Global equity markets broadly ended last week on a weaker note taking the lead from the US where sentiment soured after the FOMC meeting and Jerome Powell’s press conference. While the Fed committed to keep an accommodative stance until its goals of maximum employment and inflation are reached and the dot plot median projection showed no change to interest rates through 2023 the market was looking for more. This included clarification in areas such as the bond buying program and whether the Fed would target more longer dated paper for its asset purchases. This disappointed some market participants and drove a modest steepening of the UST curve on Wednesday. Over the week the yield on the 10-year UST increased 3bps to 0.7% and the 30-year yield backed up 4bps to 1.45%.
Elsewhere, the BoJ and BoE made no change to interest rates or their asset purchase programmes. Of more interest was the news that the BoE will study how negative rates could be implemented effectively should economic conditions warrant it. BoJ Governor Haruhiko Kuroda reiterated that the bank would maintain stimulus to support the economic recovery and continue to coordinate policy with the government, following Yoshihide Suga being voted in as Prime Minister mid-week.
Better news on growth was also a theme: notably, the Fed revised up its growth forecast for 2020 to -3.7% from -6.5% in the June forecasts. However, Powell was cautious stating “the path ahead remains highly uncertain” and advocating further fiscal stimulus. The Republicans and Democrats have yet to reach agreement on a further fiscal package. The OECD’s latest 2020 growth estimates improved looking for global growth to contract 4.5% reflecting improved estimates for the US and China. China is the only country in the G20 that the OECD expects to register positive growth of 1.8% in 2020. Data releases over the week continued to point to China’s economic recovery with retail sales and industrial production posting positive surprises. The renminbi has been helped by this with the offshore renminbi gaining versus the US dollar over the week. As expected, with the economy recovering, China announced today that its loan prime rate, a reference rate for company loans, for 1 year and 5 years, is unchanged at 3.85% and 4.65% respectively.
For the week ahead, the risk of a resurgence in Covid-19 cases, particularly in Europe, and whether further restrictions hinder the economic recovery will be a focus along with any developments on a much hoped for vaccine. In the US, with the risk that the economic recovery could lose momentum without further fiscal stimulus, negotiations between the Republicans and Democrats will be watched for signs of a breakthrough to agree a package. Meanwhile, a bipartisan spending bill to avert a US government shutdown appears to be making progress. US-China tensions remain a theme, although Trump approved “in concept” the ByteDance-Oracle proposal for TikTok over the weekend.
In a data-light week, election news, testimonies and Fed speakers are likely to draw attention: Notably, on Tuesday and then on Thursday, Jerome Powell and Steven Mnuchin appear before the House Financial Services Committee and then the Senate Banking Committee respectively. A number of Fed speakers are also due to appear over the week: These include Lael Brainard, Loretta Mester, Charles Evans, Eric Rosengren, Mary Daly, James Bullard and John Williams. Elsewhere, Christine Lagarde, ECB President is due to speak on Monday while BoE Governor, Andrew Bailey, is due to appear on Tuesday and Thursday: Bailey’s comments are likely to be monitored for any further insights on the potential use of negative rates. Central bank meetings include New Zealand, Norway, Sweden and Mexico: the Bank of Mexico meeting on Thursday, will be watched to see if the bank takes a more cautious approach cutting rates by only 25bps: while growth is weak, the August CPI data increased to 4.05% yoy. Data-wise, key releases include the US Chicago Fed National Activity Index on Monday, the US Markit PMI data for September mid-week and US durable goods orders for August at the end of the week. In Europe, the German Ifo survey (due on Thursday) along with the September PMI data for France and Germany mid-week will be watched for any moderation in the economic recovery. EU leaders are also due to meet on Thursday/Friday with a range of issues on the agenda.