Wall Street rallied overnight as traders ignored some very obvious discord on the path of rate cuts from the FOMC Minutes, concentrating on sparkling results from big-box retailer Target, and home improvement retailer Lowe. Both produced sparkling results following on from Walmart last week and saw their shares jump massively in New York trading. The U.S. existing home sales for July came in above expectations at 2.50% as mortgage rates tracked lower.

Internationally, Thailand’s exports staged a recovery yesterday, rising 4.28% y/y for July and even Argentina had a pleasant surprise for everyone. Its balance of payments rose to $951 million against a consensus of $684 million.

The only blot on the copybook was the Congressional Budget Office raising its forecast for the U.S. Government deficit to a mind-boggling $960 billion, which in all fairness, President Trump said was going to be the case anyway. I can understand why he wants rates lower for longer now, although I don’t know where he would have squeezed in the necessary dollars to buy Greenland.

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Circling back to the Federal Reserve, it is clear that Corporate America is coping with trade tensions for now and that the mighty American consumer is still spending. The U.S. has a yield curve that actually pays interest thanks to partial interest rate normalisation. It leaves the Fed with monetary wiggle room should it be required, leaving it in a group of about one internationally.

Whether to potentially squander this advantage, by engaging in an easing cycle too soon and when it isn’t necessary, quite likely explains the fractious nature of the minutes of last FOMC meeting. Two governors wanted a 50 bps, two didn’t want a cut at all, and the rest settled on 25 bps with the emphasis it was a mid-cycle adjustment not the start of a new easing cycle. Clearly, the governors of the Federal Reserve does not have a unified view on what is next either.

With all of the above in mind though, the world’s uber-doves that are circling Jackson Hole, like easing sharks smelling blood, ahead of Fed Chairman Powell’s opening address on Friday. They should exercise caution. If even Argentina can put out positive economic data, maybe the world isn’t quite as bad as it seems, unless you are Europe. It is hard to see Mr Powell announcing or implying an aggressive new easing cycle in isolation when just a month ago, the FOMC was clearly very split as well.

Without sounding like a broken record, the danger is most definitely that Chairman Powell disappoints. With positioning in equities, bonds and energy all heavily weighted to this outcome, the resulting correction from a lack of Powell love, could be both ugly and emotional.

Markets will have all day to ruminate over this possibility as the data calendar is exceptionally light in Asia today, with Eurozone PMI’s the highlights later this afternoon. CommBank composite PMI in Australia fell to 49.5 this morning, with the services component particularly weak. With iron ore prices down 30 % over the last month, there is not a lot to excite about the Lucky Country at the moment, and this should temper any pre-Powell exuberance in the land down under today.

Equities

Target shares rose 20.64%, and Lowe shares rose 10.36% on Wall Street overnight, hauling the big three indices higher as consumer bellwethers again defy the trade and economic gloom. The S&P rose 0.80%, the Nasdaq rose 0.90%, and the Dow Jones rose 0.95%.

Japan is slightly higher in early trading, but the Australian ASX has fallen 0.50% as the earlier PMI release weighs on sentiment. That should not deter Asia markets though, and we would expect the region to breathe a collective sigh of relief and mark stocks cautiously higher in morning trading.

Currencies

The dollar was a mixed bag overnight, rising yet again against its G-10 counterparties while falling slightly against A-team emerging market ones, reflecting the improved risk sentiment of the last 24 hours. The greenback continues to grind out steady daily gains one day at a time like a creeping tide. It perhaps gives a false impression that a lack of FX volatility means nothing is happening when it is clear that the path of the dollar has continued higher over 2019. It is just doing it quietly.

The rise of EM heavyweights such a the Mexican Peso and Brazilian Real against the dollar overnight suggests Asia’s regional currencies could do the same today, supported by dovish rate anticipations and improving, albeit temporary, macro expectations.

Oil

Oil markets had a wait-and-see look about them overnight. Improved global sentiment offset by mixed U.S. crude and gasoline inventory data which weighed on WTI in particular. Brent crude rose 0.40% to $60.30 a barrel while WTI fell 0.60% to $55.80 a barrel.

Asia will probably look at the overnight price action and chose to remain on the sidelines until Europe arrives. Oil would be one of the most vulnerable markets to a Powell disappointment on Friday, and this should temper and short-term exuberance over the next 24-hours.

Gold

Gold continued to trade as a dollar proxy overnight as we await the learned words of Chairman Powell tomorrow. Gold fell 0.30% to $1502.00 an ounce in quiet trading as both the dollar and U.S. Treasury yields edged higher. Key support remains at $1480.00 an ounce.

Gold could be a significant beneficiary of a Powell disappointment tomorrow, with the resulting stampede out of bullish equity and rates trades potentially benefiting haven assets.

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