Core bonds initially rallied yesterday, but the earlier gains were largely given away towards the evening. The German 10-year yield ended the day lower by some half a bp, while the corresponding US yield ended the day almost unchanged. Intra-Euro-area spreads continued to feel widening pressure, but the moves were mostly rather limited.
Core bond yields are likely to continue to trade with a small downward bias ahead of the Fed meeting. The Ukrainian cease-fire remains fragile, even though Kiev approved limited autonomy to the eastern parts of the country, while Ukraine also ratified a trade-and-political agreement with the EU (whose implementation was delayed until December 2015). In addition, a US general suggested that also US ground troops might have to become involved in Iraq. Bonds are set to face some pressure later, however, on the Fed’s message.
European equities took some further losses, though nothing major, but US equities were boosted later by reports of liquidity injections in China (see more below) and a WSJ story that the Fed would not make big changes to its statement today. S&P 500 ended the day with a 0.75% gain. Asian equity markets are mostly trading higher as well this morning, and Europe will open up as well.
China’s central bank boosts liquidity
China’s central bank was reported to have injected RMB 500bn into the country’s five largest banks for a 3-month period. The measures suggest the central bank retains an easing bias, though its easing is rather targeted than large-scale stimulus. Chinese authorities thus remain committed to reaching their growth targets, but do not want to send a signal that the targets will be hit at any costs. In other words, the new stimulus measures are more targeted and smaller in scale.
More hawkish message from the Fed – but not for the longer term?
The Fed it set to change its forward guidance today, and drop the reference to the first hike being a considerable time away. Dr. Yellen will not want to trigger a market sell-off, but considering that the market is currently pricing less tightening than the FOMC median forecasts imply, she does not face a pressing need to sound overly dovish. Bonds are thus set to face some pressure today, at least initially.
The Fed will also include its forecasts for 2017 for the first time, and here the risks are tilted towards a dovish message. Low longer-term forecasts should quickly offer support to bonds again, and the curve should thus flatten.
The Fed’s statement, along with the new projections, will be released at 20:00 CET, while the press conference is set to start at 20:30 CET.
Elsewhere in the calendar, BoE minutes will gather attention at 10:30 CET, final Euro-area August inflation numbers will be out at 11:00 CET, while US August inflation will be released at 14:30 CET and the NAHB housing market index at 16:00 CET. In addition, the ECB’s Mersch will speak at 9:00 CET.
On the issuance front, Germany will re-open its 2-year benchmark for EUR 4bn.
Nordea