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Edward Bell - Commodity Analyst
Published Date: 14 November 2019
All eyes were on Washington, DC overnight as Fed Chair Jerome Powell gave a testimony to Congress and the public impeachment hearings into US President Donald Trump got underway. Powell told Congress that current monetary policy was “appropriate” given the conditions in the economy but also did note that some “noteworthy risks” remain. In general, Powell’s comments reaffirmed the Fed’s ‘on hold’ stance while not completely ruling out another rate cut if there was a “material reassessment” to the growth outlook. Powell also hit back against Trump’s call earlier in the week for the Fed to implement negative rates, saying they wouldn’t be appropriate given that growth and employment in the US are quite strong relative to economies that have introduced a negative rate policy.
Public testimony into the impeachment of President Trump got underway yesterday with statements from the acting US ambassador to Ukraine and another State Department official. The inquiry into whether President Trump requested the Ukrainian government to investigate a political rival will preoccupy policymakers in the US and likely detract from pressing issues of whether the US and China can achieve any initial trade deal.
Highlighting the concern for a trade deal was a further slowdown in China’s economy. Industrial production in China slowed in October, rising by 4.7% y/y, down from 5.8% previously and well off market expectations. Fixed asset investment also dipped to its slowest pace since 1998, rising by just 5.2% ytd. The scale of slowdown in China’s economy means that even if a small-scale trade deal with the US can be achieved, it may not be enough to really help turnaround growth and further stimulus measures may be needed to prevent growth dipping further.
India’s CPI for October 2019 came in at 4.62% y/y, higher than consensus expectations of 4.35% and previous month’s reading of 3.99%. This is the first time in the current monetary cycle that inflation has breached Reserve Bank of India’s median target of 4%. Prices were driven higher by 6.93% y/y increase in food and beverage segment which includes vegetables. The latest reading does throw a spanner in central bank’s drive to ease monetary policy in their bid to revive growth. However, the weak industrial production data and probable sub 5% GDP growth reading towards the end of this month is likely to force the central bank’s hand in ignoring inflation till growth revives.
Source: Bloomberg, Emirates NBD Research
It was another volatile session for Treasuries as investors grappled with a comments from the Federal Reserve Chairman Jerome Powell and fresh concerns over trade talks between the US and China. Yields on the 2y UST, 5y UST and 10y UST closed at 1.63% (-3 bps), 1.69% (-4 bps) and 1.88% (-5 bps) respectively.
Jerome Powell reaffirmed his views that rates are appropriate despite risks to outlook. He also said that the full benefits of the rate cuts are yet to be felt in the economy.
Regional bonds moved in line with benchmark. The YTW on Bloomberg Barclays GCC Credit and High Yield index dropped 2 bps to 3.31% and credit spreads widened to 152 bps.
This morning AUS is the softest performing major currency, AUDUSD trading 0.60% lower at 0.67974. The AUD found itself under pressure after economic reports showed that 19,000 jobs were list in October following a gain of 12,500 jobs the previous month. This change has taken the unemployment rate up to 5.3% compared with 5.2% the previous month. This latest move has taken the price back below the 50-day and 100-day moving averages (0.6818 and 0.6844 respectively). This is the first time in a month that the ptice is trading below the 50-day moving average and should the price close the week below this level, it could result in a break of the currently daily uptrend that has been in effect since the start of October.
Developed market equities pared early session gains as trade concerns crept back. The S&P 500 index added +0.1% while the Euro Stoxx 600 index dropped -0.3%.
Regional markets closed mixed. The DFM index and the Tadawul dropped -0.5% and -0.6% respectively. Emaar-related names dragged the DFM index lower with Emaar Properties and Emaar Development losing -0.7% and -1.6% respectively.
Oil prices added aroun 0.5% in both Brent and WTI overnight thanks to a modest drop in inventories reported by the API and comments from OPEC’s secretary general that non-OPEC supply may be lower going forward. Brent futures continue to rise this morning, up by around 0.4% at USD 62.60/b while WTI is up nearly 0.5% at USD 57.4/b.
The EIA released its latest short-term perspective on oil markets and revised up its supply growth forecast for the US to 1m b/d in 2020 from 910k b/d previously. The move comes at odds with downbeat assessments for growth from shale oil executives.