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US Thanksgiving day holidays will likely mute market activity today and tomorrow, which might be a welcome development in view of the recent weakness in U.S. indices, even though small recoveries were posted yesterday. The more the overall softness persists, however, the more the question will become whether policymakers will react, namely whether the Fed will hold back from raising interest rates.
The probability of a ¼ point December Fed hike has only receded marginally from last week, currently standing at 73% from 76% a week ago. However, it is what the Fed will do next year that is becoming the main issue. US durable goods orders data for October released yesterday sank by -4.4% m/m, with transportation (-12.2%) and defense (-38.9%) leading the decline. Furthermore the September data was also revised lower to -0.1% from 0.7% previously. Other data also showed consumer confidence softer than expected and jobless claims higher. Overall the data adds to evidence that the U.S. economy is already beginning to slow, and this may be another factor that the Fed will have to weigh when it comes to how much to tighten by in 2019.
On our recent trip to the U.S. the broad view we received was that the Fed could hikes rates by 3-4 times next year. However, markets have never really endorsed this view and are currently only seeing scope for 1-2 further rate hike next year. Our own view has been to expect 2 hikes as well as we also anticipate that the economy will slow, due to the combined effect of cumulative monetary policy tightening and the impact of trade tariffs. If more data to support this view begins to be seen then Fed Chair Powell is likely to start making the case for more moderate rate moves at the December FOMC meeting, potentially dialling back on the current 3x25bps ‘dot-plot’.
Treasuries traded in a tight range. Yields on the 2y UST, 5y UST and 10y UST closed at 2.81% (+1 bp), 2.89% (flat), 3.06% (flat) respectively.
Regional bonds too remained flat. The YTW on the Bloomberg Barclays GCC Credit and High yield index remained unchanged and credit spreads tightened slightly to 188 bps.
According to reports, EA Partners 1 failed to get consent for sale of claims.
The USD was sluggish overnight and looks likely to remain so in view of Thanksgiving holidays in the US impacting liquidity over the next 48 hours. Weak U.S. economic data yesterday maintained a soft overall tone to the USD, with reports circulating that the Fed may pause its tightening program in spring next year.
Developed market equities rebounded from the recent sell-off. However, volumes remained thin ahead of holiday in the US. The S&P 500 index and the Euro Stoxx 600 index added +0.3% and +1.1% respectively.
Regionally, markets were largely positive. The DFM index and the Tadawul added +0.2% and +0.1% respectively. There was very little in terms of specific stock movements.
WTI recovered after falling to $53.98 following the EIA inventory data which showed a 4.9mn barrel rise in crude stocks. Markets had been expecting a 3.0mn increase, though the API reported a 1.5mn barrel draw on Tuesday. Meanwhile, gasoline supplies, seen flat, actually fell 1.3mn barrels, while distillate stocks were down 100k barrels versus expectations for a 2.5mn barrel draw. Pre-holiday short covering after the week’s slide, along with an improved risk sentiment, were the main drivers.
Emirates NBD Research
