Rates: Fed Chair Powell ready to cut rates if needed
US Treasuries fell prey to minor profit taking yesterday. Fed Chair Powell hinted at what has been discounted over the past weeks/days: readiness to cut policy rates if needed. US stock markets rallied. The environment is nevertheless expected to remain bond friendly with downside risks to US eco data.
Currencies: USD fails to rebound as markets see chances on Fed cut confirmed
Equites rebounded and US yields rose a few basis points yesterday after Monday’s fall. It didn’t help the dollar much as Fed comments indicated that Powell and co are prepared to support the economy if needed. EUR/USD is holding near recent correction top. USD/JPY struggles to prevent a next down-leg below 108. Soft US data might weigh further on the dollar.
The Sunrise Headlines
- US stocks jumped yesterday after Powell flagged the Fed’s willingness to act “appropriate” to sustain the expansion. The Nasdaq (+2.65%) outperformed. Asian markets track Wall Street’s gains. Japan outperforms (+2%).
- Powell’s comment were later echoed by Fed’s number 2, Clarida. The vice-chair said if the central bank senses growth slowing, they will act to maintain growth at potential, referring to the “insurance cuts” back in the 90’s.
- The Japanese composite PMI (50.7) creeps closer to the 50 boom-bust mark in May. The services index declined to 51.7. Caixin’s composite PMI in China tumbled to 51.5 in May (52.7 in April). Services slip to 52.7 (vs. 54.5 in April).
- Mexican president Obrador is confident a deal with the US can be struck before June 10, when tariffs kick in. US president Trump sounded less optimistic and keeps the pressure on Mexico, saying the tariff threat is “no bluff”.
- The World Bank cut global GDP projections from 2.9% to 2.6% for 2019 as trade slows. The US/Sino trade conflict, financial turbulence in emerging markets and unexpectedly weak growth in advanced nations skew risks to the downside.
- Australian GDP growth accelerated to 0.4% QoQ in 2019Q1 after slowing three quarters. On a yearly basis growth was still the lowest (1.8%) since 2009Q3 as the country struggles with a housing downturn and a slowing Chinese economy.
- In today’s economic calendar the US takes centre stage. We watch for the ADP job report and ISM non-manufacturing index. The Fed releases its beige book while Fed-heavyweight Clarida is scheduled to speak
Currencies: USD Fails To Rebound As Markets See Chances On Fed Cut Confirmed
Soft Fed speak keeps USD in the defensive.
The dollar stabilized yesterday after a sharp, interest rate driven decline on Monday. Trading in EUR/USD (and USD/JPY) was mainly inspired by the US side of the story. EMU CPI dropped more than expected to 1.2% Y/Y, but was ignored by euro traders. The USD tried comeback, but it had no strong legs even as US yields reversed part of Monday’s fall. Fed Powell and Clarida gave a balanced view on the US economy but the Fed is prepared to take action if the fall-out from the trade tensions would warrant to do so. Equities rebounded. US yields and the dollar reacted more to the dovish side of this Fed guidance. EUR/USD closed at 1.1252 (from 1.1241). USD/JPY hardly profited from the risk rebound closing at 108.15 (from 108.07).
This morning, Asian equites join the risk-rebound on WS with japan outperforming. Japanese yields continue to decline as markets are mulling additional BoJ easing. Still the yen hardly declines. USD/JPY fails to move higher off the 107.85/108 support. The dollar continues trading soft against the euro (EUR/USD near 1.1260). The Australian Q1 GDP was soft at 0.4% Q/Q, but with little impact on the Aussie dollar. AUD/USD hovered in the 0.70 area as the focus stays on Fed easing.
Today, the calendar contains final EMU (services) PMI’s. In the US, ADP job growth is expected at 185K. The ISM (non-manuf.) is expected little changed at 55.4. We see downside risk for both indicators. Several Fed members will speak and the Fed Beige book will be published.
Of late, EUR/USD extensively tested the 1.1110 support, but no break occurred. The USD topside test was rejected as markets anticipate Fed rate cuts as trade tensions might hurt US growth. Yesterday’s price action suggests USD momentum to remain fragile. Mediocre US data might cement Fed rate cut expectations and weigh on the USD. EUR/USD still tries to break the 1.1265 level in a sustainable way. A break would improve the technical picture with 1.1324 the next target.
Recent sterling decline took a breather yesterday. A new attempt of EUR/GBP to extend gains beyond the 0.8840/0.8900 area was rejected. USD softness also protected the downside in cable. EUR/GBP returned to the 0.8860 area. Brexit and the campaign to succeed PM May remain the dominant factor sterling trading. However, in a daily perspective, the UK services PMI remains interesting too. A stabilisation just above the 50 boom or bust level is expected. Some ST sterling consolidation might be on the cards, but we stay cautious on sterling LT
EUR/USD holding near recent correction top as markets expected Fed easing soon