Another 'mid-cycle adjustment' from the Fed

Allan von Mehren Danske Bank A/S

Market movers today

Key focus today will be the Fed meeting tonight, where we look for another rate cut of 25bp but no pre-commitment to further cuts, see FOMC Preview, 13 September 2019. Another 'mid-cycle adjustment' cut is warranted by weak global growth and high uncertainty, while a still strong US consumer puts the Fed on a 'meeting-by-meeting path' to gauge the need for how much further support the economy needs. We see a risk that markets will be disappointed from what might be perceived as a hawkish rate cut. We still expect the Fed to ultimately cut five times in total until March 2020 as we look for weak global growth and high uncertainty to prevail for some time. The tensions in the Middle East have only added to the uncertainty.

Saudi state television said the Saudi Defense Ministry will hold a media conference on Wednesday that will show evidence of Iran's involvement in the Aramco attacks, including the use of Iranian weapons.

On the economic front we get UK inflation and final euro area inflation for August and US housing starts.

In Scandi markets focus will be on the Swedish budget proposition for 2020 at 8.00 CEST, see page 2.

Selected market news

Saudi Arabia yesterday indicated that its crude oil output will be ready to return to normal levels within two to three weeks. The news triggered a sharp fall in the crude oil price from USD68 to USD65 per barrel, as the market was concerned it would take longer. The crude oil price is still much higher compared to last Friday, as the market will continue to demand a premium on oil until the situation is fully normalised.
Stock markets were slightly higher yesterday on the Saudi news but otherwise markets are in wait-and-see mode ahead of the Fed decision tonight.
The effective Fed Funds fixing jumped to 2.25% on Monday (published yesterday), which was an increase of 11bp compared to Friday, hitting the ceiling of the Fed's target range. Short-term USD funding has been under pressure due to tighter USD liquidity conditions also seen in elevated US repo rates. Consequently, New York Fed announced a repo operation of up to USD75bn to support the market, the first one since the financial crisis in 2008/09. Another repo operation is scheduled for Wednesday.

The first day of three days of hearings in the UK Supreme Court started yesterday . The court will decide on the legality of Prime Minister Boris Johnson's suspension of the parliament. The day ended with Johnson on the back-foot judging from the questions asked by the judges.

US industrial production for August was better than expected, rising 0.6% m/m (consensus 0.2% m/m). Japanese exports overnight also surprised slightly to the upside at -8.2% y/y (consensus -10.0% y/y). It is within the range it has been throughout 2019.

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Author

Allan von Mehren

Danske Bank A/S

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