30th January 2019
Markets struck a defensive tone ahead of the US-China trade talks, Brexit votes and tomorrow’s FOMC meeting. The US Treasury Secretary, Steven Mnuchin, has indicated that President Trump could lift tariffs if China makes significant concessions in the trade talks, but markets have taken little encouragement from this.
It is clear that there is a long road ahead to achieving meaningful progress between the two countries and while steps forward are possible, this week is unlikely to bring the certainty markets are looking for.
Trade uncertainty is playing a role in the Fed’s decision to pause interest rate rises for the moment. US Treasuries rallied as investors wait to see if the FOMC meeting provides any changes in guidance on interest rates or the balance sheet unwind.
Also, weak January US consumer confidence data added to cautious sentiment, pushing the yield on the US 10-year note down to 2.72%. The US 10yr treasury yield fell from 2.74% to 2.71%, while the 2yr yield fell from 2.58% to 2.56%.
Futures markets continue to price little chance of any further Fed rate hikes in this cycle, with only a 1% chance assigned to the March meeting, and a 20% chance to the June meeting. The FOMC meeting concludes with the usual brief statement at 2 pm local time (6 am Thursday Sydney). The funds rate will remain at 2.25-2.50% but there could be some tweaks to the statement to indicate the Fed’s willingness to be patient.
Fed Chairman Powell will also conduct a press conference, where he should be quizzed on topics such as the government shutdown and the pace of reduction in holdings of bonds bought in the QE (money printing) program.
A ‘no deal’ Brexit is inching closer. There is still time, however, and markets are still likely to respond positively to any sort of consensus that results in a Brexit delay.
Australian CPI data is the main Asia-time release today. Headline inflation is expected to be subdued at 0.4% q/q translating into an annualized figure of about 1.7%. If the numbers disappoint it could intensify market expectations of a softening in tone from the RBA next week with implied probabilities of a rate cut from the RBA in 2019 climbing to roughly 40%. Although, RBA Board member Ian Harper, said in a recent interview that the Australian economy “is still strong” and that he expects the next move on the cash rate to be up. RBA’s default position has always been no change.
Queensland Treasury Corporation (QTC) has launched a 4-year AUD floating rate note that will mature on 6 February 2023. Size is to be finalised but it will be $500m+ and indicative pricing is around 3 months BBSW + 20-22 basis points.