Fed Chairman Jerome Powell stated at since early May the economic outlook has become darker, underpinning the case of interest rates cut by the Fed in July. Mr. Powell said, "We do see that the risks to that outlook have increased. We're very mindful of those risks and prepared to use our policy tools to support activity as needed." In response the US 10-year treasury yield fell by 2bps to below 2.0%. Interestingly Powell also stated that "It's important not to overreact in the short term to things which may turn out to be temporary." In our view, this comment goes directly at trade war concerns and the potential for a resolution to drive equities higher. However, the rising expectations (Fed’s Bullard comments have use rethinking the probably of 50bp cut) was not able to lift Asian equity markets. Most Asian stocks market were lower, Shanghai -0.17% and Nikkei -0.51%, with those in the green baseline. Global risk appetite remains weak.
The news flow that is likely to give stocks a renewed vigor is reports that new tariffs on the remaining $300bn worth of Chinese goods are on hold. This new should be the minimal announcement after the Trump-Xi summit scheduled for this Saturday. Yet the optimism has been tempered by rumors that three Chinese Banks are under US probe due to violations of North Korea sanctions. We still view trade rhetoric as short-term volatility-inducing rather than a longer-term cyclical shift. Given this thinking, we are constructive on EM currencies as a bloc. The Fed dovish pivot and aggressive rate cut expectations will force investors to search for yield. After a period of hesitation, the Fed is now prepared to do whatever is necessary to secure US growth, especially in the absence of inflation. The only real question is how quickly monetary and fiscal policy change react to shifts in data. The surge in Gold is typical when central banks plan further debasing of their currencies.
