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Central bankers remain in wait and see mode

1 September 2020

Stock markets were mostly higher overnight, after Wall Street closed mixed yesterday, amid month-end portfolio rebalancing. A strong manufacturing PMI out of China helped to boost confidence, and Hang Seng and CSI 300 lifted 0.3% and 0.2% respectively. Japanese markets struggled for direction, however, leaving the Topix down -0.1%, while the JPN225 lifted 0.1%.

RBA left rates on hold, as expected, with the targets for the cash rate and the yield on 3-year Australian Government bonds unchanged at 0.25%. At the same time the bank decided to increase the size of the Term Funding Facility and make the facility available for longer. RBA Governor Lowe said “the board is committed to do what it can to support jobs, incomes and businesses in Australia”. This didn’t prevent bank stocks from weighing on the overall performance, leaving the ASX down -1.5%, with virus developments remaining in focus.

RBA Governor Lowe also promised that the “Board will maintain highly accommodative settings as long as is required and continues to consider how further monetary measures could support the recovery. It will not increase the cash rate target until progress is being made towards full employment and it is confident that inflation will be sustainably within the 2-3% target bad”. “Low for longer” then, with the willingness to do more if necessary, which is pretty much the stance at most major central banks as the world economy deals with Covid-19.

Meanwhile, a cautiously positive picture seen in European session after a narrowly mixed session in Asia overnight. GER30 and UK100 futures are trading mixed, with the GER30 up 0.6%, the UK future down -0.32%, after returning from the extended weekend. US futures are up 0.1-0.4%, with the USA100 outperforming again.

Bunds are supported in early trade, with the German 10-year yield down -1.4 bp at -0.41%. Other Eurozone bonds are also moving higher, with dovish leaning comments from ECB officials, yesterday adding support. The ECB’s central bank meeting next week is coming into view, as central bankers remain in wait and see mode but with the option of additional measures still on the table, while French central bank head Villeroy continues to promote a more symmetric inflation target as part of the framework review, that would not really change much in substance as the central bank’s inflation target is already medium term and allows for temporary under as well as overshoots. Still, at the current juncture it could help to strengthen the low for longer message.

Today’s calendar is pretty busy, with final manufacturing PMIs for the Eurozone and the UK as well as Eurozone inflation data for August and German jobless numbers for the same month.



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