Calendar contains eco data, auctions & ECB speakers
US yield curve bear flattens as Fed sticks to its plan
German bonds moved modestly higher before the FOMC meeting ended, ignoring hawkish comments of ECB Knot. Following the steep decline in the past week, there were apparently some bottom fishers at work. However, the real deal yesterday was the FOMC meeting. The FOMC, as expected, kept rates unchanged and announced the start of a gradual and predictable balance sheet run-off. The FOMC struck nevertheless a rather hawkish tone, especially when compared to the market's view. It has no big concerns about the decline in inflation, which was characterised as due to cyclical unrelated one-off factors. Yellen re-affirmed that the Phillips curve was still valid and tighter labour market conditions would push wages and inflation higher. (see KBC Flash)
The FOMC explicitly said the damage of the hurricanes would cause only some volatility in the data, but wouldn't' taffect the moderate underlying momentum. The FOMC's message of sticking to the course was reflected in the dot plot. The median rate for the end of 2017, 1.375%, still discounts one more 25 bps rate increase. For end 2018, the median suggests 3 additional 25 bps rate increases (to 2.125%), unchanged from June. The median projection for end 2019 fell from 2.93% in June to 2.68% now. That means 2 rate increases in 2019. For 2020, the median rate projection is 2.875%, which suggests one final rate increase to lift the FF rate above its projected long run rate of 2.75%, which was lowered from 3% in June. The Fed actually suggests that its policy will get really restrictive by putting the 2020 projection above the neutral rate. US Treasuries reacted promptly, as did other markets. The gap between the Fed's rate projections and market expectations remains wide as ever though, despite the increase in yields. The curve bear flattened with yields up about 4 bps at the shorter end and up 2.1 bps at the 10-yr tenor, while the 30-yr yield fell 1.2 bps.
Calendar contains eco data, auctions & ECB speakers
EMU Consumer confidence is expected to have stabilized in September, just below its cyclical highs. We have no reasons to expect a decline in confidence. The debate surrounding the ECB's APP programme is in full swing. Various national governors already showed their preferences, but the outcome is far from certain. ECB Smets and Praet are close to Mario Draghi and key players inside the ECB. So, any comments from them on the fate of APP won't go unnoticed. The monthly ECB bulletin probably won't touch upon the current key issues (APP, euro). US initial claims are expected to rise further as a result of the tropical storms. Markets will ignore the increase as noise. The Philly Fed business survey is expected to show a stable, but strong headline figure (17.1).
France and Spain conclude EMU bond supply
France and Spain conclude this week's scheduled EMU bond supply. The French Treasury taps two OAT's (0% Feb2020 & 1.75% Nov2024) and launches a new one (0% Mar2023) for a combined €6-7B. The relatively low amount on offer should be easy to digest for investors. Additionally, France will try to raise €1.5- 22B via tapping three inflation-linked notes. The Spanish debt agency auctions a 3-yr Bono (0.05% Jan2021) and taps three Obligacions (1.3% Oct2026), 5.15% Oct2028 & 5.15% Oct2044) for a total amount of €4-5B. Tensions between Madrid and Barcelona over the Catalan secession referendum had only limited impact on Spanish bonds so far, but we nevertheless believe that they could hamper demand today.
Flattening US yield curve after Fed verdict
US Treasuries lost ground yesterday after the FOMC decision, flattening the yield curve. Overnight, the decline in the US Note future halted, as did the rise in USD/JPY. Asian risk sentiment is mixed. We expect the Bund to open near levels reached in after-market trading.
Today's eco calendar contains some EMU/US eco data, but these won't be relevant for trading. Digesting the FOMC statement will be key. We conclude that US Treasuries re-entered a sell-on-upticks phase after the Fed confirmed his view on 2017/2018 interest rate policy. A December rate hike isn't fully discounted yet. Short term though, we could get some correction higher after a nine straight days decline. ECB speakers are a wildcard today. They could give first guidance of what to expect at the October policy meeting (future APP). We hold a sell-on-upticks view in the Bund as well.
From a technical point of view, both the Bund and the US Note future fell below uptrend lines (early September) since the Start of Summer, making the picture neutral from bullish.
Author
KBC Market Research Desk
KBC Bank
