All eyes on the Fed

Emily Nicol

Ahead of the conclusion of tonight’s FOMC meeting, and after US and European equities edged slightly lower yesterday, it was a mixed performance in Asian markets today. China’s CSI300 fell a further ½%, with similar declines in the Hang Seng and Korea’s KOSPI. In contrast, the TOPIX eeked out a modest gain (0.2%), perhaps taking some support from some positive Japanese retail sales figures (see more details below). Meanwhile, Japanese and Aussie bond markets followed Treasuries higher, with 10Y JGB yields down 1bp to -0.13%, still close to the top of range of the past five months, while 10Y ACGB yields declined 4½bps to 1.13%, nevertheless reversing only half the gain seen the previous day despite the latest Aussie CPI figures further underscoring the weak inflationary environment.

In Europe, govvie bonds have opened a touch weaker, with Q3 GDP growth from France matching our expectations (but exceeding the consensus forecast) of 0.3%Q/Q. But the European Commission’s sentiment survey due later this morning is likely to underscore that economic conditions across the euro area as a whole remained downbeat at the start of Q4. Elsewhere, there was predictably limited market reaction to the result of last night’s vote in the House of Commons, which saw UK MPs vote in favour of an early General Election. So assuming this Bill receives approval in the House of Lords and Royal Assent over coming days, Parliament will be dissolved in the coming week, ahead of the election on 12 December.

In Japan, there was further evidence of a surge in demand ahead of the consumption tax hike in the latest retail sales release, with the more than 7%M/M rise in September double the expected increase and the largest since the pre-tax hike jump in March 2014. This left sales up 9% compared with a year earlier. Within the detail, there was double-digit monthly growth in sales of general merchandise (14.8%M/M, the most since March 2014), household machinery and appliances (28.2%M/M, the most since November 2010) and vehicles (13½%M/M, the most since the pre-2014 tax hike surge). Given also the strength in August, retail sales were up an impressive 3.2%Q/Q in Q3, a pace of growth last exceeded by the 4.4%Q/Q rise in Q114. While retail sales figures do not always provide an accurate guide to overall household consumption growth, today’s release strongly suggests a solid contribution to GDP growth in Q3.

Euro area:
It should be a busier day for euro area economic releases today, with the European Commission’s business and consumer surveys – which arguably provide the most comprehensive guide to euro area GDP – for October to be accompanied by the first estimates of Q3 GDP and October inflation at the national level. In particular, with the flash consumer confidence indicator having deteriorated at the start of the fourth quarter (falling 1.1pts to -7.6), and little improvement expected in business conditions, the headline euro area ESI is expected to have declined to a more-than 4½-year low, implying ongoing subdued euro area GDP growth at the start of Q4.

Ahead of tomorrow’s first estimate of euro area Q3 GDP, this morning’s equivalent figures from France came in bang in line with our expectations, with GDP growth unchanged for the third consecutive quarter at 0.3%Q/Q. Within the expenditure detail, household consumption accelerated slightly in Q3 to account for the largest contribution to growth (0.3ppt). And with private investment providing a boost to growth (0.2ppt) for the sixth consecutive quarter and private inventories adding a further 0.1ppt, domestic demand was the strongest for two years. Indeed, while exports posted a modest increase (0.3%Q/Q), a surge in imports (1.4%Q/Q) left net trade subtracting 0.4ppt from growth, the most since the start of 2017.

Today will also bring flash CPI estimates from Germany and Spain, with the EU-harmonised inflation rates expected confirm still very weak price pressures in October. Indeed, Spanish figures just released showed that headline CPI was unchanged at just 0.2%Y/Y. Finally, German labour market figures for the same month will also be published, while Germany will sell 5Y Bunds and Italy will sell 5Y and 10Y fixed-rate bonds and 5Y floating-rate bonds.

Of course, all eyes in the US today will be on the conclusion of the latest FOMC meeting. With economic momentum slowing, risks to the outlook skewed to the downside, and various Committee members having noted the importance of acting pre-emptively, we expect the FFR target range to be cut by 25bps to 1.50-1.75%. The vote split will be closely watched – September’s meeting saw two members vote to keep rates unchanged, while one member voted for a 50bps cut – as will Chair Powell’s post-meeting press conference for any insight into the near-term policy outlook.

This afternoon will also bring the first estimate of US Q3 GDP, which is expected to show that growth moderated further last quarter to 1.6%Q/Q ann. which (aside from the Government shutdown related slowdown in Q418) would be softest pace for almost four years. And ahead of Friday’s payrolls report, today will also bring the ADP employment report for October.

Ahead of next week’s RBA policy meeting, the domestic economic focus overnight was on the ABS release of Q3 CPI figures. These broadly aligned with expectations, with headline inflation nudged slightly higher for the second successive quarter, by 0.1ppt to 1.7%Y/Y. While this aligned with the RBA’s most recent inflation forecast, it still remained firmly below the RBA’s 2-3% inflation target range. And various core measures suggested underlying price pressures remained subdued too. For example, the trimmed mean CPI – the RBA’s preferred core measure – was unchanged at 1.6%Y/Y, while the weighted median CPI fell a further 0.1ppt to 1.2%Y/Y, the lowest for three years and the second-weakest reading since the series began in 1983. As such, while we expect the RBA to keep rates unchanged at its meeting on 5 November, it seems bound to leave the door open to further easing in due course.

Categories : 

Back to research list


This research report is produced by Daiwa Securities Co. Ltd., and/or its affiliates and is distributed by Daiwa Capital Markets Europe Limited in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority and is a member of the London Stock Exchange and Eurex Exchange. Daiwa Capital Markets Europe Limited and its affiliates may, from time to time, to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities referred to herein (the “Securities”), perform services for or solicit business from such issuers, and/or have a position or effect transactions in the Securities or options thereof and/or may have acted as an underwriter during the past twelve months for the issuer of such securities. In addition, employees of Daiwa Capital Markets Europe Limited and its affiliates may have positions and effect transactions in such securities or options and may serve as Directors of such issuers. Daiwa Capital Markets Europe Limited may, to the extent permitted by applicable UK law and other applicable law or regulation, effect transactions in the Securities before this material is published to recipients.

This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available.

Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at  /about-us/corporate-governance-regulatory. Regulatory disclosures of investment banking relationships are available at