Weekly fixed income review

Week to 1 November 2019

  • The Federal Open Market Committee (FOMC) cut the benchmark Federal Funds Rate by 25bp to a range of 1.5% to 1.75%, consistent with market expectations. Notable was the removal of a key clause that previously stated it was committed to “act as appropriate to sustain the expansion”, indicating that the Federal Reserve (Fed) may pause further rate cuts. Two members of the FOMC voted against the rate cut – Esther George of Kansas City, and Eric Rosengren of Boston.
  • The Brazilian real reached 11-week highs, following an apparent hawkish shift in the Banco Central do Brasil’s (BCB) monetary policy outlook, despite inflation continuing to print below target. The BCB nonetheless cut its benchmark Selic interest rate to a new record low of 5.00%, as expected on Wednesday. The Mexican peso softened over the week after data showed that the economy slowed in the third quarter, falling short of investor forecasts.
  • Japanese government bonds held steady over the week after the Bank of Japan decided not to change current policy targets of -0.1% for short-term interest rates and 0% for 10-year bond yields, while tweaking its forward policy outlook. While the announcement had little impact on Japanese bonds, the market derived support from the rally in US bonds that occurred after the Fed cut interest rates for the third time this year.
  • Tax revenues in Germany are expected to end the year 4 billion euros higher than previously estimated, the German finance ministry announced. This improved forecast comes despite a slowdown in the German economy, and will likely apply pressure on the government to use greater fiscal measures to counter economic weakness. Incoming European Central Bank President, Christine Lagarde called on Germany and the Netherlands to make greater use of fiscal measures to stimulate their respective economies, stating “those that have the room for manoeuvre, those that have a budget surplus, that’s to say Germany, the Netherlands, why not use that budget surplus and invest in infrastructure? Why not invest in education? Why not invest in innovation, to allow for a better rebalancing?”
  • In US credit while corporate spreads marginally tightened, the combination of both a return of corporate supply and a hawkish tone from Fed chairman Powell began to weigh on risk sentiment. Amid a rise in new issuance, dealer inventories rose by $10bn this week as investors made room in their portfolio for these deals as well as over $40bn in the first two weeks of November. There were deals from Comcast, Braskem and Ashtead amongst others.

Chart of the Week: The Brazilian real reached 11-week highs after the BCB turned hawkish

Chart of the Week The Brazilian real reached 11-week highs after the BCB turned hawkish_01.11.2019

Source: Bloomberg. Data as at 01 November 2019.

Bloomberg statistics_01_Nov_2019

Source: Bloomberg, 01 November 2019

Economic calendar

4 November: European market manufacturing PMI
5 November: Australia interest rate decision
6 November: European retail sales
7 November: UK Bank of England interest rate decision

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