Fed Chair Spurs Expectations of Rate Cut

UNITED STATES

Federal Reserve chair Jerome Powell put at ease investor fears that a rate cut may be delayed in the wake of strong US labour data during the first session of his two-day congressional testimony. In his testimony, Powell noted how trade tensions have contributed to slower growth in the US and thus posed more risk to the economy; he reiterated that the Fed is prepared to “act as appropriate to sustain the expansion”, a phrase analysts say points strongly to a rate cut at the next Fed meeting this month. Minutes of the Fed meeting in June also added to the momentum with the summary of the meeting stating that “many” Fed officials were willing to cut rates if necessary. Stocks picked up on Powell’s dovish tones with the S&P going over 3,000 intraday before closing 0.45% higher, just 0.1% below its all-time closing high. The NASDAQ also recorded noteworthy performance, gaining 0.75% to close at a record-high as the DOW bucked its losing streak to rise 0.29%. Yield on 10Y USTs closed slightly lower at 2.0613%.

UNITED KINGDOM

UK car production figures for May picked up to mark a bright spot given the dour figures that have accompanied the economy lately. Vehicle production surged 24% in May to spur a 14.4% rise in manufacturing which had slumped 4.2% in April. GDP for May in turn rose 0.3% after a decline in May. The bounce back may not be enough to prevent a contraction in Q2 with the Office for National Statistics predicting a fall in GDP unless June output manages another small gain. The pound rose back above the psychological $1.25 mark, but only just, closing at 1.2502 while yield on 10Y UKTs gained about 4bps to 0.7565%.

EUROPEAN UNION

The European Commission cut its eurozone growth and inflation forecast for next year as trade tensions continue to weigh on the region bolstering the case for further stimulus. In its quarterly forecasts the Commission trimmed next year’s GDP estimate to 1.4% from 1.5%   while inflation was lowered to 1.3%. Their remarks come just two weeks before the next ECB policy meeting where there are high expectations of a rate cut or signals that action is imminent. The euro closed higher at $1.1251 while yield on 10Y DBRs was 5bps higher at -0.307%.

ASIA

Asian stocks opened on a high note followed their Wall Street peers’ gains yesterday as the Fed gave signals that it would cut rates for the first time in a decade. Trading remained in the green in afternoon trading with the HANG SENG and NIKKEI trading 0.73% and 0.51% respectively. The CSI had however pared early gains to trade just about flat at 0.01%.

TURKEY

Turkey recorded its smallest annual current account gap since President Recep Erdogan took power recording a monthly surplus of $151 million in May and reducing the 12-month rolling gap to $2.37 billion. As weak consumer demand continues, imports have been drastically reduced resulting in the deficit falling significantly from $8.69 billion in April. The reduction in imports has also seen the trade deficit shrink to $706 million, $5.9 billion down from a year earlier. The central bank statement also showed an increase in reserves of $3 billion which the bank partly attributed to capital inflows. The lira firmed, closing at 5.6763 to the dollar while TURKEY 47s traded unchanged in the mid 82s.

LATAM

Brazil’s pension reform cleared a major hurdle with the draft legislation clearing its first lower house vote with a 379-to-131 victory. While it may yet face a number of amendments before becoming law, it signals a positive step in reforms that will result in significant government savings. Previous administrations had failed at attempts to reform the pension system of the country – which spends ten times more on retirees than on education – and its victory by a significant margin above the minimum 308 votes promises little resistance to its future passage. Ahead of the vote, Brazilian assets had rallied with the benchmark stock gauge, the IBOVESPA rising 0.7% before closing 1.23% on the day. The real also rallied gaining a little under 1% to close at 3.7543 to the dollar as did BRAZIL 47s trading in the high 108s.

RUSSIA

Demand for Russia’s OFZ bonds is showing little signs of slowing as Wednesday’s auction saw a demand of an equivalent $817 million against a placement size of an equivalent $249 million. An earlier statement by the central bank on Wednesday had showed that foreign holdings of OFZs had increased to 30% in June as demand had remained strong throughout the month. With a rate cut largely expected during the central bank’s meeting this month, demand for the bonds yielding about 7.3% was high as expected. The ruble closed 1.15% against the dollar at 63.1611 while RUSSIA 47s traded unchanged in the mid 111s.