US
The renewed increase in crude oil prices is weighing on stocks and bonds, while underpinning a firmer USD. Oil prices jumped on fresh Gulf tanker attacks, reports of possible US strikes on Iran before the midterms, and hurricane disruption to US production.
Persistently high energy prices keep risks to inflation, policy rates, and benchmark bond yields skewed to the upside, while favoring energy exporters’ currencies and USD over energy importer’s currencies. US growth outperformance and strong foreign appetite for US securities give USD an added boost.
There was no new information from the September 15-16 FOMC meeting minutes. The key takeaway is that “most participants assessed that another increase in the target range for the federal funds rate would likely be appropriate by year end.” Fed funds futures already fully price in a full 25bps hike to 4.00-4.25% on December 9.
The minutes also suggest US financial conditions give the Fed room to keep hiking. “Many participants commented that, despite the recent rise in longer-term Treasury yields, financial conditions appeared to be supportive of economic growth, with equity prices having risen substantially this year and spreads on corporate bonds having remained narrow.”
Indeed, St. Louis Fed financial stress index signals below-average stress, while the Chicago Fed adjusted national financial conditions index points to still easy conditions.
EUROZONE
EUR/USD is trading heavy under 1.1200. The ECB Account of the September 9-10 policy meeting is due today (12:30pm London, 7:30am New York). At that meeting, the ECB unanimously voted to raise the policy rate 25bps to 2.50%. The Account will likely reinforce the case for further hikes, but the message will look somewhat dated given the recent surge in bond yields.
Above target Eurozone inflation and a firmer growth outlook give the ECB scope to deliver additional hikes. The swaps curve implies nearly 75bps of tightening to 3.25% in the next twelve months. That limits policy divergence with the Fed and the drag on EUR/USD. However, stronger US growth traction relative to the Eurozone and France’s worsening budget crisis keep EUR/USD risk skewed to the downside.
PERU
Peru’s central bank (BCRP) unexpectedly kept the policy rate unchanged at 4.25% for a 13th consecutive meeting. 9 of the 13 analysts polled by Bloomberg had a hike penciled in, including us. BCRP remains relaxed about inflation overshooting its 1% to 3% target range, suggesting no urgency to begin tightening. As such, real rates in Peru can stay negative for longer and undermine PEN.
