· The dollar neared a three-week high against a basket of major currencies on Wednesday as investors continued to unwind bets on deep U.S. interest rate cuts, pushing Treasury yields higher.
Further gains in the greenback depend on the tone Federal Reserve Chairman Jerome Powell strikes during two days of Congressional testimony starting later on Wednesday.
Expectations for a 50 basis point (bps) rate cut at a Fed meeting later this month have evaporated, but investors still expect a 25 bps cut due to weak inflation and worries about growing business fallout from the U.S.-China trade war.
· In Asian trading, the index that tracks the greenback against six other major currencies was at 97.516 after touching 97.588 on Tuesday, which was the highest since June 19.
The benchmark 10-year Treasury yield was at 2.0752%, up from a 2-1/2-year low of 1.9390% reached on July 3.
The probability of a 25 bps cut was 98.5% on Wednesday, with a 1.5% chance of a 50-point cut. A week earlier, those forecasts were 75% and 25%, respectively.
· Traders will also closely scrutinize the release later on Wednesday of minutes from the Federal Open Market Committee’s previous meeting.
· A break in Treasury yields above 2% is a sign the dollar can continue to rise,” said Junichi Ishikawa, senior foreign exchange strategist at IG Securities in Tokyo.
“The most important event is Powell’s comments. An unwinding of long Treasury positions is pushing up yields and supporting the dollar.”
· Against the dollar, the euro was steady at $1.1208 after hitting $1.1194, which was the lowest in nearly three weeks.
· Fed Chair Powell heads to Capitol Hill — What to know in markets Wednesday
Wednesday is gearing up to be a big day for the Federal Reserve. First, Fed Chairman Jerome Powell heads to Capitol Hill to kick off two days of testimony in front of Congress. He will be delivering his semi-annual Monetary Policy Report. Then in the afternoon, the Fed will also release its June meeting minutes. Investors will be paying close attention to these two potential market-moving events.
Powell’s testimony comes on the heels of a blowout June’s job report that was released on Friday. The U.S. labor market continues to remain the bright spot in the economy, even as other recent economic data points to a deceleration. Stocks sank following the jobs report, as investors worried that the stronger-than-expected data would dampen the chances of a rate cut at the Fed’s July meeting. Nevertheless, the markets are still pricing in a 100% chance of a 25 basis point cut in July. Several economists have noted that the recent jobs report illustrated that the data was not weak enough for the Fed to cut rates at this month’s meeting.
“The recent better-than-expected economic data and the easing of trade related uncertainties following the G-20 give Powell the chance to push back against markets pricing in a July cut. We think he takes this opportunity to do just that, while continuing to note that uncertainties are elevated and global crosscurrents remain,” Bank of America Merrill Lynch predicted in a note Friday.
Now, many are wondering what the central bank’s future monetary policy path will look like, and Powell could provide some clues during his testimony. His language about the current state of the economy, as well as risks and “crosscurrents” will play a crucial role.
In addition to questions about the economy, Powell will likely be grilled on political pressure, as President Donald Trump continues to relentlessly attack the Fed.
· It remains relatively undetermined to what extent U.S.-China trade tensions have weighed on the American economy, but any continued damage could tip the scales in the upcoming presidential election, according to David Firestein, executive director of the University of Texas at Austin’s China Public Policy Center.
That is, if Trump continues imposing tariffs, he may lose the slim electoral edge that won him the White House in the 2016 election, Firestein predicted.
“He doesn’t have the slack in his popular support to be able to damage the economic interests of many of his constituents in the heartland of the United States and still expect that they will unanimously support him for president as they did four years ago,” said Firestein.
· U.S. inflation is unlikely to surge anytime soon, though keeping interest rates too low for too long creates risks for financial stability, Kansas City Federal Reserve Bank President Esther George said on Wednesday.
Speaking in Helsinki, George said that inflation expectations, which have recently been falling, could change quickly if, say, investors or the public more generally became alarmed about rising government spending on an aging population.
· Japan and South Korea raised the stakes on Tuesday in a dispute that threatens to disrupt global supplies of smartphones and chips, with South Korea denouncing Japanese reports it had transferred a sensitive chemical to North Korea.
It quoted an unidentified senior member of Abe’s Liberal Democratic Party (LDP) as saying some hydrogen fluoride exported to South Korea had ultimately been shipped to North Korea.
Hydrogen fluoride, a chemical covered by the Japanese export curbs, can be used in chemical weapons. Japan has said it has seen “inappropriate instances” of South Korea’s export controls, but has not elaborated.
South Korea’s president said on Wednesday Japan’s export curbs on key materials used by South Korean technology firms could be prolonged and his government will sharply boost spending to help reduce their reliance on Japanese suppliers.
· China’s producer prices flatlined in June on lower oil prices and weak global demand, fuelling concerns that a slowdown in manufacturing from a bruising trade war will further drag on growth in the world’s second-biggest economy.
The producer price index (PPI) showed no growth in June from a year earlier, the National Bureau of Statistics (NBS) said on Wednesday. That compared with a 0.6% rise in May and a gain of 0.3% forecast by economists in a Reuters poll.
· Automobile sales in China fell 9.6% in June from the same month a year earlier, the country’s biggest auto industry association said on Wednesday, marking the 12th consecutive monthly decline in the world’s largest vehicle market.
Sales fell to 2.06 million vehicles, the China Association of Automobile Manufacturers (CAAM) said.
That followed declines of 16.4% in May and 14.6% in April, as well as the first annual contraction last year since the 1990s amid slowing economic growth and a crippling trade war with the United States.
· Oil prices rose on Wednesday after industry data showed U.S. stockpiles fell far more than expected, alleviating concerns about oversupply, while major U.S. producers evacuated rigs in the Gulf of Mexico ahead of a brewing storm.
West Texas Intermediate (WTI) crude Clc1 climbed 85 cents, or 1.5%, to $58.68 by 0541 GMT. Brent LCOc1 was up 64 cents, or 1%, at $64.80, having earlier hit $64.95.
The U.S. and global benchmarks have gained this year as the Organization of the Petroleum Exporting Countries (OPEC) and big producers such as Russia have curbed output to bolster prices.
However, ongoing trade tensions have raised fears about weaker demand, and investors have been on the lookout for signs that rapidly increasing U.S. production is being consumed.
U.S. crude stockpiles fell more than forecast last week, while gasoline inventories decreased and distillate stocks built, data from industry group the American Petroleum Institute (API) showed on Tuesday.
Crude inventories fell by 8.1 million barrels in the week to July 5 to 461.4 million, compared with analyst expectations for a decrease of 3.1 million barrels, according to the data.
Reference: Reuters, CNBC, Yahoo
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