Rates as of 06:00 GMT

Market Recap

A classic “risk on” day as AUD/JPY led the way. Odd, because stock markets aren’t reflecting that so much. The S&P 500 was up only 0.23%, while stocks in Asia are mixed this morning, with no big movers (Tokyo is either down or up, depending on whether you look at TOPIX (-0.19%) or Nikkei (+0.15%), while Australia is -0.29%).

USD failed to gain from a slightly stronger-than-expected US CPI yesterday (headline figure came in at +1.6% yoy as expected, down from 1.8% yoy in the previous month, but core accelerated slightly to 2.1% yoy from 2.0% -- it had been expected to remain at 2.0%) even though US bond yields rose sharply, partly on the CPI and partly due to a poorly received 30yr auction.

Fed Chair Powell’s second day of testimony basically just confirmed the impression he gave on the previous day, namely that they are poised to cut rates. “I think we have signaled, and central banks around the world are seeing weakness everywhere and they’re also providing more accommodation, we’ve signaled that we’re open to doing that, and you’re seeing that in the curve now, you’re seeing that embedded in the United States interest rate curve, the fact that we have said that we’re going to do…” (at which time a senator interrupted him). He added that “the bottom line is the economy is in a very good place and we want to use our tools to keep it there… it’s very important this expansion continue as long as possible”.

We also heard from a large niumber of other FOMC members. Atlanta Fed President Bostic (NV) and Richmond Fed President Barkin (NV) were quite hawkish:  Bostic said he opposes a rate cut, while Barkin said, “I don’t see the current levels of inflation or inflation expectations as a trigger for additional accommodation.” Actually though those comments make a rate cut more likely, not less. People are looking at the “dot plot” and trying to figure out who each dot belongs to. If the “no change” dots belong to non-voters, it means the “lower rates” dots belong to voters! Williams, a voter, said that ““the arguments for adding policy accommodation have strengthened,” while Quarles basically repeated what Powell said. Fed Governor Brainard (V) also saw reason to cut rates "according to basic principles of risk management” while Minnesota Fed President Kashkari (NV), well known as the #1 dove on the FOMC, repeated his call for a 50 bps cut.

Today’s market

A quiet end to the week.

EU industrial production isn’t usually a market-mover, but I put it in the schedule today because I’m going to be interested to see if the collapse of output in Germany is unique to that country or more widespread throughout the Eurozone. That’s what’s expected – as you can see, the two data series usually move in tandem. This is well known, but still could be negative for the euro.

The US producer price index (PPI) is expected to show some slowdown on upstream inflation, both at the headline and the core level. That’s worrisome for the Fed after the rise in earnings also slowed in the latest month. All told, inflationary pressures seem to be abating. That’s going to make them more willing to take out an “insurance cut” in rates, cutting before they need to. USD bearish

Monday morning, while those of us in Europe are still busy knitting up the raveled sleeve of care, China announces four major indicators: fixed asset investment (FIA), industrial production, retail sales, and the all-important Q2 GDP. It’s expected to slow slightly to 6.3% yoy from 6.4%. The target for this year is a range of 6.0%-6.5%, down from “about 6.5%” last year. The market’s estimate of 6.3% would certainly be within that target range and so wouldn’t necessitate any policy response, but it could raise fears of slightly less activity in China. Risk negative

The other Chinese indicators due out aren’t expected to show any major change in the recent trend despite the ongoing trade war with the US. Mysterious!

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Marshall Gittler

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