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Markets Morning - Fed holds, global bonds rise, Trump ups the trade ante, risk a little off

Market Analysis /
Greg McKenna / 02 Aug 2018

Welcome to my daily Markets Musings.

You’ll see things are different from now on. That’s because the full note was approaching 2,000 words some days and I’m breaking it up into a number of reports on the Axi Blog each day now.

That way traders can subscribe to the Axi Blog easily and then cherry pick the yarns and markets of interest 

Feedback always welcome


Market Summary (7.40 am Thursday, August 2)

The Fed reiterated its commitment to higher rates in the statement which accompanied the FOMC’s decision to keep rates steady in the 1.75% to 2.0% range. It wasn’t the longest statement ever but there was the notable dropping of the characterisation that “growth was rising at a solid rate” in favour of “strong rate”.

That might sound pedantic, but given business and household spending was characterised as growing strongly as well and given there was an absence of worries about the risks to outlook from trade and perhaps housing, and given the Fed said rates are still “accommodative” this is a no surprise statement but one which reinforces the Fed hike next month and likely another in December.

Oh, and did I say the Atlanta Fed’s GDPNow guesstimate of Q3 growth was upgraded to 5% last night? Yeah, yeah, I know. But the US economy has momentum.

Not so much global manufacturing if the raft of PMIs released yesterday are any guide. JP Morgan’s global addition of all the country specific PMI’s slipped to 52.7 in July from 53. Still in expansion but the lowest read in a year.

Trade wars suck folks.

Anyway the washup on global markets is fairly muted. US stocks are actually a bit higher than where they were just before the Fed release at 2pm New York (4am Sydney). The S&P 500 is down just 0.10% at 2,813. The Dow is down 0.2% at 25,365 and the Nasdaq added 0.57% at 7,272 with a little help from Apple.

Europe had a poor day with the DAX down 0.5%, the CAC off 0.24%, the FTSEMIB off 1.91% and the FTSE 100 in London down 1.24%. The washup for the ASX after yesterday’s fraidy-cat stall below the range high and 5 point loss is that SPI traders have lopped another 27 points off prices overnight.

Copper (-3.29%, $2.73), base metals broadly, and Oil (WTI -1.32%, inventories) are lower while global miners got belted overnight. So the local market might indeed struggle today.

And naturally, that means the Aussie dollar is lower and reversed yesterday’s outperformance with a 0.4% loss overnight to 0.7397. No big deal, still ratcheting in this range. Trade data today will be important. The Kiwi lost about the same amount and is at 0.6785 while the Canadian dollar did better even with the big collapse in oil – USDCAD is at 1.2997, down 0.09%.

The Euro is lower by 0.3% as it too – like the AUD – reverses off recent range tops. It’s at 1.1661 this morning as we wait now for non-farms on Friday. The Yen gained 0.2% as stocks and risk appetite goes a little off and the Yen catches the tiniest of bids – it’s at 111.62. GBPUSD is unchanged as we await the BoE and it’s expected rate hike tonight – it’s at 1.3125.

Back to oil now and it was a big increase in Saudi production and then a build in US Crude inventories (+3.8m v -2.79m exp) that knocked prices lower. Distillate’s build was much bigger than expected though gasoline showed a bigger than expected draw. So WTI is now down 1.32% $67.80 while Brent is down 2.26% at $72.53 (love those techs). Gold is under pressure again at $1216 while Bitcoin is struggling to hold important support around $7500   after a 2% loss.

To bonds then and in many ways, this is the big news given rates are rising while commodities are falling and global growth – as measured by manufacturing PMI’s – is slowing.  10 year JGB’s are at 0.128%, German 10 year bunds are at 0.48%, and US 10’s are just the tiniest of a smidge under 3%. Keep an eye on this folks if bonds get funky everything else will too.

LATE BREAKING: News is that President Trump HAS directed the USTR Lighthizer to consider a 25% tariff on $200 billion of Chinese imports. This is a clear move to get the Chinese to talk and eventually fold. But China said yesterday it won’t be blackmailed.  

On the day we get trade in Australia with the market expecting a $900 million surplus. Euro area PPI is out tonight but everything pales into insignificance when compared to the BoE meeting decision. The market expects rates to be lifted 0.25% to 0.75%. But there will be much poring over the statement, minutes, and Mark Carney’s press conference.    US factory orders and ISM manufacturing will be interesting later in the night.

Have a good day

Macro Stuff that affects everyone and everything – either today or eventually


  • Not much to add about the Fed really from the above. But here’s the redline of the statement (from ZeroHedge) so you can see what the Fed changed. As I highlighted above, while the Fed says the risks are balanced there is not a lot of negativity in this statement. The Fed seems on track right now for two more hikes in 2018.
Source: ZeroHedge
Source: ZeroHedge
  • I want to share a big swathe of Greg Valliere’s, Horizon's Chief Global Strategist, note overnight on what’s really going on in the US economy. It shines a very bright light onto why we’ll see the two hikes from the Fed this year, why they say rates are still accommodative, and crucially why the momentum is there in the US economy right now. Greg wrote (his bolding and capitalisation):

“AS THE JOBLESS RATE fell to 3.8% this spring, skeptics howled about the missing ingredient – wage growth. But even that has come around, with new data showing that it's picking up, which in turn will boost real disposable income and consumer spending. The economy could grow by a stunning 4.7% in the third quarter, according to the widely-followed Atlanta Fed model, which underestimated the second quarter; even tariffs won't make a major dent.

REGULAR READERS KNOW we think the economy is booming in much of the country; just travel to Austin or Nashville or Charlotte or Seattle. The statistics finally are catching up; the Employment Cost Index, released yesterday, showed that wages and salaries have grown by 2.8% in the past year, the fastest pace in a decade. Everywhere we go, business leaders complain about a scarcity of skilled labor, which is forcing them into a bidding war for qualified employees.

THAT BIDDING WAR, in the form of higher wages, is prompting many companies – worried about profit margins – to raise prices. Inflation is still moderate; excluding food and fuel it's a little below 2%, but it seems to be heading higher. Make no mistake: the economy is showing signs of re-accelerating, as household income and spending surge.”

  • Me again, reaccelerating folks, reaccelerating!!!!
  • Oh and just quickly, the Atlanta Fed has actually upgraded it’s guess on Q3 growth to 5%. Lots of folks will rag this measure, lots of folks do. But after it underestimated Q2 growth by the time the final revisions had come in the naysayers might be less that last quarter. That said 5% is over the top. But as the Fed said the US economy IS strong. So we’ll likely see another good print for Q3 given current momentum.
  • Global manufacturing is slowing down. If you watched the releases in real time in Asia yesterday it was a bit disquieting and then even though Europe ended up printing on expectations there were a few disappointing results there as well. And then the ISM manufacturing PMI missed on almost all metrics except maybe employment. Anyway the takeaway is global manufacturing is slowing.
  • Summing up the global picture in the JP Morgan Global Manufacturing PMI, David Hensley, Director of
  • Global Economic Coordination at J.P.Morgan, said,” July PMI data signaled a further slowdown in the rates of expansion of both output and new orders. The manufacturing upturn has lost sizeable momentum since the start of the year”. But he remains an optimist saying “ with final demand growth having firmed in recent months and signs that an inventory drag is nearing an end, we think output gains will strengthen in coming months”. Let’s not hold our breath, but hope it is so. Here’s the pic with my annotation.
Source: Markit
Source: Markit
  • I’ve always been a strong believer in the connection between money growth, velocity, demand for debt, and economic growth as measured by GDP. So if there is one thing that gives me pause right now for the global outlook it is that various measures of money supply growth – here in Australia, in Europe, the US, and across the global more broadly – are pointing down. Lacy Hunt wrote a great wrap of all this in Hoisington Management’s latest quarterly note. I shared the outlook for and impact of the Australian version yesterday in my Australia Today article. But this morning I want to share the EU version from a tweet I saw float past last night. You get the picture.
Source: Twitter Screenshot
Source: Twitter Screenshot
  • One last thing.  Do yourself a favour and take a listen to a new Stitcher/Business Insider podcast called Household name. Specifically listen to this week’s episode on Pizza Hut, stuffed crust, and Donald Trump. It’s enlightening about the man – and a good listen. Last week’s episode on TGIFriday’s was a surprise too. You can find it on Stitcher or Apple podcasts. I listen through an app on my iPhone.

Have a great day's trading.

Greg McKenna

Chief Market Strategist


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