E Markets: Softer?

The big event for today is likely in the FOMC minutes as investors dissect the true meaning of removing the word “accommodation” from the Fed Statement. This removal brought out a raft of analysis on where US neutral rates are and could be over the next few quarters. Some think the Fed is already tightening – read President Trump, others see them behind the curve. Inflation showed them more in the Goldilocks zone and so the bounce back in US shares yesterday after being oversold might make some sense but be aware that the minutes won’t be softer nor gentler towards future hikes. The second event is UK May addressing the EU Brexit summit in Brussels as she tries to buy more time for talks after spending nearly 3 hours with her cabinet on the subject. What seems obvious is that the GBP is not going to find this speech softer or gentler in her approach. What already happened hasn’t derailed the feel-good bounce completely but it has dented the momentum.

The global extension just stalls in Europe with UK CPI lower, EU Construction lower, EU car registrations plummeting and EU HICP unrevised – all aren’t enough to change the big dynamic but clearly do shift the mood into a lower gear. With FOMC Powell warning that a disorderly Brexit could harm the US economy, with India’s Modi underfire for his silence on their version of #MeToo and his cabinet, with Turkey back to the bond markets with $2bn 5Y sale with spread wider to US at 4.48%. On the day, the focus is GBP as it’s the logical mix of US and UK news risks ahead but the chart remains biased to risk higher with 1.2950 the key for trouble and a less gentle end to a soft start.

Question for the Day:Are earnings the key to risk-on? The bounce back in risk yesterday mattered and many see it linked to the 3Q Goldman and Morgan Stanley earnings.

The question is whether its earnings or outlooks that matter in the weeks ahead as CEOs comment on trade policy, political uncertainty at home and abroad and the global demand picture. The interesting thing so far has been that blame for trouble ahead isn’t about those issues as much as inflation and FX. A weaker USD maybe the key to risk-on more than earnings beating 19.5% in 3Q.

What Happened?

RBA Debelle: Sees lower unemployment before higher wages. His explanation merits attention – “On any of the measures, wages growth has been low over the last few years (Graph 7). One of the factors contributing to this is the low level of voluntary job turnover. Workers tend to choose to leave their job for a better job – be it in conditions or pay. The fact that little of this is occurring is likely to be contributing to the subdued wages growth. Recently, some of our liaison contacts are now reporting that turnover is increasing.”