E Markets: Neutral

The stick-shift is likely not far from the 8-track tape. Dinosaurs in the history of technology wrapped around transportation and entertainment, but they remain part of the history and culture. Describing neutral was much more straightforward when you had a clutch. Perhaps that is the lesson for the Fed Chair Powell as the removal of the “accommodative stance” phrase sent markets into a overdrive yesterday and that despite a heavy slate of economic data, more central bank decisions and pronouncements, it’s the key driver with a solid second place to the Italian Budget. Latest headlines on Italy are that the coalition parties have agreed on a deficit above 2.0% of GDP, but that Fin Min Tria is holding to a target of 1.6% of GDP under threat of resignation with meetings ongoing today. This leaves the EUR vulnerable and the USD up on the day. The issue for the USD and US bonds rests on how wide neutral rates are to the FOMC – 2-3% is the best guess after the dot plots with consensus for a December hike and 2-3 more in 2019 from the market. The overall mood for a FOMC that bought wiggle room to be slower is surprisingly negative with central bankers clearly underscoring the global uncertainty of trade first and foremost. This puts the C/A and growth of the USD against the rate differentials and path of other central banks as the key for understanding the forecasts for FX but for risk overall, its less clear as a weaker USD is also less reliable as a safe-haven. We are in neutral in trend and with the FOMC meaning a range with 92.50 against 95.50 key.

Question for the Day: Is Asia the risk for 2019? Markets maybe a bit vulnerable to rethinking the consensus views into October with Goldilocks less clear post the FOMC. The view on growth in 2019 also is a risk with many expecting a US slowdown now less sure and with more doubt about Asia next year as trade hopes wane. The FT Focus survey on Asian 2019 growth is a must read for all those in EM looking for a bottom.

The 19 largest economies across emerging Asia will expand by 5.8 per cent in 2019, according to the forecasts collated by FocusEconomics. While this is highly likely to outstrip growth anywhere else in the world, it would represent a slowdown from a projected 6 per cent growth rate this year and would be the weakest reading since 2001, when regional growth fell to 5 per cent as the tech bubble burst.

What Happened?

RBNZ leaves OCR unchanged at 1.75%– as expected – downside risks to growth remain despite 2Q GDP. The RBNZ included “global trade tensions” in the one-page statement, which indicates its significance to the monetary policy outlook and is a downside risk. “Trade tensions remain in some major economies, increasing the risk that ongoing increases in trade barriers could undermine global growth,” the RBNZ said. On the other hand, the RBNZ reiterated that robust global economic growth and a lower New Zealand dollar exchange rate is expected to support demand for New Zealand’s exports.

BOJ Kuroda: Will keep easy policy even with expanding economy. In a speech at the annual meeting of the Japan Securities Dealers Association, Kuroda also said the BOJ would maintain “its firm stance of achieving the price stability target” of 2%. Kuroda remained optimistic on Japan’s economic outlook, saying, “Japan’s economy is expanding moderately, with a virtuous cycle from income to spending being maintained in both the corporate and household sectors.” The economy is likely to continue its moderate expansion, although the BOJ needs to pay attention to recent protectionist developments. Kuroda also noted there were no observed signs of overheating in financial conditions.

China August industrial profits slow to 9.2% y/y at CNY519.69bn after 16.2% in July. Industrial profits for the Jan-Aug period, dragged by the plunge in August, rose by 16.2% y/y to CNY4.42 trillion, slowing down from the 17.1% y/y growth recorded in July. Out of 41 industries, 34 industries, including most mining and manufacturing, saw profits rise y/y, while 7 saw profits decline. State-owned enterprises’ profits rose 26.7% y/y to CNY1.35 trillion, compared with a 30.5% increase in Jan-Jul.

Indonesia Central Bank raised rates 25bps to 5.75%– as expected – cites C/A and global uncertainty.“The decision is consistent with ongoing efforts to lower the current account deficit within a manageable threshold while maintaining the attractiveness of the domestic financial markets, thus further strengthens Indonesia’s external resilience despite widespread global uncertainty….”

ECB August M3 slows to 3.5% y/y after 4% – less than 3.8% expected. The M1 growth also slows to 6.4% from 6.9%. The private loans to households rise to 3.1% after 3% – as expected – while private loans to non-financials rose to 4.2% from 4.0%.