The IMF lowered its global growth forecast to 2.9% but boosted its inflation projection from 5.2% to 5.8% for next year, warning the global central banks that they should hold on to their tight monetary policies if they want to keep inflation under control. That’s not something that investors wanted to hear. Happily, the overall market reaction to the IMF’s inflation forecast was: ‘Whatever’. The US 2-year yield remained steady around the 5% level on the growing choir of Federal Reserve (Fed) members singing the dovish tune and the 10-year yield consolidated within the 4.60/4.65% range.
Due today, the FOMC minutes will remind investors that ‘the rates will stay higher for longer’ if inflation remains above target. Going into the data, the expectation is a mostly softening inflation both for producer and consumer prices. Despite the rising crude prices, US gasoline prices have been falling since mid-August due to a collapse in refiner margins. The latter could temper a seasonally strong September spending. But how long gasoline prices will remain on a falling path is yet to be seen. The risks in US yields remain tilted to the upside despite the dovish Fed talk and the safe haven inflows into the US treasuries following mounting tensions in the Middle East. The US 2-Year yield remains 50bp above the upper range of the Fed funds policy target.
But anyway, regardless of where the risks are tilted, the softer yields please equity investors. The S&P 500 extended its rebound into the third straight session yesterday, and the Nasdaq pulled out its 50-DMA resistance and closed above this level. Chinese equities, on the other hand, rallied after the IMF recommended Beijing to take ‘forceful action’ on its real estate troubles, and on news that China was considering fresh stimulus measures to boost growth, anyway. Let’s see if this time is the charm – I am not convinced.
In the FX, the US dollar is giving back strength globally, the EUR/USD extended gains above the 1.06 mark, and Cable is preparing to test the 1.23 offers.
The barrel of American crude sees solid support near the 50-DMA ($85.50pb level); mounting tensions in the Middle East threaten the bears; daring a short position in oil is risky beyond a corrective move. The good news is that OPEC now has a decent spare capacity to stabilize global oil prices thanks to their production cut strategy to push oil prices higher. The bad news is the cartel wants to see oil prices surge. In the actual geopolitical context, crude oil could further rise toward the $90 - $100pb range but a rise beyond the $100 level is unlikely with the morose global economic outlook. On the downside, we almost have insurance that the prices won’t sink below the $80pb level.