All eyes on the Fed
Rates
Global core bonds gained ground yesterday with US Treasuries heavily outperforming German Bunds. European equities still moved south with losses varying between 0.25%-1.0%. The sell-off in US equities came to a halt. US indices opened higher, but eventually remained near their multi-month lows as oil prices suffered another huge setback and as investors brace tonight's Fed policy decision. The US yield curve moved substantially lower with changes ranging between -4.0 bps (10-yr) to -4.9 bps (2-yr). The second straight bull steepening adds evidence to investors discounting a rate cut as the next policy move following tonight's anticipated Fed hike. The German yield curve flattened with changes varying between -2.3 bps (30-yr) to +0.3 bps (2-yr). Closer to home, Belgian PM Charles Michel offered his resignation yesterday after his opposition tabled a no confidence vote as Michel's government lost majority over a migration dispute. Belgium's King Filip is keeping the decision under consideration. The most probable outcome is that PM Michel will chair a government of current affairs up until the national elections of May'19. We don't expect any specific OLO underperformance.
Asian equity markets opened mixed this morning with China and Japan underperforming. Japanese equities moved lower amid a disappointing IPO for Softbank Group's Japanese telecom business, while the Japanese 10y bond yield surged higher after slipping to within striking distance of zero percent. US Treasury Secretary Mnuchin said face-to-face negotiations with China are planned for January, while both VP's spoke already on the phone.
Today's eco calendar is richly filled with UK consumer inflation data, US existing home sales and ECB's Hansson speaking. All will fall in the shade of the Fed meeting tonight. With a 25 bps rate hike already discounted, investors will eye the ‘dot plot' that forecasts the future policy rate. A ‘hawkish hike', where they forecast 3 rate hikes for 2019, will lift he short end of the US yield curve (bear flattening), causing a further inversion between the 2- and 5-yr yield. Investors are currently very soft positioned, not pricing in any rate hikes for 2019. We think this is exorbitant and suspect that even a ‘dovish hike', where the dot plot displays 2 rate hikes for 2019, will evoke markets to move in the similar direction. The magnitude of the moves will be lower of course. From a risk point of view, this is the more preferable outcome. The US 10-yr yield approaches 2.78%/2.8% key support, but we don't expect a break lower.
Author
KBC Market Research Desk
KBC Bank
