Today’s stock market rally that was driven on Trump’s optimistic trade tweet and expectations central banks globally are on the verge of delivering more stimulus. US equities and global bonds soared early on the prospects that the US-China trade war could see a return of constructive dialogue and on stimulus hopes from the ECB and Fed. Markets were strongly reacted to Draghi’s speech that signaled the ECB is almost ready to add stimulus. The euro dropped against the dollar following Draghi’s much to the chagrin of President Trump. The US President noted that the ECB is making it easier for Europe to compete against the US. Trump also reiterated criticism of the Fed, also attempting to pressure the FOMC to deliver rate cuts. In February, the White House explored the legality of demoting Fed Chairman Powell. The Fed’s nonpartisan independence is important, but with the recent run of data deterioration, when they capitulate, President Trump is certain to take a victory lap in saying he was right that they needed to cut interest rates .
– Fed to drop ‘patient’ stance – First time dot plots to show rate cuts – Next move could be a 50-basis point cut
The Federal Reserve will conclude its two-day policy meeting with economists expecting a confirmation of an easing bias in the second half of the year. Fed fund futures see a 22.9% chance that rates will be cut at tomorrow’s meeting, while the July 31st meeting have an 83.0% expectation for a rate cut. The data dependent Fed will only have to look at their first regional survey, Empire Manufacturing which saw its worst decline on record. Broad weakness has started to hit the US economy from trade uncertainty and that should still persist even if Trump and Xi deliver a de-escalation in tariff threats at the G20 summit at the end of the month. The Fed could try to hold out one more month before committing to rate cuts and note that the policy stance is appropriate right now. The dollar could rally if the Fed reiterates their patient stance, but the more likely scenario is for Powell to begin to adopt a dovish stance. How dovish of statement and how many rate cuts are shown in the dot plots will likely determine how far the dollar could fall.
If the Fed does not surprise markets with a rate cut, investors will quickly look to see how the dot plot forecasts are updated. Each quarterly meeting the central bank will show what each policy makers’ expectations are for interest rates over the next few years. The last update in March saw 11 of the 17 FOMC officials expected rates to remain on hold for the rest of the year, while four expected a 25-basis point increase and two expected interest rates to rise by half a percentage point.
This will be the first time the dot plots are being updated to what is expected to be interest rate cuts and not hikes. Historically, the rate projections have only been used to show a gradual path of increases, so markets will closely watch how dovish each member becomes.
How Big will the first cut be?
With markets preparing for the Fed to begin an easing cycle, many will look to see if policy makers are opting for a half-percent move over a quarter point adjustment. When beginning an easing cycle in both 2001 and 2017, the Fed decided to surprise markets with a 50-basis point cut over a quarter point adjustment. The argument for a steeper rate cut stems from the recent success with market impact in delivering a stronger dovish signal. Fed officials may lose this surprise however if the dot-plot forecasts prompt investors expectations.
Economists mostly agree that the December rate hike was a policy mistake and if the Fed wants to send a clear dovish message, a half a percentage point cut in July could do the trick.
The yield curve inversion between the 3-month and 10-year yields has been inverted for 19 straight day, currently at 14.7 basis points. The 10-year and 2-year spread, which has yet to invert in this cycle has narrowed to 19.18 basis points. The 10-year yield on Treasuries continues to slide and is approaching the 2.00% level, which is well below the current Fed Funds target range of 2.25-2.50%. A Fed rate cut will help the current strain on bank lending which heavily relies on the 2-year and 10-year yield curve.
Bond markets soared after ECB Chief Mario Draghi reminded investors the bank could provide additional stimulus via rate cuts or asset purchases if the outlook does not improve. Since the inflation path is converging more slowly than expected, financial markets are now targeting fairly confident the ECB will cut rates at the September 12th meeting. Mr. Draghi’s term ends on October 31st and it seems even if we see him replaced by German hawk, interest rates are set to turn lower.
Crude prices were supported earlier as Iran eased off its hard stance on when OPEC should hold their next meetings on production cuts. Tehran initially wanted to keep the June 25th meeting date but has now offered July 10-12th. After the NY close, the OPEC secretariat proposed a new meeting date of July 1st and 2nd. The decision needs to be unanimous by OPEC and expectations are high for the rest of the cartel to agree.
Global demand for crude got a boost on expectations that trade talks are showing some positive signs following President Trump’s tweets.
Oil did not see much of reaction to the API inventory report which showed a draw of 0.8 million barrels. Current expectations are for the EIA weekly oil inventory report to deliver a 1.5 million draw. Last week’s data saw Cushing account for most of the 2.2 million build that stemmed from flooding in the Midwest. With most of the affected refineries and pipelines returning to normal, markets are strongly expecting a draw with tomorrow’s reading.
Gold prices remain supported on expectations additional easing will be delivered across all the major central banks. Gold prices would have delivered stronger gains if it were not for President Trump’s optimistic tweet on the trade front. Trump tweeted that he spoke with Xi and that the US and China will hold an extended meeting next week at the G-20 in Japan. While today’s positive trade tone was heavily embraced, meaningful progress at the G-20 remains an unlikely scenario. The base case remains that we will not see an escalation in tariffs and that we could see a plan that outlines a potential removal of some tariffs based off of specific benchmarks.
Now well-off last week’s high of $1,362.20, the yellow metal will look to regain its bullish momentum on a very clear and strong dovish signal from the Fed.
The Canadian dollar rose 0.23 percent on Tuesday. US President Donald Trump unlocked risk appetite this morning by tweeting that he had a telephone conversation with Chinese President Xi and agreed to meet in the sidelines of the G20 in Japan. The ECB had earlier said that it could cut rates if needed, which added to the anticipation of what the Fed will announce on Wednesday as its two day Federal Open Market Committee (FOMC) meeting comes to an end.
Oil prices jumped as the trade war factor had weighed on global growth forecasts, and with supply issues still very recent the price of crude was higher. Gold had a mixed session, that ended in the positive as the ECB comments were a positive for the metal, but were cancelled out by the optimism on a potential trade deal stoking risk appetite.
The Bank of Canada (BoC) has stayed in the sidelines keeping the interest rate unchanged, and if the U.S. Federal Reserve decides to signal a benchmark rate cut in the near term it would drive the loonie higher as the rate differential would shrink.
Oil prices surged on Tuesday after US President Donald Trump tweeted encouraging developments with China. A sit down with Chinese President Xi as part of the G20 meeting in Japan at the end of the month appears to be in the works. The Chinese official media confirmed that the two leaders are talking with a possible talk during the G20. The trade war between the two largest economies has been a negative factor for energy prices. The Canadian benchmark rate is 1.75 percent, while the Fed funds rate is in a range of 2.25 to 2.50 percent.
The Fed meeting this week got an even bigger spotlight after European Central Bank (ECB) President Mario Draghi said he is ready to cut rates if necessary. The US central bank now appears close to signalling an imminent rate cut, to stimulate the economy and avoid falling into a recession.
The anxiety around supply disruptions has died down as trade optimism is surging. Middle East conflict is sure to influence crude prices, with a frenetic end to the month of June as the G20 meeting and more details emerge on the possibility of an extension to the OPEC+ supply cut agreement.
Gold is higher on Tuesday on a volatile day for trading the yellow metal. Gold broke through the $1,350 price level after the ECB President announced a rate cut was possible if needed. After the Fed led major central banks in a move towards normalizing rates, the economy could warrant a 180 degree turn and a return to lower rates.
Lower rates are a positive for the yellow metal, but with a tweet Donald Trump infused optimism into the market saying that its posible for Chinese President Xi and himself to have a meeting while they are both in Japan for the G20 at the end of the month. Gold has been a favorite destination of investors seeking a safe haven from the US-China tariff uncertainty. Hope for an end to back and forth aggression could be near, and reduces the appetite for the metal.
Conflict in the Middle East and Brexit concerns will remain and will continue to push gold higher as investor appetite for risk wanes during high volatility periods.
US stocks were back to a record breaking pace as US and China appear to be headed to a trade meeting while both leaders take part in the G20 in Japan at the end of the Month. Central banks have been dovish, but after the ECB said in no uncertain terms that it would cut rates if needed, the spotlight is now on the US Federal Reserve who kicked off its two-day meeting today.
The Fed is not expected to cut rates in June, but could in fact signal a willingness to do it in the short term. The biggest risk to the stock rally is how exactly the messaging from the central bank comes across. Not dovish enough, could trigger a sell-off as the market is now pricing in more than one rate cut in 2019.
The Fed is facing a challenging balancing act. How to stay hawkish on the economy and minimize recession anxiety, but at the same time remain dovish and ready to act if needed. A less than full dove statement and press conference from Powell, could reverse gains in the stock market
Oil prices rose about $2 a barrel on Tuesday after U.S. President Donald Trump said he would hold an extensive meeting with Chinese President Xi Jinping at the G20 summit later this month.
Tensions in the Middle East after last week’s tanker attacks, with the U.S. planning to send more troops to the Middle East, also lent support.
U.S. West Texas Intermediate crude futures rose $2.26, or 4.4%, to $54.19 a barrel by 11:11 a.m. EDT (1511 GMT). Brent crude futures rose $1.80, or 3%, to $62.74 a barrel.
“Had a very good telephone conversation with President Xi of China. We will be having an extended meeting next week at the G-20 in Japan. Our respective teams will begin talks prior to our meeting,” Trump tweeted.
White House economic adviser Larry Kudlow on Tuesday said U.S. President Donald Trump is not considering any changes to Fed Chairman Jerome Powell’s status following a report that the White House had explored the possibility of demoting him.
Kudlow spoke to reporters at the White House ahead of the U.S. Federal Reserve’s meeting this week that comes amid mounting pressure from the Republican president to cut interest rates. The Fed is expected to leave rates unchanged but could lay the groundwork for a cut later this year.
“The Fed is independent. They’ll act on their own time, in their own way,” Kudlow said.
Bloomberg News, citing people familiar with the matter, reported earlier on Tuesday that the White House had looked into the legality of demoting Powell in February soon after Trump discussed firing the Fed chairman.
Investors seem to think if there’s a rate cut by the Federal Reserve, stocks will automatically rally. That may not be the case.
That’s the message from UBS ahead of the Fed’s policy decision on Wednesday. Traders are betting that the central bank would deliver an easing of monetary policy soon to provide the economy with some insurance and hence boosting stocks, but UBS believes such a move would do little to lift the market.
“When it comes to U.S. stocks, the Fed put is dead,” UBS equity strategist Francois Trahan said in a note on Monday. “In the past 20 years, the so-called ‘Fed Put’ has failed to revive equities the way rate cuts did in the 1990s. The two easing cycles of this millennium took place amidst severe declines in equities.”
The correlation between the S&P 500′s price-to-earnings ratio and the fed funds rate has broken due to the long period of low rates since the early 2000s, UBS noted. When the Fed slashed rates in 2001 and 2008 to salvage the economy from recessions, U.S. equities did not rally following the rate reductions. In fact, the S&P 500 fell as much as 16% in the 12-month period after the cuts, the bank pointed out.
U.S. homebuilding unexpectedly fell in May, but data for the prior two months was revised higher and building permits increased, suggesting that the housing market was drawing some support from a sharp decline in mortgage rates.
Housing starts dropped 0.9% to a seasonally adjusted annual rate of 1.269 million units last month amid a drop in the construction of single-family housing units, the Commerce Department said on Tuesday.
Data for April was revised up to show homebuilding rising to a pace of 1.281 million units, instead of increasing to a rate of 1.235 million units as previously reported. Housing starts in March were also stronger than initially estimated.
Economists polled by Reuters had forecast housing starts edging up to a pace of 1.239 million units in May. Single-family housing starts fell in the Northeast, the Midwest and West, but rose in the South, where the bulk of homebuilding occurs.
Building permits rose 0.3% to a rate of 1.294 million units in May. It was the second straight monthly increase in permits. Building permits have been weak this year, with much of the decline concentrated in the single-family housing segment. The housing market hit a soft patch last year and has been a drag on economic growth for five straight quarters.
President Donald Trump on Tuesday said that he and Chinese President Xi Jinping “will be having an extended meeting next week at the G-20 in Japan.”
In a tweet, Trump said that he and Xi “had a very good telephone conversation,” and that “our respective teams will begin talks prior to our meeting.”
China had kept mum about whether Xi would agree to a face-to-face meeting with the U.S. president at the summit, scheduled for June 28-29 in Osaka, while the two economic superpowers remain locked in a heated trade dispute.
Trump has said he expected that meeting to occur at the high-profile summit, but had recently downplayed the impact that it could have on forging a trade deal with Beijing. Trump told Fox News’ “Fox & Friends” last week that “it doesn’t matter ” if Xi attends the G-20 or not.
“If he shows up, good, if he doesn’t — in the meantime, we’re taking in billions of dollars a month [in tariffs] from China,” Trump told Fox.
The Chinese embassy in Washington did not immediately respond to CNBC’s request for comment on Trump’s tweet.
U.S. stocks opened at their highest level in six-weeks on Tuesday, with Nasdaq leading the charge, as dovish calls from the European Central Bank raised expectations of a similar accommodative stance from the Federal Reserve.
The Dow Jones Industrial Average rose 116.35 points, or 0.45%, at the open to 26,228.88. The S&P 500 opened higher by 17.04 points, or 0.59%, at 2,906.71. The Nasdaq Composite gained 75.95 points, or 0.97%, to 7,920.98 at the opening bell.
President Trump’s tweet minutes after the open sent markets soaring. Leaders of the two largest economy spoke on the phone and expectations are for them to hold an extended meeting at the G-20. Markets previously were concerned if Xi was going to attend and if anything of substance would come out of the G20 summit. China’s state media confirmed the call between Trump and Xi.
Investors rushed to US stocks, with the S&P 500 index rising 1.1%, the Dow Jones Industrial higher by 1.3% and the tech heavy Nasdaq leading the rally with 1.8% gain. The dollar also remains near its high of the session.
US equities may be poised to make a run at those record highs if we see continued trade optimism and a strong dovish signal from the Fed.
The Conservative party leadership election has not been kind to sterling so far, with contenders being forced to paint themselves as the bigger Brexiteer and the more willing to leave without a deal.
The efforts are deemed necessary to compete with the front-runner Boris Johnson and stand a chance of winning over the Tory membership, who’s views on these issues are well known. Unfortunately, these views don’t sit well economically and therefore with the currency which is why the decline has been quite consistent.
Another casualty will fall following the race today and if that is a remain-voter and/or a proponent of delaying exit day rather than embracing no-deal, it’s unlikely to sit well with the currency. It will also make for an interesting debate this evening, when the remaining contenders will face off, this time in the company of Johnson who will have a chance to defend himself.
Sterling has been on a tear lower for over a month now and there’s so far few signs that it’s letting up. Having taken out recent support yesterday, the pair is now trading at its lowest levels since the start of the year, with further support potentially being found around 1.2450-1.25.
As we approach these levels though, momentum looks to be slipping. The MACD histogram and moving averages are both showing signs of divergence, having failed to match the new lows made in the price. The stochastic isn’t quite there yet but it’s not really making new lows either.
GBPUSD 4-Hour Chart
The 4-hour chart is displaying similar divergence and in this case, the stochastic is on the same page. That’s not to say we can break the 2019 lows but lagging momentum is not an encouraging sign. Perhaps after such a long period of downward pressure, a correction of some kind may be warranted.