What you need to know Dollar firms despite Fed minutes sounding a dovish tone on rate rise outlook Attention turns to US inflation data after US bank earnings season starts New York indices slip lower as European stocks lack direction Sterling stumbles as EU chief talks of an “impasse” but later recovers Oil slides even as US inventories report shows crude stockpiles falling Leading quote “While many Federal Reserve officials expected another rate hike would be appropriate later this year, many also expressed concern that inflation might be more than transitorily low,” says Michael Hanson at TD Securities.
“For the dollar and near-term price action, given the market has largely priced in a December hike, the burden of proof is placed on this Friday’s consumer price index report. This backdrop leaves us comfortable holding long exposure to the euro and the yen.” Hot topics A four-session slide in the dollar prompted by dovish comments from Federal Reserve policymakers stalled while US bank earnings failed to ignite Wall Street stocks. Global equities were mixed while the euro dipped and a volatile ride for the pound saw it sinking after the EU’s Michel Barnier said that talks on Brexit terms with the UK were at “deadlock”.
However, sterling later recovered amid a German media report of some progress in negotiations. “The dollar index itself is marginally firmer on the day, mainly reflecting the euro’s drift off the overnight peak,” said Shaun Osborne of Scotiabank. “However, the Federal Reserve minutes poked dollar bears into thinking that, while a December rate increase looks a lock at this point — around 80 per cent priced in — the Fed sounded somewhat concerned about the weak pick-up in inflation, keeping the outlook for 2018 hikes quite equivocal.” Thursday’s US data showing producer prices increasing 0.4 per cent in September from 0.2 per cent in August and jobless claims dropping to a one-month low helped to provide some support for the dollar after the currency had been buffeted overnight by the dovish Fed minutes of its policy meeting last month. “While US short-term rates eased fractionally in response to the FOMC minutes, spreads remain widely in favour of the dollar in theory at -220 basis points at the two-year point of the curve,” added Mr Osborne. Analysts pointed to Friday’s US consumer price inflation release as the next key data point for Fed policymakers and the short-term direction of the dollar but others highlighted the forthcoming change of the US central bank’s leadership. “Expectations over the outlook for Fed policy will be largely dictated in the coming months by President Trump’s nomination for the next Fed chair,” said Lee Hardman of Bank of Tokyo-Mitsubishi UFJ.
Equities Stocks on the FTSE All World index set an all-time high for the third day in a row but the tone was muted as a 0.1 per cent rise reflected flat moves in Europe and moderate losses on Wall Street. The S&P 500 slipped 0.2 per cent by the close after Wednesday saw record finishes for all three of the main US equity benchmarks. The Dow Jones Industrial Average was able to eke out another fresh intraday high shortly after today’s opening bell but a drop in trading revenues at JPMorgan and Citigroup failed to excite investors and the gauge slipped back 0.1 per cent. “JPMorgan and Citigroup earnings again lay bare the hype over potential US tax cuts,” said Ken Odeluga of City Index. “Neither bulge-bracket behemoth knocked the ball out of the park and we think this calls the financial sector’s surge from the doldrums this year into question.”
The Euro Stoxx 600 closed flat while London’s FTSE 100 set a record closing high after gains of 0.3 per cent. Asian stocks were the session’s outperformers as Hong Kong’s Hang Seng index reached decade highs and Tokyo’s Nikkei 225 Average rose 0.4 per cent to its best intraday level since 1996. “Despite a slight strengthening in the yen, the Nikkei rose again to a fresh 21-year high in the process as new opinion polls suggested that PM Shinzo Abe’s LDP is on track for a decisive victory at the October 22 elections,” said Chris Scicluna of Daiwa Capital Markets.
Forex The early pressure on sterling came after Michel Barnier said talks on the terms of Britain’s departure from the EU were at “deadlock”. The pound was 0.6 per cent weaker at one stage before recovering after a report in Germany’s Handelsblatt newspaper that the EU could offer Britain a two-year transitional Brexit deal. The dollar index rose 0.1 per cent as the gauge tracking the world’s reserve currency against six peers found support following its decline over the past four sessions approached 1 per cent. The euro dipped from two-week highs to trade 0.2 per cent lower at $1.1832 after the European Central Bank’s chief economist Peter Praet suggested a longer extension of its bond-buying programme. The yen is 0.2 per cent stronger at ¥112.25 per dollar.
Commodities Oil prices pared their worst losses for the day after stockpiles of US crude fell more than expected last week. Brent crude fell 1.1 per cent to $56.28 a barrel while US marker West Texas Intermediate slipped 1.4 per cent to $50.61 a barrel but both measures improved by about half a dollar in the wake of the US inventories release. Gold climbed 0.1 per cent to $1,293.01 an ounce after being lifted the previous session by the dovish tone of the Fed minutes. Fixed income Government bond markets made modest moves on Thursday after showing little reaction to the Fed minutes release late on Wednesday. Yields on 10-year Treasuries were 2 basis points lower at 2.32 per cent but the more rate-sensitive two-year US yields were flat at 1.52 per cent. German 10-year bonds followed suit by dipping 1bp to 0.44 per cent while Spanish bonds continued their recovery with 10-year yields moving 1 basis point lower to 1.64 per cent.