Fed tempers hope for 50 bps of July cuts

Fed pours cold water on the market

Financial markets have woken-up, after slow-start to the week, with Wall Street stocks selling-off, volatility picking-up, and the US Dollar attempting to recover a skerrick of some of its recent losses. The action comes consequent to a speech delivered by US Fed Chair Jerome Powell overnight, in which central-bank-head acknowledged a dimming US economic outlook, but poured some cold water on the notion of a 50-basis point cut from the Fed next month would be required in response. The US yield curve flattened as a result, as bets of such aggressive Fed-action was unwound, which weighed on risk-assets like equities and corporate credit.

US economic data tonight

Tonight’s US Core Durable Goods Orders take on greater significance now – and will act as a little teaser for the Final US GDP read on Thursday. The recent trend in US Core Durable Goods Orders has been to the downside, as the US economic cycle seemingly enters its later stages. At that, there is concern that the trade-war ought to soon manifest in this economic indicator, as business conditions in the US tangibly wane. With markets sensitive to the Fed’s rate outlook, tonight’s release will be one to watch, especially as it relates to the USD, which is still general lower, in sympathy with lower US rates.

A falling Greenback

The US Dollar is edging towards oversold now. Markets are implying a greater than 70% chance that the US Fed cuts by 50 basis points at its July meeting. It’s an aggressive bet, and one that has pushed the EUR above 1.14, the JPY into the 106 handle, the CHF closer to 1.03, and the AUD towards 0.7000. But most notably of all: gold continues to rally, despite looking aggressively overbought right now, as the yellow metal continues to find buyers, in the face what is a growing pool of negative yielding debt in global financial markets.

ASX200 range trades

Rallying gold prices has been good for the mining stocks on the ASX, supporting solid gains for the materials sector yesterday. Indeed, a bounce by industrial metals off recent lows helped deliver some of this gain; however, the large-chunk of the sector’s gains came from gold-mining stocks, in particular. In all, though, it was a lacklustre day again for the ASX 200 yesterday, in a week characterized, thus far, by range trading. A retracement in financials stocks dragged-on ASX 200, as the bank’s retraced some of Monday’s gains. The bearish overnight lead will manifest in the ASX 200 today: SPI Futures are suggesting a 32-point dip this morning.

RBNZ highlights Asian trade

The Reserve Bank of New Zealand’s meeting will be the highlight of the Asian economic calendar today. In line with the chorus of central bankers across the globe, the RBNZ are expected to progressively ease monetary-policy in the near-term, in response to what is a sluggish inflation outlook, slower jobs growth, as well as a forecast slowdown in the global economy. Markets are betting that the chances of a rate cut from the RBNZ today sits at a relatively modest 20%; with the next rate reduction from the central bank fully implied by September, at the latest.

RBNZ, Kiwi-rates, and the NZD

But like many central banks the world over, an RBNZ rate cut is considered a matter of if not when. And given the implied likelihood of a rate-cut today, trader interest in the event may well be directed towards deciphering what the RBNZ board’s language says about when that move may happen to be. It’s here where volatility in the New Zealand Dollar may arise. Bets are heavily skewed towards a rate cut in August – it’s considered a roughly 75% chance. A more hawkish than expected RBNZ could lead to some unwinding of this positioning, and consequently a pop in the Kiwi Dollar.

What the RBNZ means for Australian markets

It must be said, that’s a low-probability, high-risk, and high-reward scenario out of today’s RBNZ meeting. Anything but a dovish-title from any central banker in this current market-environment would be a surprise. The tides carrying the global economy towards lower interest rates appear too irresistible. And of course, this dynamic is as pertinent in Australia as anywhere else. True to history too, as it relates to Australia’s financial markets: the RBNZ will likely act as a little bellwether for market participants for next week’s RBA meeting, with action in the AUDand Australian interest rate markets likely to mirror their New Zealand counterparts today.