Bessent put, economic warfare and Fed minutes

It is one of those mornings where it is difficult to know where to begin.

The bessent put

One of the key threads this morning is the bond market, after US Treasury Secretary Scott Bessent announced that the Fed would intervene to curb government borrowing costs, and that the Treasury Department would at least double its bond purchases on the long end to around US$4 billion.

On the back of this, though, I believe this equally calls Bessent’s credibility into question. You may remember that he has consistently called for a ‘regular and predictable’ operating framework. There was nothing about this that was predictable!

As you would expect, the announcement triggered a sizeable bull-flattening of the Treasury yield curve yesterday, sending 30s and 10s to 5.19% (from a 19-year high of 5.33% on Tuesday) and 4.64% (from 4.75%), respectively. However, like the US-Japan coordinated yen intervention at the tail end of July, the move has certainly gained some short-term momentum in the bond market, with CITI Group saying this is a top in yields. Many, however, do not see this bond-market intervention as anything other than temporary in a roughly US$30 trillion market, with the Treasury still needing to finance deficits and maturing debt.

The announcement also pushed the USD sharply lower, underpinning a strong bid in EUR/USD. On the back of this, the Team highlighted a completed head-and-shoulders top on the USD/CHF daily chart, with the pattern’s profit objective at ₣0.7885. In other markets, gold and Bitcoin rallied strongly yesterday, though equities were largely left out of the move in the US, which was surprising.

Trump’s economic warfare

When actual war fails to achieve its desired effect, Trump has resorted to economic warfare – something he has recently labelled ‘economic D-Day’. Specifics were few and far between as of writing, but given his latest messaging via Truth Social posts, he is growing increasingly impatient.

Trump wrote that he was announcing ‘the MOST CRUSHING ECONOMIC OPERATION EVER TAKEN AGAINST ANY COUNTRY! This will be Economic Warfare and Isolation on an unprecedented scale’. He added that any country seen providing a ‘lifeline’ to Iran will face ‘TREMENDOUS ECONOMIC CONSEQUENCES’. Trump did not name any countries, but instead said ‘you know who you are’.

Frankly, as long as this continues in the Middle East, the risk premium will remain priced into oil. Brent crude is now comfortably above its 200-day SMA, with scope for further outperformance towards US$100, according to the technical landscape.

Old-fashioned family fight?

The minutes from the July Fed meeting, which hit the wires yesterday, indicate that there was indeed an old-fashioned family fight, with inflation front and centre.

Most Fed participants agreed that if inflation did not ease, policy firming would be necessary. They also said inflation outlooks were ‘highly uncertain’ and that inflation risks were skewed to the upside, adding that the escalation in the Middle East has also clouded their outlook. The minutes also revealed that growth/employment risks were skewed to the downside, leaving the Fed in a genuine two-sided bind. However, I must add that the minutes are evidently outdated, with CPI and PPI numbers for July, as well as retail sales data, coming in weaker than expected.

Year-end market pricing still indicates about a 70% chance that the Fed pulls the trigger and raises the target rate by 25 bps, with a hike fully priced in by the end of Q1 27.

Day ahead:

Overnight, we saw the July Australian employment data land, showing employment fell by 15,800, marking a 0.1% MM dip and taking the unemployment rate up to 4.5% from 4.4% in June; the participation rate also eased to 66.9% from 67%.

However, looking under the hood, you will find that full-time employment was actually up by 16,300, while part-time jobs fell by 32,200. Further, you may recall that the 4.5% unemployment rate landed bang in line with what the RBA expected by the end of this year. This is largely why the AUD failed to follow through on its initial push lower, making it a difficult event to trade out of, and is why I believe we only saw a modest dovish repricing in rates markets.

As for the day ahead, traders will watch the August Philadelphia Fed manufacturing survey at 12:30 pm GMT, with estimates suggesting a pullback to 24.1 from 41.4 in July. At the same time, US weekly jobless claims are expected to remain largely unchanged around 210,000.