· The dollar rose against the safe-haven yen and Swiss Franc on Wednesday, as risk appetite further improved with global stocks and U.S. yields higher ahead of an annual Federal Reserve gathering later this week in Jackson Hole, Wyoming and a summit of major central banks this weekend.
Market participants are waiting for any statement from the Fed and other global monetary authorities meeting at a Group of Seven summit this weekend on possible measures to lift slumping economies around the world.
The U.S. dollar last traded at 98.295 against a basket of its peers, climbing from levels near 98.145 earlier in the day.
In morning trading, the dollar rose 0.2% against the yen to 106.43 yen, gaining in four of the last five sessions.
The euro, meanwhile, was slightly lower at $1.1096, moving little since Italy’s Prime Minister Giuseppe Conte resigned on Tuesday.
The dollar has also been supported by talk of more spending. U.S. President Donald Trump said on Tuesday his administration was considering potential tax cuts on wages as well as profits from asset sales. The Fed minutes of the last monetary policy meeting are also due out later on Wednesday, although that is being overshadowed by the Jackson Hole meeting later this week.
Some investors believed the move made a snap general election less likely. Credit Agricole strategist Manuel Oliveri expects the euro to strengthen towards $1.12 by September even though the European Central Bank will struggle to exceed investor expectations for cutting rates. Talk of more fiscal spending in Germany and the hit to the U.S. yield advantage from falling interest rates, should support the euro, he added.
· The spread between the yield on the 10-year Treasury note and that of the 2-year note on Wednesday turned negative for the second time in one week, a recession warning that flashed for the first time since 2005 on Aug. 14.
The inverted bond-market spread is seen by many veteran traders as an important recession omen, though the timing on the eventual downturn is less predictable. Shortly before 4 p.m. ET, the yield on the benchmark 10-year Treasury note was below the 2-year Treasury note yield by a hair. The spread then quickly widened again and was last seen at a positive 1.8 basis points with the 10-year yield at 1.587% and the 2-year rate at 1.569%. A basis point is 0.01 percent.
Fears of an economic slowdown appeared to resurface Wednesday afternoon, when the release of the Federal Reserve’s July meeting minutes reiterated officials’ belief that its July rate cut was just a “mid-cycle adjustment.”
Central bank officials who voted to lower interest rates late last month agreed that the move shouldn’t be interpreted as a predecessor to more rate cuts or a “pre-set course” for the overnight lending costs.
· Market moves were modest after the Fed released minutes of its last meeting, but the message was clear — the market still fears the Federal Reserve will not be aggressive enough in its rate cutting to save the economy.
“If midcyle adjustment is not in the Jackson Hole speech, people will interpret that as opening the door for more cuts as opposed to two or three,” said Michael Gapen, chief U.S. economist at Barlcays. Since the Fed’s last meeting, bond yields, which move opposite price, have dropped or moved deeper into negative territory.
· Minutes from the Fed’s last rate-setting committee meeting, which ended on July 31, revealed that most officials saw the 25 basis point reduction in the Fed’s main interest rate as a “recalibration of the stance of policy, or a mid-cycle adjustment, in response to the evolution of the economic outlook”.
But within that general consensus, there was a wide range of views on the Federal Open Market Committee. “A couple” of members said they would have preferred a 50bp cut in rates immediately, pointing to the need for “stronger action” against “stubbornly low inflation”.
But “several” officials argued in favour of keeping rates steady, “judging that the real economy continued to be in a good place”. Two of them, Esther George, the president of the Federal Reserve Bank of Kansas City, and Eric Rosengren, the president of the Boston Fed, voted against the committee’s decision.
The diversity of views about last month’s reduction adds to the issues confronting Mr Powell ahead of the next FOMC in September, when investors are expecting a new move by the central bank to cut interest rates to insulate the US economy from the impact of trade tensions and a global slowdown.
· Senior economists at the International Monetary Fund (IMF) have warned countries against relying too heavily on monetary policy easing, and argued that currencies are “neither the hammer nor the nail” in efforts to reinvigorate economies.
With global growth sluggish and inflation low, a host of central banks have recently cut interest rates to prop up their respective economies, with others, such as the ECB (European Central Bank), expected to follow suit later this year.
Cutting interest rates reduces the cost of borrowing in the hope of encouraging consumers and businesses to spend and invest more.
However, in a blog published Wednesday, IMF senior economists Gita Gopinath, Luis Cubeddu and Gustavo Adler warned that the recent surge in monetary easing from both advanced and emerging market economies has created concerns over so-called “beggar-thy-neighbor” policies and fears of a currency war.
Beggar-thy-neighbor refers to international trade policy which aids the country which enacted it while harming its neighbors or trade partners.
· Analysts generally doubt how effective the People Bank of China’s latest interest rate announcement will be in significantly helping businesses grow.
“I think LPR could help lower the funding cost for SMEs, albeit modestly,” Larry Hu, chief China economist at Macquarie, said in an email. “But it could not do much about the key constraint for credit growth at this stage: the lack of credit demand.”
· President Donald Trump on Wednesday declared himself “the Chosen One” as he defended his administration’s actions in the ongoing U.S.-China trade war.
The president’s remark followed a string of criticisms aimed at his predecessors, whom he claimed had ignored China’s alleged malpractice on trade.
“Somebody had to do it,” the president says, and “I am the Chosen One.”
· Japanese manufacturing activity shrank for a fourth straight month in August as export orders fell at a sharper pace, a preliminary business survey showed on Thursday.
But services sector activity expanded at the fastest pace in nearly two years, suggesting resilient domestic demand is continuing to offset some of the strong external pressures on the economy.
The Jibun Bank Flash Japan Manufacturing Purchasing Managers’ Index (PMI) rose to a seasonally adjusted 49.5 from a final 49.4 in the previous month, but stayed below the 50.0 threshold that separates contraction from expansion for a fourth month.
· Oil futures steadied on Wednesday after U.S. government data showed a drawdown in domestic crude stocks but rises in refined product inventories, while lingering worries about the global economy weighed on the market.
Brent crude rose 0.42% to $60.28 a barrel, down from a session high of $61.41. U.S. West Texas Intermediate (WTI) crude settled down 0.8% to $55.71 a barrel, after hitting $57.13 a barrel.
Prices pared gains after data from the Energy Information Administration showed bigger-than-expected builds in U.S. fuel inventories last week. Gasoline stocks rose by 312,000 barrels, while distillate supplies grew by 2.6 million barrels.
Crude stockpiles decreased 2.7 million barrels, a bigger drawdown than the 1.9 million barrels that analysts had forecast.
Reference: Reuters, CNBC, Financial Times
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