FOMC minutes reality check

FOMC to remain aggressive with rate policy

US markets got little solace but more clarity from the FOMC Minutes overnight. It was clear from the minutes that the committee members remained highly focused on culling inflation, even if it was at the expense of a sharp economic slowdown. For July’s meeting, a 0.50% to 0.75% Fed Funds rate hike was most likely. The minutes touched on the need for credibility and as such, I believe there will be no wimp-out by the FOMC at the end of this month, as that would achieve exactly the opposite plus interest.

That was enough to shift the US yield curve higher although most of the gains were concentrated in the two-year tenor which closed back at 3.0% overnight. Ominously, the inversion widened to around eight basis points to the 10-years which finished at 2.92%. Clearly, the street remains on recession watch, and that sentiment will only increase if the inversion across the 2s/5s/10s part of the curve increases.

Still, the US continues to deliver a mixed bag of data although I do accept that the positive releases seem to be generally showing as a series of lower highs. The ISM Non-manufacturing PMI for June edged lower from May, but still posted a healthy 55.3, with the business activity and new order sub-indexes also healthy. Ominously, the employment sub-index slumped to 47.4, contractionary territory. The US Jolts Job-Opening data for May also slowed modestly, but still came in at an impressive 11.254 million job openings, not the stuff of recessions. Still, May seems like a long time ago now and much has changed.

The US data and another night of slumping oil prices likely saved the equity market’s bacon overnight. European stock markets had a huge up day, reversing Tuesday’s losses after the Norwegian government stepped in to impose a settlement on both sides of the oil workers’ strike. Wall Street could only manage a sliver of modest gains though, in the face of hawkish FOMC Minutes, a soaring US dollar and rising US bond yields which also continued pricing in a recession.

The Minutes and solid US data also propelled the US dollar to another series of powerful gains across the currency space, boosted by higher US yields. The big loser was gold which met my next downside target within one day and now threatens long-term support. Despite more credit implosions in the crypto space as the reality of concentration risk in a lending portfolio hits home to those bright young things, bitcoin has clung to the USD 20,500.00 region, although it can probably thank its Nasdaq correlation for that.

Oil prices crashed another 5.0% lower overnight, with Brent crude dipping under USD 100.00 a barrel at one stage. The wipe-out still looks to be very much driven by a culling of speculative longs and trend-following fast money to me, with nothing changing materially in the real world vis-à-vis the supply/demand imbalance.

One part of the world absolutely loving the price slump in oil is Asia’s Caligula’s of energy importing. Japan, China, South Korea, and Taiwan. I expect India to feel the same warm afterglow later today. Equity markets in the first four are rallying powerfully today as Brent nibbles at USD 100.00. Oil is rising in Asia as physical buyers quite rightly jump in to fill their boots with this mid-year Christmas present.

Elsewhere, Australia’s Trade Balance massively outperformed in May, leaping to just shy of AUD 16 billion. The trade balance was boosted by increased exports of natural gas and thermal coal along with accompanying price rises in both. Australian GDP has an upside risk now and will be another reason for the RBA to stay off the fence and keep tightening. Even currency markets couldn’t ignore the data from the Lucky Country today, AUD/USD has climbed 0.50% today, dragging up its feathered kiwi friend, the New Zealand dollar, by 0.55% also.

The news isn’t so good from China where the announcement of incentives to buy more electric cars has been tempered by rising cases in Beijing and Shanghai. Tokyo’s local government is also considering new covid restrictions, but the impact has been non-existent. In China, fears over renewed restrictions in Beijing and Shanghai are tempering the oil-induced rally there today.

There is much else on Asia’s data calendar for the rest of the day. Yesterday, Bank Negara Malaysia did what was necessary, and hiked policy rates by 0.25%, but any benefit to the ringgit was squashed under the US dollar juggernaut. Markets will be focused on German Industrial Production for May this afternoon, and then US ADP Employment this evening, from which they will try to derive bad guesses on tomorrow evening’s US Non-Farm Payroll release.

Given the amount of conflicting noise across asset classes and in the media space now from officials here and there, it wouldn’t surprise me in the least if Asia, quite wisely, decides to sit out the last two days of the week from the side-lines and let the heavily-caffeinated gnomes of Wall Street do their thing. They won’t be able to resist USD 100 a barrel Brent crude though, merry early Christmas Asia!

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Jeffrey Halley

Jeffrey Halley

Senior Market Analyst, Asia Pacific, from 2016 to August 2022
With more than 30 years of FX experience – from spot/margin trading and NDFs through to currency options and futures – Jeffrey Halley was OANDA’s Senior Market Analyst for Asia Pacific, responsible for providing timely and relevant macro analysis covering a wide range of asset classes. He has previously worked with leading institutions such as Saxo Capital Markets, DynexCorp Currency Portfolio Management, IG, IFX, Fimat Internationale Banque, HSBC and Barclays. A highly sought-after analyst, Jeffrey has appeared on a wide range of global news channels including Bloomberg, BBC, Reuters, CNBC, MSN, Sky TV and Channel News Asia as well as in leading print publications such as The New York Times and The Wall Street Journal, among others. He was born in New Zealand and holds an MBA from the Cass Business School.
Jeffrey Halley
Jeffrey Halley

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