The Weekly Update

The Fed cut rates for the first time in a decade although there were two dissenters; they also announced they will stop their balance sheet runoff two months ahead of schedule now in August. However, there were conflicting messages in the press conference where Chairman Powell described the cut as a “mid-term policy correction” and intended to “insure against downside risks from weak growth and trade uncertainties” only then to comment that he was concerned for the risks to global growth, manufacturing and below-target inflation. This caused a stormy session for bond yields and the stock market.

Discontent with the quarter-point rate-cut, Trump tweeted that “Powell let us down” and, against most of his advisors, went on to escalate the “trade war” with a further 10% tariff on $300 billion of Chinese exports from September 1st. Markets doubled down on their retreat as those negative “trade uncertainties” became certain with Trump’s brinkmanship and China’s swift and inevitable retaliation. Unsurprisingly, US 10-year Treasury yields plummeted over 22 basis points to close the week at 1.85%, with the entire curve shifting lower and maturities above 5-years all rallying at least 19 basis points. Correspondingly equities had their worst week since before Christmas 2018 with the S&P 500 falling 3.1%, also the Japanese yen appreciated nearly 2% from 108.7 to 106.6 to the dollar.

In Europe, Bund yields followed lower with the 10-year falling 12 basis points reaching -0.50% by the end of the week. UK Gilts kept in trend with the 10-year falling 14 basis points to +0.55% but perhaps only remain positive as a reflection of hard-Brexit risk which continued to materialise in the currency market with sterling depreciating a further 1.8% against the dollar.

Today the focus of the economic calendar will be on PMI data from China, US, UK, Eurozone, Germany and France. The Reserve Bank of Australia release their rate decision on Tuesday (expected to hold following two recent cuts) alongside trade balance data and German factory orders; then on Wednesday Germany industrial production and France trade balance. China’s trade balance data is published on Thursday, and on Friday China CPI and PPI, US PPI, UK and Germany trade balances, in addition to the UK and Japan Q2 GDP readings.

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