This afternoon traders will learn
About how the Fed did discern
A rate cut was right
And how they just might
Keep cutting despite no downturn

As we look forward to the first truly interesting information of the week, this afternoon’s release of the FOMC Minutes from the July meeting, markets have a better attitude this morning than they did yesterday. As has been the case for the past decade, all eyes remain on central bank activity with the Fed in the lead. If you recall, at the July meeting when the Fed cut the Fed funds rate by 25bps, there were two dissenting votes, Boston’s Rosengren and Kansas City’s George. Monday, Eric Rosengren reiterated that he saw no reason to cut rates given the recent economic data and the outlook for continued solid growth. At the same time, yesterday we heard from San Francisco Fed President Mary Daly, a non-voter, that the cut was the right thing to do despite the growth prospects as continued low inflation and the opportunity to improve the labor market further called for more action. Of course, Chairman Powell will be on the wires Friday morning from Jackson Hole and the market is quite anxious to hear what he has to say, but until then, this afternoon’s Minutes are the best thing available for the market to try to discern the FOMC’s overall attitude.

With that as a backdrop, this morning’s market activity can more readily be described as risk-on as opposed to yesterday’s risk-off flavor. At this point, though, all we have seen is a retracement of yesterday’s losses in equities and gains in the bond market. As to the dollar, it is modestly softer this morning, but that too is simply a retracement of yesterday’s price action.

Clearly it has not been the data which is fueling market movements as there was just not much to see overnight. The little bit released showed continued weakness in Japanese consumer activity (Department Store Sales -2.7%) while UK public finances were modestly less worrisome than forecast. But neither one of those was ever going to move the market. Instead the stories that are of most interest have included Germany’s failed 30-year bund auction, where only €824 million of the €2 billion offered were bought. The interesting thing here was that the coupon was set at 0.00% and the yield that cleared was -0.11%. So the question being asked is; have we reached a limit with respect to what bond investors are willing to buy? While I am surprised at the poor outcome, given my view, as well as the growing consensus, that the ECB is going to restart QE next month and absorb up to €50 billion per month of paper, I believe this will be seen as a temporary phenomenon, and that going forward, we will see far more interest at these levels and even lower yields.

On a different note, Brexit has seen a little more headline activity as yesterday German Chancellor Merkel seemed to start the concessionary talk on behalf of the EU by explaining they need “practical solutions” to solve the Irish impasse. As soon as those words hit the tape the pound rebounded sharply from its lows rallying more than a penny and closed higher on the day by 0.3%. However, this morning, Irish Deputy PM Coveney complained that British PM Johnson was trying to ‘steamroll’ Ireland into accepting new terms and that the result of this was a hard Brexit was far more likely. Funnily enough I don’t remember the Irish complaining when the EU was ‘steamrolling’ former PM May into a completely unacceptable deal for the Brits. At any rate, the latest comments have taken a little steam out of the pound’s rally and it has given back yesterday’s gains. In the end though, I think Germany’s word is going to be far more important than Ireland’s and if Johnson and Merkel have a successful discussion today, the Irish are going to have to accept any deal that is brokered. If anything, yesterday’s commentary and price action have simply reinforced my view that the EU will blink and that the pound is destined to trade much higher before the end of the year.

And in truth, away from those stories it is hard to find anything of interest in the G10 space. In the emerging markets, this morning sees strength virtually across the board as risk appetite everywhere improves. ZAR is leading the way, up 1.1% after a better than expected CPI print of just 4.0%, well below the 4.3% market expectation encouraged inflows to the local bond market where 10-year yields have fallen by 10bps this morning (to a still robust 8.96%). But we have also seen a stronger RUB (+0.95%) on firmer oil prices; and KRW (+0.5%), as traders reduce long dollar positions despite weaker than expected trade data, where exports fell a troubling -13.3% in the first 20 days of the month.

It should be no surprise that European equity markets are firm (DAX and FTSE 100 +1.1%) and that US equity futures are firmer as well, with all three indices seeing gains on the order of 0.6%.

Ahead of the Minutes we will see Existing Home Sales (exp 5.39M) but remember this has been the one area of the economy that has suffered recently. Given the continued decline in yields, and correspondingly in mortgage rates, one would think the housing market would stabilize, but we shall see. And then it is a collective breath-holding until 2:00pm when the Minutes come out. Ahead of that I don’t anticipate much movement at all. After that…

Good luck
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