Rate cut fever remains alive and well

With the latest inflation data uptick led by volatile categories, equity investors quickly brushed it aside and continued to relish in the afterglow of a far more dovish than expected Chair Powell as rate cut fever remains alive and well.

The CPI report will have no material impact on Fed guidance nor have a significant influence on the great Fed debate around  25 or 50. After all, the FOMC is unquestionably  willing to let inflation run hotter after spending the better part of a decade trying to ignite those flames

The Fed will keep all options open suggesting the hurdle is very low for the market to shift into 50 bp mode, and all that stands in the way will be the US economic data between now and then.

 After all, was said and done, it was a stellar week for global equity markets thanks to the Fed who are always the key to the "risk on "equity view.

The Great FED Debate

After the who's who of the economics world has left no stone unturned during the great Fed debate. I don't have a great deal to add other than to suggest we have a sitting FOMC that is prepared to overdeliver on markets expectations as Federal Reserve Chairman Jerome Powell's monetary policy testimony unambiguously reinforces his inclination to cut rates aggressively.

After chatting with my trader colleagues in NY last night after the CPI print, not surprisingly there is 100 % consensus the Fed is going to cut in July. But we are still no closer to settling the 25 or 50 July rate cut debate 

At the June FOMC, Chair Powell was looking to cut rates 50bp at the July meeting and based on this week FOMC communication that option remains on the table.

The only things that should matter to the markets are Fed forward guidance, current inflation and inflation expectation.   It's clear as a bell, the FOMC have regime-shifted away from policy supported by the Taylor rule in its economic forecasts and have adopted a risk management approach to their policy game plan which in my view is the most significant dovish pivot from a Fed in some time.

Key takeaways

During Wednesday's testimony Fed Chair Powell said the better payrolls print did nothing to change the Fed's assessment which should resonate super-dovish.

But One comment from Powell's Q&A session that should have attracted more attention is that the Fed "does not want to get on the road to periods of low inflation such as in Japan". Such a categorical mention of the Bank of Japan inflation conundrum surely reinforces the message that risk management and specifically inflation concerns are on the Fed's mind and that a 50bp cut remains firmly on the table at the July meeting.

From my July 2 note supporting the 50 bp cut post G-20 "Despite the G-20 trade armistice, I 'don't think this should shift the needle for a 50 bp Fed cut in July because inflation expectations are dangerously close to spiralling downward. For the sake of policy credibility alone and from the fear of falling into the same category as the Bank of Japan, the FOMC needs to ignite the inflationary flames."

Oil markets

The bullish edge came off oil prices on Thursday after OPEC forecasters painted a less rosy demand side picture pointing to a glut in 2020 on lower demand.

However, offsetting this gloomy medium-term forecast and supporting the near-term outlook is the intensifying storm bearing down on the Gulf which has shuttered about half of US Gulf coast oil output.

After an incredible price gusher on Wednesday, market participants should be content to book some profits but could be willing to keep some risk on the table as tropical storm Barry intensifies, amidst uncertainty in the middle east. Both of which should be enough to hold a floor on prices after the hugely bullish US inventory draws this week.

But what a ripper of a week for oil markets!!

Gold markets

Yesterday’s stronger Gold prices had reflected the increased probability of a 50 bp Fed cut in July after a hugely concerted effort by Fed Chair Powell to lean dovish, so there was a fast money long position flush on the better than expected CPI print. But does this minor inflation uptick led by volatile components change the Fed narrative?

However, it is sudden and quick moves on Gold are also contributing to Gold markets rapid undoing at times. With volatility tracking higher, Gold markets are attracting the attention of fast money and news reading algorithm types that have shifted away from saturating low volatile currency markets to sullying the landscape in the Gold market.

Currency markets

The US CPI proved not to be the disaster print for the USD many had expected, but it's challenging to see, other than a run of extremely positive US economic data, what will shift the markets short term bearish view on the US dollar. And supporting that narrative is the EURUSD sitting at 1.1255-60 even as super-dovish speculation builds ahead of the July 25 ECB meeting, selling short the EURUSD remains a challenge in this environment.