain in May) and talk of inflation being low, this has enhanced bets of forthcoming Fed rate cuts. Such talk has also been supported by some Fed participant comments, not least from FOMC voting member James Bullard of the St Louis Fed, who at the start of June said that rate cuts might soon be warranted.

 

Dovish Draghi pulls euro lower

In what appeared to be a clear shift in positioning from the ECB’s policy meeting less than two weeks ago, President Draghi said (at the ECB’s Sintra Central Banking forum) yesterday that in the absence of an improvement in the return of inflation to target “additional stimulus will be required”. He also spoke broadly about applying all instruments including specifically mentioning further “headroom” in the Asset Purchase Programme and “further cuts in policy interest rates”. But hints on policy thinking went even beyond these tools as the President discussed a potential evolution in the policy framework saying in “the coming weeks, the Governing Council will deliberate how our instruments can be adapted”.

 

The heightened focus on low inflation and study of the framework was taken by markets as a clear hint that further policy easing would be forthcoming. The reaction was most marked in fixed income markets, whilst European equity markets rallied too and the benchmark EUR/USD moved lower. The extent of the response in fixed income markets is laid bare, with 10-year French government bond yields down nearly 11bps to just below zero, with Italian 10-year yields 21bps lower at 2.08% and with 10-year Bund yields languishing at -33bps (-8bps).

 

Tory leadership contest

In yesterday’s voting amongst Tory MPs, Dominic Raab (30 votes) was forced out of the leadership race leaving just Boris Johnson (126), Jeremy Hunt (46), Michael Gove (41), Sajid Javid (33) and Rory Stewart (37) contending. The remaining candidates participated in a live TV debate last night, however, it failed to generate sufficient sparks to shift the dynamic which continues to see Boris Johnson as the firm favourite, with Rory Stewart gaining momentum in the race for second place, nearly doubling his number of backers. The final two candidates standing in the Tory MP voting will go forward to the vote of full party members, where Boris Johnson is clearly the most popular candidate. In next steps, the third round of voting will take place today between 3pm and 5pm, with the result expected at around 6pm.

 

Economic Releases

09.30 UK CPI & PPI
15.00 EZ ECB President Draghi Speaks
19.00 US FOMC Statement
19.00 US Fed Interest Rate Decision