Fed Bullard puts 50 bps July rate cut scenario to bed
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Core bonds managed to extend gains yesterday. The European part of trading was driven by heightened geopolitical concerns. The US session started with a dreadful June consumer confidence (lowest since September 2017), but investors were reluctant to add positions given near overbought conditions and the looming Fed Powell speech. Comments by St. Louis Fed Bullard did trigger some reaction. The most dovish governor, who voted in favour of a 25 bps rate cut last week, said that the current situation doesn't call for a 50 bps rate cut.
Rate markets had already completely discounted Fed action in July, but were at odds (40/60 ahead of Bullard) on the size of the cut (50 bps or 25 bps). The dovish governor calling for the smaller move caused some return action higher in yields, especially at the front end of the US curve. Fed Powell's speech eventually erased the Bullard-move. He remained rather positive on the current state of the economy, but stressed that the outlook has become grimmer since May. Businesses and farmers are becoming more concerned about trade tensions, resulting in weakening business confidence. Inflation trends are an additional argument for easing. Powell repeated that "an ounce of prevention is worth more than a pound of cure" and again referred to economic research which says that the Fed should act pre-emptively to avoid a steeper downturn when interest rates are historically low. Additionally, he referred to revamping QE if needed. Daily changes on the US yield curve ranged between flat (2-yr) and -2.9 bps (10-yr). German yields differences ranged between +0.3 bps (2-yr) and - 2.4 bps (10-yr). 10-yr yield spread changes vs Germany ended narrowly mixed with Italy (+3 bps) and Greece (+7 bps) underperforming. Asian stock markets lose ground this morning with India slightly outperforming. Losses are contained given WS's performance yesterday (Nasdaq -1.5%). Core bonds trade weaker.
The US is willing to suspend the next round of tariffs on Chinese imports as a quid pro quo for a Trump/Xi Jinping meeting. Today's eco contains May US durable goods orders which probably won't affect trading. Speeches by ECB/Fed governors are wildcards. We have the impression that Bullard's comments might have pulled the sting out of the core bond rally, at least from a short term point of view. The US 10-yr yield still failed to pierce through 2.01% support which could call for some consolidation/profit taking on core bonds in the run-up to Friday's PCE numbers and G20-meeting. A repeat of yesterday's dismal stock market performance is a risk factor to this scenario.
Long term view: The onus of the ECB is back on potential easing measuring including revamping asset purchases or cutting rates. The Fed opened the door for cutting rates with a July rate cut discounted.
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