The Dow staged an impressive comeback in the previous session, boosted by retailers and tech stocks even as the bond markets were once again flashing recession warning signals. The Dow rallied 240 points despite the 2 year bond yield inverting with the 10 year yield for the second time this month – a classic recession warning shot. Every recession in modern history has been preceded by a yield curve inversion. Asia is trading mixed whilst European futures are pointing to a softer start on the open.

The markets barely reacted to the minutes from the July FOMC. This was the meeting where the Fed cut interest rates for the first time in a decade. The minutes showed that policy makers at the Fed debated the idea of interest rate cuts more aggressively, but in the same breath wanted to avoid the appearance of being on a path to more cuts.  They remain optimistic about the health of the US economy but increasingly concerned over the state of the global economy. Whilst a couple of policy makers were in favour of a deeper cut of 50 basis points, several were in favour of no action at all.

The market reaction to the FOMC minutes was lacklustre at best. The minutes were viewed as being less dovish than expected. Expectations for a 25 basis point cut in September declined to 2% from 100% to 98%. A marginal decline, but a decline all the same. This was barely reflected in the dollar, which moved a few points higher before dipping a few points lower. To say that the reaction was lacklustre would be a big understatement. However, it’s also worth remembering that a lot has changed since the last FOMC meeting when expectations of a rate cut were just 60% – most notably an escalation of the  US – Sino trade war and recession signals flashing from the US bond market.

 

US PMI data up next

Dollar traders will now turn their attention to US PMI data before the central focus of the week, Federal Powell’s speech at Jackson Hole. After the outdated nature of the FOMC minutes, you can’t get more current that pmi figures and a speech on monetary policy from Powell. By the end of the week there should be a lot less guess work going into what the Fed plans to do next.

 

Eurozone pmi’s to weigh on euro?

Whilst the euro is nudging higher versus the dollar in early trade on Thursday, could put an abrupt stop to euro gains. Eurozone pmi figures, particularly German pmi figures will be under the spotlight this morning, after German data showed the economy contracting in the second quarter, investor sentiment hitting its lowest level since 2010 and industrial production falling by the most in a decade there is a good chance that pmi figures will cone in softer, cementing the case for ECB monetary policy easing and pulling EUR/USD towards $1.10.

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