Trade talks and Beltway brawls won’t be the only thing worth watching for market participants in the week ahead.
Also on deck are minutes from the September ECB and Fed meetings, where policymakers expressed divergent views on the correct path forward at a pivotal juncture for the global economy.
By most accounts, Mario Draghi faced an unprecedented “rebellion” while trying to marshal support for a comprehensive easing package that ultimately included a rate cut, tiering and the restart of net asset purchases on an open-ended basis.
Read more: Christine Lagarde Inherits ‘Unprecedented’ ECB Split After QE ‘Revolt’
At the Fed, Jerome Powell stared down a trio of dissents, as Eric Rosengren and Esther George stuck to their guns from July, arguing against a rate cut, while Jim Bullard protested in favor of a larger move.
Given the amount of dissension among policymakers on both sides of the Atlantic, traders will be keen on parsing the accounts of the meetings.
In Europe, the data continues to suggest that a recession may well be in the cards and is already here for Germany. The final read on IHS Markit’s Composite PMI for September slipped to 50.1 from the flash print of 50.4. It was the lowest reading since June of 2013 and effectively means the bloc’s economy has stagnated. Meanwhile, headline inflation is now just half of the ECB’s target.
BofA delivered an amusingly downbeat assessment of the situation in a note dated Friday. To wit, from the bank’s European economics team:
We feel uncomfortable. Our GDP tracker points to 0.0% qoq 3Q growth, below our forecasts. It could get worse. The trade war, in form of the Airbus vs Boeing standoff, has arrived in Europe. China remains weak. The US looks wobbly. The UK is busy with Brexit. The spreading of German manufacturing weakness slowly turns from risk to reality. Euro area PMIs suggest spillovers through the production chain and to the services sector. The consumer could be next. It is high time to discuss policy options. There aren’t that many. The ECB has reached its limits, and has undermined its last package so much by now that it looks toothless. Fiscal policy can be the only medication now, but if there is progress somewhere, it is too microscopic for us to see.
That pretty much sums it up. Good luck to Christine Lagarde.
In the US, markets will be interested in any color around how Fed officials viewed the acute funding squeeze that showed up on September 16 and 17. Powell came across as insufficiently concerned in the post-meeting press conference. Ultimately, the New York Fed wrested back control by scheduling overnight repos and conducting a series of term ops, but the message was clear: A permanent solution is needed, and markets are now all but sure that “organic” balance sheet expansion (i.e., “QE Lite”) with begin next month. The fate of the long-rumored standing repo facility is still up in the air.
Although the minutes will obviously be stale in light of subsequent developments, it will still be interesting to hear what officials were saying as the drama unfolded. “An in-depth discussion of the FOMC’s assessment of funding pressures would be swell, especially if we were also to get a sense of the debate on the merits of the different policy tools on offer (standing repo facility, outright SOMA purchases, etc)”, BofA wrote late last week, reiterating that the bank’s rates team expects funding pressures “to reemerge into year-end”.
Read more: The Funding Storm Has Passed. Now What?
The dots are now ambiguous, and recent commentary by Fed officials hasn’t done much to clear things up, although the incoming data (e.g., horrible ISMs and the sluggish AHE print that accompanied September payrolls) suggests there’s room to justify a third consecutive rate cut.
(BofA)
“The market is pricing a scenario in which US data have deteriorated enough to trigger a new Fed insurance cut, but not enough to foretell impending global doom”, Barclays said over the weekend, adding that they’re “looking for signals about whether the committee has a high or low bar for further easing”.
On the data front in the US, this week brings PPI, CPI and consumer sentiment.
Full calendar via BofA
I’ll add-in my FRED chart and just say that something is going on in the world of money. My gut feeling is that something weird happened as treasury rates fell fast, over the last few months, (years) making both the Fed & Treasury uncertain about how to manage collateral. Maybe I’ve read one to many posts by Jeff Snider, but I wonder if all the players in the IOER tri-party game collectively decided they didn’t want junk for collateral and that caused some weird lag in trading, or hesitations.
The following FRED chart shows that as trump entered office, Treasury changed its behavior with TGA and then radically went the other direction a year later — pulling away funds as IOER rates climbed. It looks like one or the other was trying to hit a fast moving target – and the volatility of rates impacted everyones strategies. That concept opens up a weird black hole as to how to value treasuries in terms of yield and price and thus what role that played in hedging bets or some dynamic related to the trump budget and the deficit …. which may have been dependent on the Fed having a certain amount of capital surplus needed for the next budget negotiation. Is that too weird?
https://fred.stlouisfed.org/graph/?g=p5hX
I have long been suspicious of the role of the IOER component that your displayed chart has a tendency to place in good context… Thinking you’re on to something!!!
Parts of Jeffery Snider posts are sometimes tough to understand at least for me….