Home / Blog / Market Analysis / Markets Morning - FOMC minutes show Fed still tightening but getting closer to a pause, USD down, stocks stable

Markets Morning - FOMC minutes show Fed still tightening but getting closer to a pause, USD down, stocks stable

Market Analysis /
Greg McKenna / 23 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 (7.42am Thursday August 23)

Did you see the footage of President Trump’s rally yesterday, the night of the Manafort and Cohen news? If you didn’t it’s worth having a look because what you’ll see is a President who is not going to back down and one who might even double down just to make a point.

That’s my fear after I heard him again reiterated he’s going to whack a 25% tariff of European cars. No mention of his two former advisers just the fire and brimstone we’re used to seeing from Trump on the hustings.

So when Wilbur Ross said again this morning that now is a good time to have a trade spat because the economy is strong you get a sense the administration is not backing away anytime soon.

And that’s important in the context of the minutes to the last FOMC meeting suggest the Fed is taking the trade war threat seriously. Other than that the minutes also show that the Fed sees the economy as strong but the debate about just how many more rate hikes are needed before the pause is hotting up. The takeaway is that September is a lock and December is certainly live.

That didn’t help the US dollar which is still under pressure though. IN DXY terms it’s down 0.2% at 95.06 whilethe Euro is up at 1.1595 for a 0.2% gain after an overnight high of 1.1623. GBPUSD is up 0.12% to 1.2916 and USDJPY has actually risen 0.2% to 110.49.

On the commodity bloc the machinations in Australian politics have been a handbrake on the Aussie’s full participation in the USD reversal. Stuck in the 0.7250 region it’s up 0.2% at 0.7255 but if the previously solid correlation with the Euro was holding it would be north of 74 cents. The Kiwi is up 0.13% at 0. 6699 while the Canadian dollar gained 0.3% with USDCAD back below 1.30 at 1.2992.

EM currencies have been interesting. The Mexican peso is a per cent better bid as a NAFTA deal looms, the South African Rand has gained another 1.6%, while the Turkish lira is fairly stable around 6.04. Yesterday’s latest target, the Brazilian real, lost another 0.3% with USDBRL at ~4.06. But today’s winner of EM currency wack a country is the Russian rouble which has lost 1.3% to 68.05 on fear of more sanctions.

To stocks then and Europe was mildly more positive with the CAC up 0.22% and the FTSE up 0.11% but the DAX barely budged to close with a gain of 0.01%. It gave up the highs, around the same level, for the second day in a row.  In the US the dog days of August continue. Fresh from a new record for a bull market today the S&P 500 dipped 0.04% to 2861.82 down 1.14 points. But that’s better than the knee jerk reaction we saw in futures after market. I don’t like the price action and candles though, I can see a test toward 2,820 coming on my charts.

The Dow finished down 0.34% at 25,733, the Nasdaq 100 was 0.37% higher though at 7,424 while the Russell 200 made another closing high at 1,722 up 0.26%.      

The wash up here at home is that after another disappointing day on the overall market yesterday - where the big miners and banks got belted but where there was a capitulation of the tech shorts with a couple of 30%+ gains – the index ended down 20 points. SPI traders, buoyed by the fact the US didn’t kick lower and some decent moves in metals and mining shares globally , have added 17 points overnight.

On commodity markets Brent consolidated the break of trendline resistance the previous night while WTI crashed through multiple resistance with solid gains of 2.9% and 3.1% respectively. A big draw in US crude inventories helped fuel these breaks and Brent sits at $67.89 while WTI is at $67.89. Gold is essentially flat at $1195, Copper – in HGc1 terms – is down 0.93% to $2.6645.

US Treasury rates retain a bid tone and sit at 2.595% in the 2’s and 2.82% for the 10’s. Thus the curve is around 22 points rounded.

Bitcoin is at $6,333 down 1.9% after a dodgy looking ramp above $6,800 in Asia trade yesterday.

Looking at the day ahead the big event is the release of the raft of “flash” PMI’s across the globe. That will give us a quick sniff test on the health of the global economy. Singapore inflation is out in our timezone today along with the Japanese leading index of economic growth. Tonight it’s the ECB minutes that will capture the attention. If the Fed was keeping an eye on the trade tensions surely the ECB will be worried. We’ll see. Later in the US it’s jobless claims, and new home sales.

Have a great day.   

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


  • Fed minutes. I didn’t see anything that we didn’t already know. Just take the comments from Bostic and Kaplan this week. While Bostic was cautious about a fourth rise for the year saying he was 3 at the start and remains 3 Kaplan said the Fed has another 3 or 4 hikes before a pause. That’s not inconsistent with what the minutes showed which was essentially the FOMC is working through the path of interest rate hikes which is least likely to disrupt the economy.
  • Certainly the minutes reflected members wondering when they’ll stop saying monetary policy is “accommodative”. But that’s the key point isn’t it? The Fed is still being accommodative, as I highlighted earlier this week financial conditions are still stimulative.
  • That’s against a backdrop where the minutes reflect that members see “considerable” momentum in household and business spending and that even with a slowing in the second half of 2018 the economy would still be operating above potential. Thus it’s no surprise then that participants expect further hikes and that it would “soon” be appropriate to raise rates.
  • So all this tells me is that the Fed is on track to hike next month, is likely to hike in December, and then depending on how the economy is heading into the early part of 2019 likely to hike one or two more times before it pauses to assess.
  • One thing the Fed did note which is worth watching in case president Trump’s Mueller investigation worries make him angry enough to double down – as I think it might – is that the Fed said most participants “expressed the view an escalation in international trade disputes was a potentially consequential downside risk for real activity”. Importantly if things do get worse, “some participants suggested that, in the event of a major escalation in trade disputes, the complex nature of trade issues, including the entire range of their effects on output and inflation, presented a challenge in determining the appropriate monetary policy response”. That’s something to keep in the back of traders and investors minds. Because if the Fed is uncertain everyone else will be too and that could impact markets.
  • Here’s something that suggests both the tax cuts are working and which supports the Fed comments about Business investment. Via the excellent @TonyNashOnAsia  comes news via Reuters BreakingViews that "Companies in the S&P 500 Index reported a 24 percent year-on-year increase in capital spending in the second quarter". That, according to BAML, is the fastest pace since 2011. Here’s the important part, “Investment is increasingly going into tangible goods, not just software and intellectual property that predominated in the past. Spending on structures increased by more than 13 percent in each of the first two quarters of this year while investment in equipment has been growing at a nearly 10 percent rate since the start of 2017. U.S. Steel has increased its capital-expenditure plans by a quarter, to $1.5 billion, to overhaul plants and boost flat-rolled steel capacity by 10 percent by 2020”.
  • Like the bull market, there is no reason the US economy can’t set an all-time expansion length record regardless of what the recessionistas and the curve says.
  • Back to Trump lawyer Michael Cohen for a sec. His lawyer says Cohen, Trump’s former lawyer, has “knowledge” of Russia campaign conspiracy Bloomberg reports. But lest you think I’m going all impeachment here’s what Greg Valliere, Horizon Investments chief global strategist and my favourite politico/markets watcher in the US, has to say about Trump.
  • Greg wrote overnight, “Chances of impeachment have increased; chances of conviction have not. With two more Trump associates now facing jail time, chances have improved that the House will flip back to the Democrats, who in private concede that an impeachment debate probably will begin by late winter. But we're sticking with our call—while the House might indict Trump, Senate conviction still looks unlikely…”
  • And for those interested, JP Morgan’s quant guru says the recent outperformance of US stocks relative to the rest of the world won’t last. CNBC has more here.

Have a great day's trading.

Greg McKenna

Chief Market Strategist


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