USD keeps soaring after Fed meeting

Summary:

  • A Fed rate cut disappoints market participants sending the greenback higher, bonds and stocks lower
  • Powell has not signalled more rate reductions, market-based expectations assign more than 60% to see another move in September though
  • Chinese Caixin/Markit manufacturing PMI ticks up, US and Chinese negotiators plan to meet again next month

One and done?

As widely expected, the Federal Reserve slashed interest rates on Wednesday by 25 basis points and decided to bring forward the end of its securities holdings run-off effective on August 1, two months earlier than previously indicated. In the statement we did not find anything suggesting the Fed could continue cutting rates in the foreseeable future and basically this notion was reiterated by Jerome Powell during his press conference. On top of that, the US central bank repeated that business investment was soft while uncertainties about the economic outlook remained. It noted that market-based inflation expectations slightly changed while measures of inflation remained low (previously it said these measures “have declined”). When a paragraph justifying a cut the Fed suggested that this move was “in light of the implications of global developments for the economic outlook as well as muted inflation pressures”. During his press conference Powell said that yesterday’s reduction was not “one and done” but at the same time he added that it was not the start of a long series of rate cuts. This sounds somewhat ridiculously and stresses how much Jerome Powell was uncertain what he was talking about yesterday. From a financial markets’ standpoint we got a knee-jerk upward reaction in the US dollar and declines in bonds and stocks. These moves deepened thereafter when Powell was talking to journalists. As a result, the EURUSD is trading around 1.1050 this morning, SP500 futures are pointing to a slightly negative opening while the 10Y bond yield is hovering around 2.044%. Keep in mind that the 10Y2Y spread has tightened since yesterday while market participants are convinced almost to the same degree as they were before the Fed meeting that the US central bank will cut rates again this year. To sum up, the Fed got what it did not want to get pushing itself to the wall when it meets again next month.

The EURUSD is trading at the lowest level since May 2017 in the aftermath of the Fed meeting. Having in mind that the ECB is broadly expected to roll out substantial monetary stimulus in September, the EURUSD could move a little down in the short-term, however, we doubt it could morph into a more long-lived rally. Source: xStation5

Chinese PMI bounces back

The Caixin/Markit PMI for Chinese manufacturing ticked up in July to 49.9 from 49.4, slightly exceeding expectations pointing to a bounce to 49.5. It is worth noting that subindices for new orders and production returned to expansionary territory, and new export orders also rose subtly but remained below the 50-point mark. The index measures activity in small to medium enterprises as opposed to the official PMI focusing on the largest and state-owned enterprises. Although both indices rebounded to some extent in July, there are still many uncertainties in place which might easily cause them to fall again. For one, let us notice that US and Chinese negotiators plan to meet again in September, as the latest round of trade talks held in Beijing this week resulted in few signs of concrete progress.

The Hang Seng has already reached the support nearby 10580 points being down almost 1% on Thursday. Source: xStation5

In the other news:

  • July manufacturing PMIs rose slightly in Australia and India, slight decreases were seen in South Korea, Japan and Indonesia

  • Earnings season: Qualcomm EPS was $0.8 (cons. $0.75), revenue was $4.9 billion ($5.1 billion); Metlife EPS was $1.38 ($1.34), revenue was $17.5 billion ($16.5 billion) - in after-hours trading Qualcomm declined more than 5% while Metlife increased 1.5%

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