Friday 25th May 2018
May 24th: John Hardy, head of FX Strategy at Saxo Bank reports today that the spin from yesterday’s release of the Federal Open Market Committee minutes was somewhat different than it was after the changes to the official FOMC statement released at the early May meeting. Back then, the Federal Reserve’s introduction of “symmetric” to describe the inflation target was perhaps seen as an attempt to not scare the market into believing that the Fed would respond too zealously to further rises in inflation now that the 2.0% inflation target is properly coming into view. This time around, at least judging from the reaction in US yields and the unwinding of Fed rate hike anticipation, the language in the minutes was seen as more dovish, as the Fed is seen as more willing to tolerate inflation on the high side of 2% for a “sustained” period before hiking further. The takeaway is that the US central bank seems to want to err on the side of not cutting the recovery short and being fully convinced that inflation will stay within the target zone. As well, other language suggested that many Fed members are concerned about the shape of the yields curve and that the Fed is reaching an inflection point on forward guidance, with the policy rate soon reaching a level at which it begins to act as a restraint on the recovery. The June FOMC meeting is shaping up as an important one for that forward guidance, and the odds of only one more hike after a June hike (which is still priced near 90% certainty) have picked up sharply since yesterday. In FX, the fairly sharp reaction in US yields to the downside has been fairly muted outside of USDJPY, which suffered a fresh, powerful sell-off leg overnight that took the pair to new local lows and well back below 110.00. The action suggests that 110.00+ was a bridge too far for USDJPY, and the top could very well be in for that pair if US yields have also topped for now. Note that the ten-year benchmark, having recently launched a break of the critical multi-year range at 3.00-05% dropped back below 3.00% overnight, although arguably, the key local break is closer to 2.95% -- Artjom Hatsaturjants, research analyst at Accendo Markets commented to clients around midday: “The FTSE100 has fallen out of its 8-week rising channel, but it is holding above rising support (circa 7775) that goes back to mid-May. The FTSE100 is flat today in a rather muted session as traders digest the overall impact of a host of geopolitical events, including revival of US-China trade tensions (this time from China, saying they agreed to nothing), aggressive NK rhetoric (will June summit happen?) and President Trump taking a “national security” swipe at auto equipment makers. Markets are taking a pause after yesterday’s continued backtrack from highs. Is that it, or is there further correction due? FTSE flat, in a perfectly balanced tug of war struggle where positive contributions of BATS/DGE/RB (defensives, Treasuries below 3%), RIO (copper up on weak USD), ITRK (results), CRH (rebound) are competing with negative pressure from Energy (oil off highs, OPEC/Russia to reassess production cuts?), GLEN (stronger GBP), VOD/BT (profit taking after bounce), IMB (ex-div), MDC (results) -- Uncertainty about US/China trade discussions continued to mount while yesterday’s newswires conveyed that the US President asked Commerce Secretary Wilbur Ross to start a national security investigation into car and truck imports. Against this background, core government bonds remained well supported and the JPY retained a firm tone against its major currency peers. In Italy, President Sergio Mattarella granted Giuseppe Conte a mandate to form a new government – EFG Eurobank in Athens reports that the Eurogroup that convenes today (15:00 CET) will take stock of the progress in the 4th programme review and the staff level agreement reached on 19 May. According to the draft SMoU for the 4th programme review released yesterday by the European Commission, as a prior action the Greek government will adopt the MTFS 2019-22 incorporating a primary surplus target of 3.5% of GDP for 2019-2022 -- Emerging market assets traded mixed in European trade today receiving some support from the US dollar’s retreat from yesterday’s new multi-month highs, but sentiment remains fragile. The Turkish lira resumed its downtrend today, giving back nearly all of yesterday’s gains which came on the back of an unexpected rate hike delivered after a Central Bank emergency meeting. The MPC decided to hike the Late Liquidity Window (LLW) lending rate - one of the CBT’s multiple monetary policy instruments - by 300bps to 16.50% at an extraordinary meeting on Wednesday, in a move aimed at supporting the domestic currency -- The OECD will publish its latest Economic Outlook, containing analysis and projections for its member countries and other major economies, at 10.30 am Paris time (08.30 GMT) on May 30th.OECD Secretary-General Angel Gurría and Acting Chief Economist Alvaro Pereira will present the outlook --

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