Archives of “June 19, 2019” day

rss

What’s priced in for the Federal Reserve in the countdown to the FOMC decision

  
  Analysis

A final look at Fed pricing in the year ahead

There is a solid chance the Federal Reserve delivers a surprise and cuts today, according to market-implied probabilities.
Fed funds traders see a 19.7% chance of a cut to a range of 2-2.25%. The risk in the Fed cutting would be that it would be sending a fearful message like ‘we know something you don’t’ and would have a counter-productive effect. For that reason, and because it would damage the credibility of ‘patient’ forward guidance, I think the probability is close to zero.
The real intrigue is in the Fed setting up a cut at the July 31 meeting. The implied probability of a cut then is 82%. That’s down from as high as 90% last week and the drop is primarily due to a US-Mexico deal and Trump restarting talks with China. In order to sustain that high probability, the statement or comments from Powell will need to include a strong hint at a cut.
My problem is that I believe even a strong hint will have conditionality, likely due to trade. If the Trump-Xi meeting goes well and genuine talks resume, I don’t believe the Fed will cut. The other factor to consider is inflation. The Fed has been wrong about inflation for years and is starting to have some self-doubt. Inflation expectations are falling and Fed may want to counteract that.
Beyond July and this year, the tougher question to answer is how much the Fed will cut. The market is pricing in a 42% chance of four or more rate cuts. That’s way beyond an insurance cut or something to stabilize inflation expectations. It would take at least a near-recession to cut that much.
If the Fed pushes back, watch for the US dollar to rise and risk aversion to pick up.

Trump Powell

German lawmaker says Draghi’s “uncoordinated” comments on monetary policy are alarming

  
  Analysis

Comments by CSU lawmaker, Hans Michelbach

  • Says that Draghi is trying to make it difficult for his successor to reverse signals on monetary policy
Well, it’s not like Germany is in a position to benefit from tighter monetary policy conditions now anyway so I’m not too sure what his point is.
It is likely his comments here pertains more to the fact that they are trying to get Weidmann to succeed Draghi but I reckon they won’t want to miss out on trying to place Manfred Weber as European Commission president.

China: It is possible to achieve a positive outcome in trade talks with US

  
  Analysis

That’s a notable positive remark from China

China speaking about trying to find an agreement is helping to nudge yen pairs a little higher with USD/JPY inching up from 108.30 to 108.38 currently to near unchanged levels on the day. That said, the move puts a reset button on the pair amid flat levels in Treasury yields and US equity futures so there isn’t much to get excited about.

Apple reportedly mulls shifting 15-30% of output away from China

  
  Analysis

According to a report by the Nikkei Asian Review

Apple

The report says that Apple is asking its suppliers to review costs of shifting roughly 15% to 30% of production capacity from China to Southeast Asia and Mexico. This comes as the US company sees the risks of reliance on the Chinese market as being too great.

That’s hardly surprising. Apple has been one of the more notable names affected by the ongoing trade dispute between US and China as they are an easy target considering their size and market share influence.

The full report can be found here.

Japan trade balance data for May, exports slide but not quite as badly as expected

  
Analysis, Economy

Japan Trade balance for May, deficit of 967.1bn yen

  • expected Y -1200bn, prior Y 56.8bn

Adjusted trade balance, deficit of 609.1bn yen

  • expected Y -754.5bn, prior Y -110.9bn

Exports -7.8% y/y

  • expected -8.2%, prior -2.4%

Imports -1.5% y/y

  • expected +1.0%, prior +6.5%

Japan May exports to US +3.3% year/year

  • to China -9.7% year/year
  • to Asia -12.1% year/year
Go to top