Powell back in the spotlight

Chris Scicluna
Emily Nicol

Overview:
All eyes today will be on the Fed, where the latest monetary policy announcement seems bound to bring a 25bp rate cut. The likely message regarding the future policy outlook, however, is rather more uncertain. And in his press conference, Fed Chair Powell might be accused of having been asleep at the wheel, after repo market pressure boiled over yesterday – the NY Fed is set to hold a second special repo operation today to help maintain the fed funds rate within its (current) target range of 2-2¼%.

With investors obviously keenly awaiting Powell’s latest utterances, stock markets in the Asia-Pacific region today reported a mixture of gains and declines. In Japan, where exports fell on a year-on-year basis by the most since January but imports plunged at an even faster rate (detail below), the eight-day rally in the Topix came to a halt, declining 0.5%. Among other moves, energy producers weighed after the oil price slipped back on reports that Saudi Arabia had restored about half of the output lost its Abqaiq facility and that it expects to return to pre-attack levels by the end of the month – Brent crude is currently close to $64.7bbl down from close to $68 this time yesterday. But while US equity futures are pointing down too, European markets are now largely up from yesterday’s close and the main indices in China, Taiwan and Korea all reported gains, e.g. the CSI300 closed up 0.5% while Taiwan’s main index rose at the same pace.

In the bond markets, UST yields have moved lower (10Y yields down a couple of bps to below 1.79%) while JGBs made gains too (10Y yields down almost 3bps to close to -0.19%) as the BoJ’s two-day policy meeting – which seems unlikely to bring a substantive policy adjustment – got underway. Following some further weak European new car registration data, core euro area bonds have opened a touch firmer too. Given uncertain politics, bonds from Italy and Spain, however, have underperformed a touch.

Of course, BTPs already weakened significantly yesterday after former PM Matteo Renzi announced his departure from the Democratic Party to form his own new party, albeit maintaining support for the new M5S/PD coalition. While the development raises uncertainty about its longevity, we continue to assume that the government will remain intact for at least year – if it didn’t, the parties involved would be on course for a hiding in any new poll. Spain, meanwhile, is on track for yet another general election on 10 November after attempts to form a majority-backed government, which have continued since the previous poll in April, finally came to a close. As before, however, with the pro-European Socialists of acting Prime Minister Pedro Sanchez set to fare best at the ballot box, we are not overly perturbed by the prospect a new elections in Spain (of course, the contrary would be the case if Italians were suddenly forced to return to the polls).

Japan:
Today’s trade report suggested that, against the backdrop of the challenging external environment, there was a further notable decline in shipments of Japanese goods in August. In particular, the value of exports fell for the second successive month and by a steeper 2.8%M/M, to leave them more than 8% lower than a year earlier, the steepest year-on-year drop since January. So, while the value of imports was down more than 2%M/M (12%Y/Y) – particularly due to the decline oil prices that month – the headline adjusted trade surplus widened to ¥130.4bn.

Within the detail, the weakness was broad based. For example, exports to China were down more than 12%Y/Y, weighed down by a near-40%Y/Y drop in shipments of semiconductor manufacturing machinery. Exports to the US were almost 4½%Y/Y lower, with a notable drop in shipments of motor vehicles (13%Y/Y). And shipments to the EU were also down more than 1%Y/Y, with weaker demand particularly for general and electrical machinery.

Admittedly, some the weakness in August reflected price effects. Indeed, exports volumes were down a slightly smaller 6%Y/Y. And when also adjusting for seasonal effects, the BoJ's trade figures today suggested a more moderate decline on the month, with the 0.9%M/M drop merely reversing the increase seen in July which had followed a more than 4%M/M increase in June. So, on average so far in Q3, export volumes were almost 2% higher compared with the average in Q2. And with imports down more than 2½% M/M in August – to leave them broadly flat compared with the average in Q2 – today's figures suggested that net trade is on track to provide a sizable contribution to GDP growth in Q3.

Euro area:
While not unsurprising, this morning's European car registration figures proved extremely disappointing, with the 8.4%Y/Y decline in the euro area in August the steepest since December after modest growth in the previous three months. There were notable declines in France (-14.1%Y/Y) and Spain (-30.8%Y/Y), while registrations were also lower in Germany (-0.8%Y/Y) and Italy (-3.1%Y/Y). Some of this weakness, however, reflected base effects following the surge in registrations this time last year (up 31.2%Y/Y in the euro area in August 2018) ahead of the introduction of new emissions testing standards in the autos sector in September 2018. Nevertheless, registrations were still down 3.6%Y/Y over the first eight months of the year, suggesting a weakening trend over the year as a whole. And with new orders suggesting little sign of life in Germany, we won’t hold our breath for an improvement anytime soon.

Later this morning, final euro area CPI data for August are set to confirm very subdued price pressures, with headline inflation highly likely to align with the preliminary reading of 1.0%Y/Y, unchanged from July’s 2½-year low. While core CPI was also unchanged at 0.9%Y/Y in the flash estimate, due to rounding there is a risk this will be nudged slightly higher, although the revision will be essentially meaningless – underlying inflation would still merely be bang in line with the average of the past three years, suggesting a long way to go before the ECB’s precondition for ending QE and raising rates has been reached.

Other euro area economic data due today include construction output data for July, which should report the first month of growth in the sector since February. In the markets, finally, Germany will sell super-long-dated bonds.

UK:
Ahead of tomorrow’s BoE meeting, today brings the August inflation data. We expect the headline rate to fall by 0.3ppt to 1.8%Y/Y, matching the lowest rate since end-2016, principally on the back of lower energy prices. But core inflation is also expected to edge lower, by 0.1ppt, also to 1.8%Y/Y. These data, however, will have negligible impact on tomorrow’s MPC announcement, which – for all intents and purposes – is likely to be little changed from August. Meanwhile, the historical Supreme Court hearing into the legitimacy of PM Johnson’s Parliament shutdown continues today, but don’t expect a judgement before tomorrow.

US:
Of course, all eyes later today will be on the Fed’s latest policy announcement on Wednesday. While the target range for the Fed Funds Rate is widely expected to be lowered by 25bps to 1.75-2.00%, the Fed’s policy statement, updated economic forecasts and dot-plot charts, as well as Chair Powell’s post-meeting press conference will be closely watched for insight into the near-term policy path. The dot-plot is bound to shift lower this year and next, probably to suggest an additional cut this year, and perhaps also with a tighter distribution than back in July. To maintain a supportive tone, Powell is likely also to repeat the FOMC’s determination to take action to sustain the expansion against the backdrop of heightened external risks to the outlook. But also expect Powell to be challenged in the press conference on this week’s extreme pressure in the repo market. Data-wise, finally, August housing start and building permits data are due.

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