Markets remain relatively unnerved around the looming shutdown

Markets

A White House meeting between US President Trump and congressional leaders from both political sides to avoid a government shutdown ended without a deal yesterday. Vice-president Vance believes that we’re effectively headed into a shutdown, obviously blaming it on Democrats. They rejected a short-term funding resolution which would have provided funding through November 21st and buy time for negotiations and crafting full-year spending bills. Democrats demand healthcare provisions before engaging their support. The funding bill for the new fiscal year will today again be presented in US Senate, where Republicans’ majority (53-47) is too small to get the notion through without Democratic support (60 votes required). In case of a shutdown, non-essential services will be suspended including the Bureau of Labour Statistics. That means we won’t get weekly jobless claims and especially the payrolls report later this week. If a shutdown runs until mid-October, publications of trade data, retail sales, consumer prices and producer prices are at risk as well. Federal workers will be furloughed with the White House last week suggesting to use the occasion to lay them off rather than allow them to return to work when funding is restored. Markets remain relatively unnerved around the looming shutdown. US Treasuries won ground yesterday, but in a global bull steepening move. We have the impression that end-of-quarter extension buying and lower oil prices (Brent $67.5/b from $69.5/b) related to rumours on another OPEC+ output rate hike next month carried at least as much weight. Daily changes on the US yield curve varied between -2.2 bps (2-yr) and -4.5 bps (30-yr) with German yields closing 0.7 bps (2-yr) to 5.6 bps (30-yr) lower. From a technical point of view, the US 10-yr yield last week bumped into technical resistance at 4.2% (previous support; neck line of triple top formation). Risk sentiment was mildly constructive with main European and US indices closing up to 0.25% higher with the Nasdaq outperforming (+0.5%). EUR/USD is still going nowhere, changing currently hands around 1.1735.

Minutes of the September BoJ meeting this morning showed a broadening view that another rate hike is needed at some stage. Dovish BoJ board member Noguchi yesterday also gave the nod towards an October rate hike, if data permit. The market implied probability of such action increased further to nearly 70% and contributed to today’s weak 2-yr JGB auction. JPY gets some more breathing room away from support levels at USD/JPY 150 and EUR/JPY 175. Apart from above-mentioned themes, today’s eco calendar contains more national EMU inflation numbers, the US JOLTS report and US consumer confidence. We don’t expect them to alter thinking on near term ECB (stable) and Fed (October rate cut) policy. Trump’s peace plan for Gaza gets a lot of media coverage, but doesn’t impact overall trading/risk sentiment so far.

News and views

Switzerland and the US Treasury yesterday released a joint declaration in which they aligned views on foreign exchange matters. In the rare statement, both promised not to “target exchange rates for competitive purposes” but also recognized that such market interventions are a valid tool for addressing currency volatility or “disorderly” moves. The latter addition is seen as a nod from the US to the Swiss National Bank to act if it deems necessary. That could be the case if inflation threatens to settle below the 0-2% target due to CHF strength and at a time when the policy rate is already 0%. As such, it lowers the risk of the SNB needing to go back into negative rate territory. The Swiss franc yesterday fell, particularly against the euro. EUR/CHF closed around 0.935. In separate news, Switzerland has offered the US to invest in its gold-refining industry as a sweetener in the trade talks aimed at lowering the current 39% import levy. Gold trade with the US, while typically balanced, blew up into a massive surplus in the first quarter of this year amid fears the US administration would levy tariffs on the bullion.

The Reserve Bank of Australia kept the policy rate stead y at 3.6% this morning. The unanimous decision was based on signs that private demand is recovering a little more rapidly than anticipated amid rising real incomes, indications that inflation - while currently within the 2-3% range - may be persistent in some areas and higher than expected in the September quarter and labour market conditions overall remaining stable. The RBA advocates a cautious stance and notes that it is well placed to respond decisively to international developments. It refrained from giving clear hints for the future, saying only that “The Board will be attentive to the data and the evolving assessment of the outlook and risks to guide its decisions.” Australian swap rates rose, pulled higher by the front end (up to +6.2 bps). AUD/USD appreciates to above 0.66, keeping the upward sloping trendline intact.

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