There is a Bloomberg headline this morning which best summarizes the market mood on the day after Powell's 1st day of Congressional testimony: "Traders Take Fed Message as License to Buy Everything", and it's pretty much spot on, with S&P futures storming back over 3,000, following Asian stock higher amid certainty that the Fed will cut rates at least by 25-50bps in the immediate future, even as an early European rally fizzled as investors didn't get the memo, and grew skeptical by the relentless dovish flood. Meanwhile, Treasuries dropped and the dollar edged lower.
The S&P was set to open back over 3,000 as it briefly topped the key psychological level for the first time Wednesday after the Fed Chair made it abundantly clear he is willing to lower rates, citing a slowing global economy and trade issues. In his first day of testimony before Congress on Wednesday, Powell confirmed the U.S. economy was still under threat from disappointing factory activity, tame inflation and a simmering trade war, and said the Fed stood ready to “act as appropriate”.
A strong June U.S. jobs report last Friday heightened expectations the Fed was more likely to cut by 25 basis points than by 50. But Powell’s cautious stance helped fuel bets of two rate cuts at its next policy meeting on July 30-31, and the odds of a 50 bps cut rose to 27.6% from 3.3% on Tuesday, after minutes from the Fed’s last meeting showed many policymakers felt there was not yet a strong case for easing.
“Powell’s statement confirmed we are going in the direction of a cutting cycle,” said Charles Zerah, a fund manager at Carmignac. “The main question now is, are investors pricing too much in terms of rate cuts by year end? The way you see equity markets behaving, risk is that what markets are pricing could lead to disappointment.”
The European Stoxx 600 Index was headed for the first advance in five days, spurred by energy companies, though it came off its highs for the session, climbing 0.1% after losing 1.4% over the past four sessions; carmakers were the worst performers on broader benchmark, falling for a fifth day while energy shares and utilities lead gains, tempering losses from cyclical sectors. Germany’s DAX dipped after opening higher, while Britain’s FTSE 100 erased a gain of as much as 0.4% as Bank of England Governor Mark Carney spoke at a press conference in London, noting that risks of a no-deal Brexit have increased and such an outcome could hurt the pound, government bonds and house prices.
Earlier in the session, shares rose across most of Asia as MSCI’s index of Asia-Pacific shares ex-Japan rose 1% with the South Korean and Hong Kong markets outperforming and stocks in China edging higher. Asian stocks climbed for a second day, led by energy and technology firms. Japan's Nikkei and Topix both closed 0.5% higher, snapping a three-day losing streak, even as Japan’s worst dispute in decades with South Korea dragged on. Nintendo helped bolster the gauge after introducing a cheaper version of its Switch gaming machine. The Shanghai Composite Index added 0.1%, supported by large banks and insurers. China’s Finance Minister Liu Kun expressed confidence that the country’s economic growth will remain in a range of 6% to 6.5%. The S&P BSE Sensex Index advanced 0.8%, with Housing Development Finance, HDFC Bank and IndusInd Bank among the biggest boosts.
As usual, some questioned how much momentum there was behind the latest rally.
“We are in the camp and have been all year, and arguably wrongly, that the Fed becoming more dovish and cutting rates is not good for risk assets,” said Neil Dwane, global strategist and portfolio manager at Allianz Global Investors. Nine of 12 Fed rate cutting cycles had not stopped a recession, he noted. “Given we are in the longest expansion and have only had rates lifted to 2.5%, for me it begs the question, is a soft landing possible?”
The rate cut prospects also weighed on the dollar. The dollar index against a basket of six major currencies slipped 0.2% to 96.929, extending losses for a second straight session after reaching a three-week peak on Tuesday. The dollar was down 0.4% at 108.03 yen, forced off a six-week high of 108.990 the previous day. It was still some distance from a six-month trough of 106.780 set on June 25. The euro nudged up 0.23% to $1.1275, as German core inflation for June was revised higher.
In fixed-income markets, the 10-year U.S. Treasury yield fell to 2.037% after dropping on Wednesday from a three-week high of 2.113%. In Europe, Italian bonds pared earlier gains after a debt sale, while bunds decline as gilts underperform. BTPs trimmed gains and curve flattens after sale of EU5.5b 3- and 7-year bonds, while Bunds fell as core debt underperforms semi-core and curves steepen. Germany’s 10-year government bond yield dropped to minus 0.32% on expectations that monetary easing in the euro zone will not be far behind the Fed.
In commodities, U.S. crude oil futures climbed to a six-week high as oil rigs in the Gulf of Mexico were evacuated before a storm, while an incident with a British tanker in the Middle East highlighted ongoing tensions in the region. WTI futures gained 42 cents to trade at $60.84 per barrel, while Brent rose 47 cents to $67.48. Spot gold gained to $1,426 an ounce, its highest since July 3, on the reinforced expectations for a Fed rate cut, while cryptocurrencies slumped after Powell voiced substantial skepticism that Facebook's Libra fiat-backed stablecoin will be greenlighted.
Looking ahead, highlights include US CPI, weekly jobs, OPEC monthly report, Fed Chair Powell’s testimony to the Senate, ECB’s Coeure, supply from the US.
- S&P 500 futures up 0.2% to 3,002.75
- STOXX Europe 600 up 0.2% to 388.01
- MXAP up 0.8% to 160.48
- MXAPJ up 0.7% to 526.05
- Nikkei up 0.5% to 21,643.53
- Topix up 0.5% to 1,578.63
- Hang Seng Index up 0.8% to 28,431.80
- Shanghai Composite up 0.08% to 2,917.76
- Sensex up 0.6% to 38,770.18
- Australia S&P/ASX 200 up 0.4% to 6,716.14
- Kospi up 1.1% to 2,080.58
- German 10Y yield rose 3.5 bps to -0.272%
- Euro up 0.2% to $1.1273
- Brent Futures up 0.7% to $67.47/bbl
- Italian 10Y yield rose 0.3 bps to 1.381%
- Spanish 10Y yield fell 3.2 bps to 0.406%
- Brent Futures up 0.7% to $67.47/bbl
- Gold spot up 0.3% to $1,422.57
- U.S. Dollar Index down 0.2% to 96.89
Top Overnight News
- The British navy intervened to stop Iran from blocking a commercial oil tanker leaving the Persian Gulf, heightening friction just as European nations scramble to salvage a landmark nuclear accord with the Islamic Republic
- The U.S. Department of Justice is investigating Deutsche Bank AG as part of a broadened probe of Malaysia’s scandal-plagued 1MDB investment fund, according to a person with knowledge of the matter
- Federal Reserve Chairman Jerome Powell says uncertainties around trade tensions and global growth have continued to weigh on the U.S. economic outlook since policy makers met in June. Fed minutes show many saw stronger rate-cut case as risks grew
- Bank of England policy maker Silvana Tenreyro says she’s unlikely to support raising interest rates in the next few months as slower growth keeps inflation in check.
- European leaders have made clear they’ll give Britain’s new prime minister a hearing over Brexit, and may be prepared to make concessions, according to David Lidington, Prime Minister Theresa May’s de-facto deputy. They would first want to know a revised deal could pass the House of Commons, he said
- The U.S. will investigate a French plan to impose taxes on technology companies, a move that has been a prelude to new U.S. tariffs under the Trump administration
- The Bank of Japan needs to extend its pledge to keep extremely low rates and there’s a good chance it will tweak the time frame as soon as the July meeting, ahead of an expected Federal Reserve rate cut, according to Kazuo Momma, a former executive director at the BOJ
- Oil extended gains after closing at a seven-week high as around a third of the Gulf of Mexico’s crude output was cut before a potential hurricane and U.S. crude inventories shrunk more than expected.
- Australia’s prudential regulator has ordered three of the nation’s largest banks to increase their capital holdings after finding weaknesses in risk management akin to those at Commonwealth Bank of Australia
- Trump administration officials signaled support for pro-democracy protesters in Hong Kong -- and defiance toward the Chinese government -- by granting a series of high-level meetings this week to a Hong Kong bookseller who has drawn Beijing’s ire
- In the crowded 2020 Democratic presidential field, campaign bank accounts are beginning to separate the contenders from the also-rans. candidates report their second-quarter fundraising totals to the Federal Election Commission on Monday
- A surprise win for underdog Jeremy Hunt in the contest to become U.K. prime minister would cause the pound to rally -- but not for long. While he is seen averting a no-deal Brexit, he would still have to face the same problems the previous PM did -- negotiating a deal
- The U.K. is stepping up its review of open-ended funds to prevent the growing industry becoming a threat to financial stability and the economy
Asian equity markets traded positively as the region took advantage of the tailwind from the US where a dovish testimony by Fed Chair Powell kept the door open for a July rate cut, which lifted all major US indices to all-time highs and the S&P 500 to briefly above the monumental 3000 level for the first time ever. ASX 200 (+0.4%) was led higher by commodity-related sectors after gold surged back above the USD 1400/oz level and oil prices rallied around 4% on bullish inventory data, but with the gains limited by initial weakness in financials after APRA advised an increase in minimum capital requirements of AUD 500mln each for 3 of the Big 4 banks and as Westpac faces legal proceedings in New Zealand for allegedly breaching the Credit Contracts Act. Nikkei 225 (+0.5%) were marginal as the upbeat momentum was partially offset by a firmer currency, while Hang Seng (+0.8%) and Shanghai Comp. (U/C) advanced with energy names frontrunning the outperformance in Hong Kong and as sentiment was also underpinned after China announced to take measures to stabilize trade as well as lower import tariff levels. Finally, 10yr JGBs were higher as they tracked the moves in T-notes in the aftermath of Powell’s dovish testimony, but with upside limited amid gains in stocks and weaker demand at the enhanced liquidity auction for longer-dated JGBs.
Top Asian News
- No Easy Exit in Sight From Worst Japan-South Korea Spat in Years
- Reliance Infra Lenders Sign Debt Resolution Pact; Shares Rise
- How Malaysia’s 1MDB Scandal Shook the Financial World: QuickTake
- China Hopes U.S. Removes Huawei Restrictions ASAP, Gao Says
- China’s Movie Business Takes a Hit -- From Its Own Government
Major European indices opened in positive territory though have drifted into negative territory recently [Euro Stoxx 50 U/C]. Sectors are somewhat mixed and unsurprisingly Energy names outperform as the broader complex gains support from the ongoing weather situation in the Gulf of Mexico, which has led to multiple platform shutdowns. Other notable movers include, Indivior (+26.0%) who are topping the Stoxx 600 after raising their FY19 guidance after experiencing a stronger than expected H1. Separately, Deutsche Banks (-0.7%) woes are continuing as reports indicate that the US Justice Department is investigating the Co. in relation to the 1MDB funds. Elsewhere, sources indicate that Ab InBev (-0.8%) are to guide pricing for their Hong Kong Budweiser unit towards the bottom end of its indicative range; which implies a price of USD 8.3bln vs. the USD 9.8bln at the top of the scale. Finally, off of the back of a broker downgrade at UBS, Sika (-4.0%) are lagging the SMI; for reference, the Co. was downgraded to sell from neutral.
Top European News
- Woodford Loses Second Long-Time Ally as Fund Freeze Bites
- Norwegian Air Chief Steps Down as Turnaround Plan Takes Form
- U.K. Labour Figures ‘Interfered’ on Antisemitism Cases
- Outperformance of Growth Stocks Is a Structural Trend: Goldman
In FX, dovish FOMC minutes have prompted another recalibration of market pricing for the July meeting and a further resurgence in expectations for a 50 bp rate cut to over 25% from as little as 2.5% at one stage post-NFP. Hence, the Greenback has pulled back further ahead of US CPI data that has assumed even more importance given Fed chair Powell’s growing concern about persistently weak inflation, in contrast to transitory factors that were deemed to be depressing prices not that long ago. Amidst widespread declines, the DXY has retreated below 97.000 towards 96.800 and not far from the 200 DMA (96.767) that was reclaimed on the back of last Friday’s stellar 200k+ payrolls count.
- JPY/NZD/CHF/GBP - The major beneficiaries of the Buck’s demise as the Yen rebounds through 108.00 and gets close to decent option expiry interest layered from 107.80 (1.2 bn) to 107.70-65 (1 bn) before losing some momentum, while the Kiwi is consolidating strong recovery gains above 0.6650 after yesterday’s overnight stop or error trade induced spill and now eyeing NZ manufacturing PMI for independent inspiration. Elsewhere, the Franc is not far from 0.9850 and the Pound has reclaimed 1.2500+ status with more conviction, though could be hampered by 500 mn expiries at the strike.
- AUD/CAD/EUR - The Aussie has also bounced firmly from lows and a probe under key Fib support with the aid of diverging RBA/Fed policy outlooks, as the former shifts to neutral or wait-and-see mode following back-to-back 25 bp eases. Aud/Usd is hovering around 0.6975 and seeking further guidance/direction from RBA’s Debelle later today. Similar story for the Loonie following Wednesday’s BoC meeting that revealed more caution and downside risks to base-line assessments and forecasts, but ultimately maintained an on hold stance, with Usd/Cad settling lower after knee-jerk moves and currently pivoting 1.3050. Continuing the Central Bank theme, ECB minutes could undermine the single currency if dovish enough, as Eur/Usd stalls ahead of 1.1300 having breached 1.1250 and the 200 DMA (1.1255), while decent option expiries lying between 1.1290-1.1300 (1.3 bn) may also prove tough to overcome.
In commodities, WTI and Brent have remained modestly firmer in what has been a quiet session thus far. The complex continues to derive support from the weather situation in the Gulf of Mexico where most recently the NHC are expecting the disturbance to become a tropical depression today; in terms of the impact, yesterday it was reported that 32% of the Gulf’s production has been halted, with the Gulf representing around 15% of the US’ total production. Additionally, the OPEC monthly report is scheduled for release today (12:10 BST) and for reference on Tuesday the EIA cut 2019 oil demand growth view to 1.07mln BPD, -150k BPD. NHC say the distrubance is expected to become a tropical depression later on today; storm surge, heavy rains and hurricane conditions are possible across the North/Central Gulf Coast in a few days Gold (+0.3%) is continuing to benefit from the softer post-Powell dollar, with the yellow metal now firmly above the USD 1400/oz level having printed a session high of USD 1427/oz. This mornings dollar drive strength from gold is likely being derived from market pricing now indicating around a 25% chance of a 50bp cut at July’s FOMC meeting, as such today’s inflation metrics and the second set of comments from Chair Powell may well prove pertinent for the yellow metal. Elsewhere, copper prices are little changed after yesterdays dollar driven rally.
US Event Calendar
- 8:30am: US CPI MoM, est. 0.0%, prior 0.1%; YoY, est. 1.6%, prior 1.8%
- 8:30am: US CPI Ex Food and Energy MoM, est. 0.2%, prior 0.1%; YoY, est. 2.0%, prior 2.0%
- 8:30am: Initial Jobless Claims, est. 221,000, prior 221,000; Continuing Claims, est. 1.68m, prior 1.69m
- 8:30am: Real Avg Hourly Earning YoY, prior 1.3%; Real Avg Weekly Earnings YoY, prior 1.0%
- 9:45am: Bloomberg Consumer Comfort, prior 62.6
- 2pm: Monthly Budget Statement, est. $7.85b deficit, prior $207.8b deficit
DB's Jim Reid concludes the overnight wrap
Just to make sure everyone is up to speed we’ll continue this message about DB Research at the top for today and tomorrow. After some difficult decisions were announced over the weekend about the firm’s direction, we want to reiterate that DB Research will remain at the forefront of the firm with strong backing from senior management. As well as FIC, Macro, QIS, Data Science, and Thematic research, DB is still committed to providing extensive and top-quality Company Research coverage in Europe and the US. DB will combine Equity Research and Research Sales into a newly formed Company Research and Advisory Group to strengthen ongoing connectivity with institutional clients. So if you are a consumer of any of our research and have any questions, please let me know and we can try to answer them.
One publication we will continue to publish is our flagship Thematic magazine “Konzept” where we take a big picture theme and use our expertise across research to delve deeper into the relevant issue. The latest edition was out yesterday and was entitled “How 5G will change your life” ( link ). In this we look behind the hype of the 5G roll-out and examine the unexpected impact on everything from smartphones to factories to politics and Smart Cities. But a deluge of data can have a real economic cost. In one piece we note that too much information and interruption could cost the US economy $1tn each year. In fact, when employees work without email they collaborate more and feel more productive. But before you strive to be more productive please don’t stop reading this email… just ignore all the others instead!
From 5G to 3K as the S&P 500 briefly crossed that landmark for the first time intra-day yesterday, on a dovish interpretation of Mr. Powell’s testimony, before closing a bit below that landmark. A week before the 50th anniversary of the first man on the moon (my Dad to his final breath was totally convinced it was a Hollywood creation), I wonder whether people will equally remember where they were the moment the S&P went through 3000. Probably not, but for me it was Starbucks. Lunar forces seemed to be in operation in bond markets yesterday as they waxed and waned sharply after an initial Europe-led selloff was quickly reversed by the text release of Powell’s testimony. The Q&A with Powell more or less affirmed the rally is back for rates while the FOMC minutes in the evening did nothing to change the narrative.
As discussed, the biggest market moves came with the pre-release of Powell’s statement in early afternoon London time. The key snippet from the statement concerned the dovish reference to "in our June meeting statement, we indicated that, in light of increased uncertainties about the economic outlook and muted inflation pressures, we would closely monitor the implications of incoming information for the economic outlook and would act as appropriate to sustain the expansion. Many FOMC participants saw that the case for a somewhat more accommodative monetary policy had strengthened. Since then, based on incoming data and other developments, it appears that uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the U.S. economic outlook. Inflation pressures remain muted."
The questioning at the hearing itself wasn’t hugely eventful, with Powell sending a strong but not completely explicit signal in favour of a rate cut this month. He cited trade uncertainty, global growth, and low inflation as the major issues facing the Fed, saying “crosscurrents have reemerged,” while simultaneously downplaying the recent bits of news that could have sparked a hawkish shift. Powell didn’t mention the positive outcome of the G20 in his remarks and downplayed the robust June jobs report, saying that while it was “positive,” it “did not shift our policy outlook.” He did say that incoming labour market, retail sales, and GDP data will be important for deciding about future policy, but it feels like the outlooks for global growth and US inflation will in fact be the key variables to watch. Our US econ team has a full write-up on their takeaways and their Fed forecasts available here .
As for markets, 10y Treasuries were trading as high as 2.112% before the Powell text was released (+4.7bps on the day at that point) only to then rally to 2.037% in a matter of minutes. They traded in a couple of basis points’ range thereafter as Powell answered questions and the Fed released the June meeting minutes, before ending the session a touch higher at 2.062% (-0.4bps on the day) however they have dropped another -2.1bps to 2.041% this morning. Two-year yields rallied more steeply, with yields dropping -8.0bps (and a further -1.6bps this morning). That encouragingly helped the 2y10y yield curve to steepen to 22.7bps at the time of writing, bringing it back more in the May-June c.20-30bp range.
Powell’s message was supported by the subsequent release of the June FOMC minutes, which admittedly were already a bit stale. While the baseline forecast remains solid, “many participants noted that the economy appeared to have lost some momentum,” and accordingly “many participants indicated that the case for somewhat more accommodative policy had strengthened.” “Many” is the FOMC’s strongest language before “most” or “a majority,” so it seems highly likely that a few members shift over to the dovish side to deliver a rate cut this month, as we expect.
One other interesting aspect with regards to inflation from the minutes was the assertion that “a number of participants anticipated that the return to 2 percent would take longer than previously projected,” which would be consistent with a more prolonged easing cycle rather than a one-and-done. However, before we get to that, we’ll have to see if the Fed delivers 25bps or 50bps of cuts this month. On that, we’re back to now pricing in 32bps of cuts for the meeting this month after starting the day at 27bps. So we’ve actually swung back to a more aggressive pricing of around a ~25% chance of a 50bps cut. This came despite further comments from St. Louis Fed President Bullard, who reiterated his recent comments that, while he supports an “insurance” rate cut, he doesn’t think the situation calls for a 50bps cut. It is pretty surprising to see the market getting so far ahead of the FOMC’s most dovish member.
Over in equities it had looked like normal service might have resumed as the S&P 500 broke 3000 for the first time ever, however markets did pare back slightly from their opening highs. The S&P 500 eventually closed below that key level albeit still up +0.45% on the day and just 0.10% away from its all-time peak. The NASDAQ closed up +0.75% at a fresh all-time high, while the DOW gained +0.29% to within 0.39% of its highest-ever level. Meanwhile, HY credit spreads were flat and the USD weakened -0.39%. Oil advanced +4.50%, boosted by strong inventory data that showed a 9.5mn reduction in US crude stockpiles, plus further confrontational rhetoric from President Trump directed at Iran. Storms in the Gulf of Mexico also reportedly derailed some drilling operations.
Looking ahead the next test for the market and perhaps the last possible hurdle for a rate cut this month is likely to be the June CPI report this afternoon in the US. The consensus expects a +0.2% mom core reading which should be enough to keep the annual rate at +2.0% yoy. Our economists forecast an unrounded +0.19% mom reading and note that this would help shorter-term inflation trends to firm with their forecast for the three-month annualized rate being a 17bp increase to +1.78%. That data is due out at 1.30pm BST and our team’s full forecast is available here .
This morning in Asia markets are following Wall Street’s lead with the Nikkei (+0.40%), Hang Seng (+1.19%), Shanghai Comp (+0.33%) and Kospi (+1.21%) all posting healthy gains while futures on the S&P 500 are also up +0.28% and trading back above the 3000 mark. There hasn’t been much fresh news however Bloomberg did report that President Trump has asked aides to find a way to weaken the US dollar in an effort to boost the economy ahead of the 2020 presidential election while adding that Trump’s chief economic advisor, Larry Kudlow, and Treasury Secretary Steven Mnuchin disapprove of the idea of government tampering to weaken the dollar.
Back to yesterday where there were also big moves for European bonds. The moves were initially driven by a combination of better-than-expected industrial production data in France and Italy – more on that below - and what was perceived to be a bit of a disappointing Bund auction given the drop in oversubscription. That said, the bund auction did result in a new record low yield for fresh issuance and was the first time that German issued a bond with a zero coupon since 2016. Thereafter, European yields eased off their highs as the Treasury rally carried over to Europe. In the end, 10y Bund yields rose +4.7bps to -0.309% which was the biggest one-day climb since April. Similar maturity yields in France, Netherlands, Spain and Portugal were also +3.3bps, +4.5bps, +1.9bps and +2.9bps higher respectively while Greece rose +7.4bps and which therefore puts the two-day move at +19.7bps after yields had edged to within a whisker of similar maturity Treasuries. Italian BTPs outperformed, with yields rising only +0.2bps, with most of the gains coinciding with Powell’s remarks, as Italy stands to be one of the top beneficiaries of easier monetary policy.
Equity markets in Europe finished a touch weaker, despite a pop alongside US equities when Powell’s testimony hit the wires, with the STOXX 600 ending -0.20%. The only bright spots were in the energy and materials sectors, which were helped by the global rally in oil prices mentioned above. Just on the data, May industrial production in France rose +2.1% mom and far exceeded expectations for +0.3% while Italy printed at +0.9% mom (vs. +0.2% expected).
Here in the UK industrial production was reported as rising +1.4% mom which was a little a bit less than the +1.5% expected while manufacturing production was much weaker than expected (+1.4% mom vs. +2.2% expected) however the focus was instead on the May GDP print which was in line with expectations at +0.3% mom. The 3M/3M reading also rose +0.3% which was a little ahead of expectations. Finally in the US the only noteworthy data were the final May wholesale inventories numbers which were confirmed at 0.4% mom as expected.
Looking at the day ahead, the big focus will be the June CPI report in the US. Prior to that we are also due to get final June CPI revisions out of Germany and France. Other US data include jobless claims and the June monthly budget statement. Away from the data we’re due to get the BoE’s financial stability report while the ECB minutes are also out around lunchtime. It’s also a packed day for Fedspeak with Powell again testifying before the Senate – which is unlikely to be a lot different to yesterday’s comments – while Williams, Bostic, Barkin, Quarles, Williams and Kashkari are also due to speak. The ECB’s Coeure is also due to speak this morning.