The market gets the “whatever it takes commitment” it was hoping for

Markets

Yesterday, the focus for global trading was on the Fed policy decision. The Fed as expected kept its policy unchanged leaving the target range for the Fed Funds rate at 0.0% to 0.25%. The Fed acknowledged that the path of the economy will depend significantly on the course of the virus. In this respect the recent rise in virus cases is weighing on the economy. In this context the Fed reiterated that it will do what it can for as long as it takes. Fed's Powell said the Fed can further support the economy by adjusting forward guidance or asset purchases. At the same time, the Fed President clearly signaled that the economy needs joined support from both monetary and fiscal policy. There are issues that monetary policy can't address, a clear signal to the politicians on Capitol Hill who are trying to find a compromise on a new stimulus package.
From a market point of view, the Fed's action was more or less as expected. At the same time, the market got the ‘whatever it takes commitment' it was hoping for. US yields at the short end of the curve declined slightly further. The 5-y outperforming (-1.2 bp) and setting a record low yield is an indication that the market is convinced that interest rates will stay very low for very long. The long end of the curve steepened slightly (+1.9 bp). US equities extended their rebound after the Fed communication with the S&P and the Nasdaq gaining more than 1%. The TW dollar (DXY) touched the lowest level in more than 2-year (93.18) during the press conference. EUR/USD tested the 1.18 big figure. USD/JPY retested the 104.80 area. Earlier, German yields finished the session marginally higher (2-y +0.6bp; 30-y +1.7 bp).

This morning, Asian equity indices are trading mixed, despite the positive lead from WS yesterday as regional bellwethers reported results. The yuan is holding remarkably stable in the USD/CNY 7.00 area. The dollar is trading slightly better compared to yesterday evening's correction low levels (EUR/USD 1.1770 area, USD/JPY 105.15 area).

Later today, the eco calendar is extremely busy. Several countries including Germany will publish a first estimate of Q2 GDP. The Germany economy is expected to have contracted 9.0% Q/Q. The country will also publish inflation and unemployment data. The EC will publish EMU confidence data. The US also will release Q2 GDP data. The US economy is expected to have contracted at an unprecedented pace of about 35 % (QoQ annualized)!.The report will of course get ample media attention. However, from a market point of view, this is history. In this respect, the weekly initial jobless claims might be at least as important. Initial claims are expected to rise again from 1.42mln to 1.45 mln. Last week, the rise in jobless claims triggered an, albeit temporary risk-off reaction. Core bond yields showed a very gradual but protracted downtrend of late. There is no reason to expect a big countermove anytime soon. Short-term US yields probably are cemented at current low levels. The US 10-y yield is within reach but still holding north of the 0.54% support. For the very long end, there is maybe some more room of maneuver as markets have to ponder the impact of rising supply. In Europe, the German 10-y yield is extensively testing the -0.5% support, but a clean break hasn't occurred yet. On the FX markets, several USD cross rates touched new correction low levels during the Fed press conference. There is no reason to expect a U-turn anytime soon. However, this morning the pressure is slightly easing. EUR/USD 1.1822 is a high profile resistance on the charts (62% Retracement LT). Maybe the pair nearing this key level might (temporary) slow EUR/USD ascent.

News Headlines

Japan retail sales rose much sharper than expected in June rising by 13.1% M/M. Only a more modest rise of 8.0% was expected. The June rise was the second in a row. Even after the good June performance, Japan retail sales are still 1.2% below the level of June last year.

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