FOMC Minute of the July meeting

Markets

• Trading remained confined to recent ranges yesterday. The eco/event calendar was unenticing apart from FOMC Minute of the July meeting. These showed that most participants joined Powell’s hawkish rate cut view (one-off adaption) with headwinds from doves (50 bps reduction) and hawks (unchanged policy). US yields and the dollar rose marginally after the release of the Minutes as they raise some doubt ahead of tomorrow’s speech by Fed Chair Powell in Jackson Hole. We think Powell will change his tone compared to the Minutes and adapt to new economic/market reality by stating that the normalization process is over and re-installing a more accommodative bias. One of the conclusions of the Fed’s monetary policy framework review was that they could more easily and pre-emptively use unconventional tools like forward guidance and QE. The US yield curve bear steepened in a daily perspective with yields rising by 6.3 bps (2-yr) to 3.4 bps (30-yr). German yields added 1.8 bps (2-yr) to 2.5 bps (5-yr). The feared “buyer’s strike” at the German 30-yr Bund auction (0% coupon; -0.11% avg yield) didn’t occur. Total bids were low, but marginally higher than in July. 10-yr yield spread changes vs Germany ended close to unchanged with Italy (-6 bps) outperforming. Investors bet that President Mattarella will be able to install a (technocrat) caretaker government to ready the 2020 Budget before returning to the ballot box. We would still shun BTP’s given heightened political risk. EUR/USD whipsawed around 1.11 for most of the session before falling towards 1.1080 after the Minutes. USD/JPY closed the day higher, at 106.62, but remains below the first resistance area (106.78/107.21). EUR/GBP rose from 0.9121 to 0.9140 with sterling feeling some pressure from French government officials saying that they expect the UK to leave the EU without a withdrawal agreement. The first meeting between German Chancellor Merkel and UK PM Johnson also didn’t yield any progress. Merkel challenged Johnson to find a solution for the Irish backstop in the next 30 days.

• Asian stock markets lose ground this morning with Hong Kong underperforming. Japanese (marginally better) and Australian PMI’s (significantly weaker) were mixed. Today’s eco calendar focuses on Europe with EMU PMI’s and Minutes of the previous ECB meeting. Consensus expects a further setback in both manufacturing (46.2 from 46.5) and services (53 from 53.2) gauges. We fear risks remain tilted to the downside of expectation. July Minutes from the ECB will probably be dovish and might provide hints on how a September easing package might look like. The combination of both is positive for Bunds (with outperformance vs US Treasuries) and can pull EUR/USD down for a test of the recent lows around 1.1027/1.1066.

News Headlines

• FOMC Minutes of the July monetary policy meeting showed that most participants agreed with the 25 bps policy rate cut as a “recalibration of the stance of policy, or a mid-cycle adjustment, in response to the evolution of the economic outlook”. Participants also noted that the experience acquired by the Committee with the use of forward guidance and asset purchases has led to an improved understanding of how these tools operate; as a result, the Committee could proceed more confidently and pre-emptively in using these tools in the future if economic circumstances warranted.

• The US Congressional Budget Office (CBO) said that the latest budget deal, which lifts spending above caps enacted in 2011, will add roughly $1.7tn to deficits between 2020 and 2029. Annual deficits are expected to average 4.7% of GDP over that period, compared to the 4.4% of GDP the CBO estimated in May. The average US deficit over the past 50 years was 2.9% of GDP. The government debt-to-GDP ratio is forecast to swell from 79% this year to 92% by the end of 2029. That would be the highest level since just after WW II.

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