Fed's credibility test

Market movers today

Today's highlight is tonight's FOMC meeting. This is the first meeting after the Fed announced its new AIT framework. We expect a change of forward guidance and an increase in QE buying. We think the Fed will recognise the importance of building up credibility right away, especially as inflation expectations remain subdued. See Fed Monitor: Forward guidance linked to inflation outcomes and faster QE buying on the cards, 2 September.

European Commission President Ursula von der Leyen will lay out her proposals for a post COVID-19 world in her first State of the European Union speech before the European Parliament at 9:00 CEST. It is expected that she will unveil a more ambitious emission cutting target for 2030 of 'at least' 55% compared with 1990 levels.

The Bank of Japan finishes a policy meeting early Thursday morning. We expect it to keep its QQE with yield curve control framework unchanged and we will look for signs whether the BoJ might start to put more emphasis on developments on the labour market.

The 60 second overview

Equities. So far September has been the first month this year where value has outperformed growth. Meanwhile, over the past sessions growth/technology stocks have begun to re-outperform value stocks. Yesterday, a slide in financials was countered by a gain in tech during a session otherwise characterised by modest risk-on and lower VIX. Overnight Asian indices have generally followed their US counterparts modestly higher.

Germany. ZEW maintained its uptrend in September, despite the flare-up of Brexit risks and rising infection numbers. Especially the current situation assessment showed a strong improvement from -81.3 to -66.2, but also the expectations index increased further to a new all-time high of 77.4 from 71.5. With the economic repercussions of the second waves seemingly more muted, the release bodes well for the September PMIs due next week, with Germany still in the driver's seat of the euro area recovery.

WTO. The World Trade Organisation yesterday ruled that the US has violated international regulations by imposing tariffs on more than USD234bn worth of Chinese exports. Specifically, the WTO's panel emphasised that the US cannot apply specific tariffs only to China, that tariff rates were above previously agreed maximum levels by the US government and that the Trump administration had not sufficiently explained the reasoning behind the tariffs. The Trump administration were quick to respond calling the WTO 'completely inadequate'. WTO's ruling is unlikely to change much short term, yet marks the early phase of a lengthy legal process made more difficult by US blocking the appointment of judges to the WTO's appellate body.

FI. Yesterday's cautious risk-on mode spilled into rates markets and left yields slightly higher with tighter spreads on a day with little news. ECB board member Panetta (dove) joined the ECB's 'dovish guard' (Rehn and Lane) as saying that policy measures are not fully satisfactory yet and that the ECB needs to be vigilant on incoming information including exchange rate developments. We assess this as a verbal intervention and keep our view that ECB will refrain from new policy steps in absence of a material negative shock.

FX. EUR/USD tested 1.19 yesterday but ended the day below settling around 1.1850 ahead of tonight's Fed policy announcement. GBP continued strengthening with EUR/GBP below 0.92 and GBP/USD briefly above 1.29. Not much price action in Scandies yesterday, where EUR/NOK ended slightly lower and EUR/SEK slightly higher. Tonight's Fed meeting is key for both majors and Scandies, which, if we are right in our expectations of a dovish Fed, should send both EUR/NOK and EUR/SEK lower and EUR/USD higher towards a new test of 1.20.

Credit. Credit markets continued to Monday's tune yesterday, with iTraxx Xover tightening 6bp and Main going half a bp tighter.

Nordic macro and markets

Norway. As expected it was difficult to draw any firm conclusions from Norges Bank's Regional Network Survey yesterday. The backward looking indicators were (unsurprisingly) in line with monthly national account figures, while the forward looking quantitative indicators likely underestimate growth prospects as indicated by Norges Bank itself. Looking ahead uncertainty remains high among the contacts yet we think Norges Bank next week will conclude that the recovery is unfolding in line with expectations. In addition, there are tentative signs that Norges Bank might have underestimated capacity utilisation, see this chart, and that registered unemployment is lower than expected. All in all, we therefore still expect Norges Bank to move forward the signal of the first rate hike likely by a couple of quarters.