The Fed Is Still On Track For Two More Rate Hikes

Market movers today

It is time for euro area Flash PMI for July. PMI manufacturing has declined every month this year and we look for another small decline in the July reading from 54.9 to 54.4 as trade worries are expected to weigh on activity. However, the level for PMI is still clearly above the long-term average of 51.9. In the afternoon, we alongside consensus expect both the US manufacturing and Service PMIs to fall back slightly.

In Scandinavia, Statistics Norway are due to release the quarterly manufacturing confidence indicator. We look for a small rise in the manufacturing composite indicator (to 6.5-7.0) as we expect the impact of a higher oil price to dominate somewhat weaker global demand. In terms of the details, we will look out for new order composition. We do not expect the release to have any significant market impact.

The central banks of Turkey and Hungary both have rate announcements today, but both are expected to keep rates unchanged.

Markets will be awaiting Wednesday’s meeting between US President Donald Trump and President of the EU Commission, Jean-Claude Juncker. Trump’s threat to impose tariffs on autos has increased tensions. However, his economic adviser Larry Kudlow has hinted that the US is negotiating with the EU. Therefore, a deal may be coming.

Selected market news

Near-term market focus remains on the impact on global growth/monetary policy from trade wars, a worsening US-Iran relationship and the impact of higher bond yields amid speculation the Bank of Japan (BoJ) is contemplating fine tuning its yield curve control (higher yields).

In terms of the latter, the global fixed income sell-off gained momentum last night and 10Y UST jumped 6bps to 2.95%. The combination of positive risk sentiment and fears that the BoJ will scale back stimuli next week by changing the yield target weighed on sentiment. The US curve 2s10s steepened for the second consecutive day after it hit an 11-year low level on Friday at 24bp. It is currently at 33bp. However, we think the US curve steepening is premature. The Fed is still on track for two more rate hikes this year and a change in the BoJ yield control is far too early given a still weak Japanese inflation picture.

In FX markets, a recent USD/JPY decouple from 10Y rates spreads suggests investors have positioned for a possible policy twist from the BoJ at the 31 July meeting. We do not expect the BoJ to adjust its policy next week, however, and if we are right, it should have a positive impact on the JPY and Japanese FI market. We will send out a BoJ meeting preview in the coming days.

In China, the authorities continue to ease economic policy amid slowing housing/construction and, not least, Donald Trump threatening to impose further US tariffs on Chinese exports. Yesterday, the Chinese central bank injected USD74bn into the banking system – the largest ever using its ‘Medium-term Lending Facility’ – and later the government announced new fiscal measures as fiscal policy is becoming ‘more proactive’ and flexible to ‘external uncertainties’. Easier monetary policy has, in our view, been the key driver behind CNY weakness.

In Scandi FX, the SEK and not least the NOK erased most of their Monday gains as renewed support to USD crosses (incl. USD/Scandies) added downward pressure on to the oil price. That said, we still regard EUR/NOK and EUR/SEK to be near-term range plays.