Long Treasury bonds and notes has been the most reliable trade in 2019, points out Landon Whaley....
Is Fed Getting Cold Feet on July Rate Cut?
07/12/2019 11:23 am EST
While the read on Chair Powell’s testimony was that there would be a July rate cut, three Fed members pushed back on a July rate cut.
E-mini S&P (ESU)
Yesterday’s close: Settled at 3004, up 6.50
Fundamentals: U.S benchmarks are edging higher after Fed Chair Powell solidified the committee’s path to a rate cut later this month. The Federal Reserve is in the driver’s seat and whether you want to justify the likely policy move as erasing December’s hike or proactively sustaining U.S growth, the expectations are boosting asset prices. Inflation is the hot topic, no pun intended, yesterday’s Core CPI came in stronger than expected with a gain of +0.3% for the month, the largest jump since January 2018. This is simply one read, and inflation has been soft leading up to this point, however, continued strength will certainly dent plans for additional rate cuts.
As of this morning, the Fed is expected to cut 75 basis points this year with a better than 50% probability, based on Fed funds futures (which doesn’t mean anything as this is not always an accurate indicator of where rates will be). In fact, three non-voting Fed members this week have pushed back on the case for cutting rates at the July 30-31 meeting; Philadelphia Fed President Harker, Richmond Fed President Barkin and Atlanta Fed President Bostic. Chicago Fed President Evans, who is a 2019 voter, speaks today at 9:00 am CT. He has been known for his dovish lean in the past, even dissenting on the December 2017 hike, but as recently as June said he did not see the case for a rate cut yet. The lesser watched Producer Price Index (PPI) data is due 7:30 am CT. This roller-coaster number has been impacted by the trade war but has clearly softened in recent months.
It does make sense for the Fed to justify a cut as sustaining U.S growth, especially given the deteriorating conditions abroad. Although Eurozone Industrial Production came in better than expected today, the overall picture is weak. China’s Trade Balance data was highlighted by much lower Imports than expected, led by imports of U.S goods dropping 31.4% year-over-year Furthermore, there are reports that China’s trade surplus with the United States jumped by 12% in the first half of the year which does not bode well for the trade war. Singapore is also making headlines, the export-rich nation’s Q2 GDP data slipped sharply by 3.4% when +0.1% was expected. Still, risk-sentiment is holding ground well this morning because the Federal Reserve is in the driver’s seat.
Technicals: The S&P and Dow closed at record highs yesterday. The bulls fought waves of selling into 1:20 CT and price action turned a corner into the close. Why?
Crude Oil (CLQ)
Yesterday’s close: Settled at $60.20, down 0.23
Fundamentals: The price of crude oil is more subdued than one would imagine given the technical breakout on the heels of a bullish EIA report, ongoing tensions with Iran and a storm brewing through the Gulf of Mexico ahead of the weekend. The U.S government noted that U.S production would be cut by about 1 million barrels-per-day or just more than half due to Tropical Storm Barry. However, the IEA did not do the bulls any favors in their Monthly Report this morning citing that growing U.S production will outpace demand and lead to another supply glut. While this issue is extremely relative and concerning for the longer-term bull case, it is not new, and we imagine the aforementioned bullish narrative will work to keep a bid under the tape heading into the weekend.
Technicals: Price action has not done anything wrong, though it is consolidating back. We have first key support at $59.70, which we pointed to yesterday as a buying opportunity.
Yesterday’s close: Settled at $1,406.7, down 5.8
Fundamentals: Gold is gyrating at a key technical level in a more broadly rangebound trade with competing fundamentals. We have had a narrative more recently that yields are due for a bounce and while this plays out, it is holding gold back from extended gains. The 10-year Treasury note yield has been building support at 2% while the U.S data has been better than expected. As you know, we have held a lower for longer rhetoric on rates, but nothing moves in a straight line and as odds for multiple Federal Reserve rate cuts this year mount, we find these expectations out over their skis. PPI data followed in line with yesterday’s CPI coming in stronger than expected. While this has not revved the dollar, it could keep pressure on Treasuries (supporting rates).
Technicals: We remain unequivocally long-term bullish gold, however, as we noted here yesterday, began neutralizing our bias upon the fourth test and failure to major three-star resistance at $1,432.9.
Bill Baruch provides technical levels on all markets throughout the week at BlueLineFutures.com.
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