Fed July Rate Cut: 25bps vs 50bps

Okay, so a very good morning to everyone. Friday, 19th of July. Hope everyone is doing well. I'm going to go over again the news flow from overnight, a look at the charts of what's happening this morning at the open in terms of general sentiment, and then a look ahead for the session. Subject matter I'm going to cover, as you can see from the headline to the side of me, an update on Fed communication. Um, the actual probability now of a 50 basis point rate cut from the Fed at the end of the month is now at 48.3%. It's a dead heat between 25 or 50. So we'll have a look at a bit of the reasoning at why that number for a 50 basis point cut has risen, and also why I still think that it's unlikely to happen. So I'll discuss that in a bit more detail. A bit of an update on the trade talks. Those phone calls obviously happening yesterday between the US and China. How did they go? Where do we go next? There was a move in crude oil last night and it has moved higher late US session, come back a little bit this morning, but we're still positive about $0.64. Latest tensions in the Persian Gulf after a drone has been shot down by US military forces. And we had Microsoft, the largest company in the world, reported their earnings last night and they were up about 2.5% in aftermarket trade. We'll have a look at that. And then obviously we had some further UK political updates, which has meant that the likelihood of a no deal happening when, when or if Boris Johnson becomes Prime Minister confirmed next week that's going to reduce his chances of proroguing Parliament, and we can have a look at that as well. So that's what's on the agenda. First of all though, let's just have a look at what's going on at the moment. You can see a nice recovery actually on Wall Street, and there was a, there was a trend line that Charlie was watching yesterday, uh, that he was, uh, he's still, he's, you know, Charlie's still a young man, he gets very excited by these sorts of things such as trend lines. To be fair, you know, he called it right. Um, I think he was probably in the pub though by the time, probably missed that last chance to get hold of the trend line. But yeah, really nice defining the price action throughout the month of July really in the S&P. You can see here 3 touches on that line from right at the beginning of the month on the 9th and then, uh, 18th and a brief flirt with that around that level, uh, late yesterday before we saw a really big push on the upside. And you'll remember me saying this before, we've kind of had these episodes of, um, slight kind of deterioration in sentiment. The market comes down but then just comes rallying all the way back. We had that, that was the— well, this was the payroll move here. When we dipped quite aggressively and rallied. We kind of had, you know, over a slightly longer time frame, but a similar type of price activity. Markets start to break down. People get a little bit nervous about the, uh, the trade situation, renewed tensions between China and the US. Earnings have been, if on the balance, you know, X-ing out Microsoft last night, have been worse than expected. We have that obviously Netflix result as well, kind of denting sentiment this time yesterday. But then we kind of hit technically that trend line, but then also, as we're going to discuss, a couple of Fed officials coming out and really stoking this idea of potentially a 50 basis point rate cut. And we've come surging all the way back up to north of 3,000 again as far as the S&P future. And that type of price movement mimicked across the other assets, uh, gold as well. This idea of you know, if the Fed are going to have to go pretty heavy with the policy shift. Gold actually saw a decent pop higher, and it eventually came after we were kind of testing up at those levels, which were— if I just get my lips around the price activity— the kind of 10th high, that high point that we had overnight in the previous Asia-Pacific session. That was holding for the best part of the late European UK afternoon, and then it just exploded higher. Around the timings of when some of the Fed commentary was coming out. And so now finding a bit of support around pivot and trading, you know, well north of the $1,400 handle now, is which where we were trading only about 2 days ago. So definitely, you know, gold can certainly shift. And you've probably read quite a lot, hedge fund managers, notorious ones as well, like Bridgewater's Ray Dalio talking up gold at the moment, probably also helping that general herd behavior, you know, when these big hitters start talking about the, the medium-term benefits of being positioned to have exposure in that particular asset. Going through then some of the comments, because one thing I noticed, and, and certainly the first thing I do when I turn on my screens, I look at the charts. And one thing I saw last night was this quite erratic movement in EUR/USD. This was last night. We had EURUSD pushing quite rapidly to the upside all the way up into the US close. Now, this was around the time the original— some of the Fed comments. So I'll go over these in a second. Clarida and Williams talking dovishly, EURUSD moving higher as the dollar weakened, and then a really sharp move lower over a couple of minutes that came close to midnight last night and pared back a lot of that move. And so picking through the reasoning behind that movement, we've got to go into the actual headlines. And let me just give you a recap of what was happening. So this is the headline: Fed officials see prudence of acting early to sustain growth. So the reason why these, these comments last night from Clarida are particularly important is because he is the Fed vice chairman. The New York Fed chief is John Williams. Both are voting members. Now let me just give you the actual verbatim comments that they made. Clarida said, "You don't need to wait until things get bad to have dramatic series of rate cuts." Williams said shortly after, "When you only have so much stimulus at your disposal, it pays to act quickly to lower rates at the first sign of economic distress." So at that point, given those comments, all of a sudden the dollar started weakening, euro-dollar started rallying, stocks start rallying, the probability of 50 basis points starts increasing. However, later then that evening, and what prompted that sharp retracement in euro-dollar overnight, the actual New York Fed spokeswoman came out and clarified that Williams' prepared remarks were, quote, an academic speech. On 20 years of research. It was not about potential policy actions at the upcoming FOMC meeting. Now, for me, the fact that the New York Fed official spokeswoman had to come out and be that clear and had to come out and reinforce that the market in a sense has overinterpreted that comment, for me shows that 50 basis points is not what these guys are saying. If you go back to the original Clarida comment, he said you need to wait until things— you don't need to wait until things get so bad to have a dramatic, important for me, series of rate cuts. You know, he's not talking about the one bullet 50 and let's go. He's talking about a series. And we know there's most likely going to be a series, 25, 25, 25. It's pretty much how the market's been positioned. So the way I'd look at this from here forward is that last comments that we've had, this is what it looks like from a market positioning point of view. The blue line is the, uh, the Fed funds effective rate. The white line is the implied yield looking at the August 2019 Fed funds futures. So you can see these last comments have seen a further divergence between now the market looking for more heavier cuts, and this is what the percentage looks like. Now importantly, we are on the 19th now of July, the Federal Reserve meeting, of course. And just to be clear, now ahead of time, I will be covering that live on YouTube, so absolutely feel free to tune in. I'll be doing the whole preview, I'll analyze everything in real time as happening, and, and we'll go through the whole event. But importantly, that rate decision is on 31st of July. And so as we get— we've basically got today, the weekend, and a few days at the beginning of next week before the Fed go into their blackout period. The blackout period, you'll remember, is when there's no Fed communication. So at the moment, given that this is 50/50, the one thing of course that is probably more beneficial for the Fed This isn't about a hold or a cut. These are both cuts. It's just about the depth of that cut. The one problem that the Fed probably have here though is that if the market is 50% prepared and positioned for a 50 basis point rate cut and they deliver only 25, the market's going to take that as initially quite a hawkish interpretation on how assets will react. Equities will probably pop lower, um, yields might spike even though they're actually cutting rates, because a lot of the market— half, in fact— are disappointed that that's not, you know, aggressive enough for how dovishly priced the market is. So I would say that over the weekend, probably the beginning of next week, Monday perhaps, we're probably going to hear a lot more from Fed speakers because I think they'll want to clarify this up and really make clear is it 25 or 50? And to be clear, and also to hedge myself, Eddie's going for 50. I think he's wrong. I think the Fed still will do 25. We shall see. Having a look at some other headlines that are coming out at the moment. US-China officials discussed trade. They had a telephone call yesterday. Lighthizer Steven Mnuchin were talking to their counterparties on the other side on the phone. There was no actual detail that I saw that came out of those conversations. However, the Treasury Secretary stating that they want to follow, and suggestions are for an in-person meeting to take place in due course. So yeah, nothing really too much for me to say on the trade side. As ever, I would still remain fairly agile for any updates from the president, obviously via the format of Twitter, if anything does come out. But yeah, nothing really much to add on that front. On the energy front, as I said, um, any— the energy chart has been an interesting one. When I say energy, I mean WTI crude futures. Let's just bring that chart up. And again, just having a bit of a conversation with Charlie yesterday about the general kind of price movement that we've been having, which is quite an accelerated downward move. We then have this pullback of about two-thirds of the pro— or one-third of the price movement before then having another push, equal kind of retracement measurements, and then, you know, another push down. Uh, obviously this, this week there's been a couple of catalysts. We had had Again, the briefing just yesterday, we thought a bit of a de-escalation in the Straits of Hormuz, but evidently that not now being the case, given that the USS Boxer, a US fleet positioned in the Hormuz, had to shoot down an unidentified drone after several calls for it to stand down. That didn't happen, so they shot it down. The US believing that that is Iranian. However, Tehran themselves denying that that in fact is actually their drone. So yeah, it's, uh, it's been quite interesting. You've had that over, you know, massive number in the gasoline and the infantries. You've had the weather system disappear, so prices have come back throughout the course of the week. But obviously there's, there's always this looming supply shock factor. And certainly that's helped a little bounce off that test of around $55 that we had yesterday. So definitely keeping an eye on, on that situation. Any further developments, of course, can cause quite rapid response in the price movement. But yeah, that seems to be a contained situation for now on that drone. But just goes to show that just when you think things were, um, were dissipating in that region politically it's come back to the forefront once again. Microsoft, just going to quickly give you an update what happened. They beat analysts' expectations for their fourth quarter revenue and profit. Obviously quite a few people were looking at this in regard to how weak Netflix were, but Microsoft moved higher about 2.5% after market last night. Particular focus, their strength driven by sales increases in their cloud computing division, their shares hitting fresh all-time highs. Um, so again, another thing to help kind of alleviate maybe some of that, um, that, that cumulative factor of how generally weak earnings had become. Microsoft kind of just helping to rebalance that slightly. Um, Microsoft has tried to set itself apart from AWS, which is the, the Amazon kind of web service division, which has been very key for them as well. And the reason why Microsoft's managed to really dominate and become such a powerful force in that area, to move away from their, their Windows-based strategy from years gone by, is they've looked at combining traditional software that runs in a customer's own database with its cloud Azure products. So more of a hybrid cloud strategy, which is a key differentiation from what Amazon are providing. So particularly strong numbers from, from Microsoft and looking how that performs when we get underway. The NASDAQ future is trading higher, the Dow future up significantly as well, and obviously US futures getting the benefit of some of this dovish Fed commentary irrespective of the New York Fed spokesperson winding back some of those initial expectations. Uh, the other thing to update you on is Brexit. You heard this yesterday, uh, the pound did actually see a little bit of outperformance yesterday. Uh, you had the fairly decent retail sales reading, so despite all the doom and gloom, the consumer still somewhat appetite to spend. Not only that though, as we had yesterday afternoon that vote that came out where MPs defeated the government by 315 to 274 votes. Although only 17 Conservatives voted against the government's orders, around another 20, including the Chancellor Philip Hammond, also abstained. You've probably read headlines saying that Philip Hammond and another group of quite senior, high-profile Conservatives are probably due to resign as well in the early part of next week, because that's probably before they would get the boot under a Johnson reshaping of a cabinet, given the fact that Someone like Chancellor Philip Hammond has been very much an advocate of remain in the sense that he's putting the economic impact of the economy at the forefront of proceedings. And anyone who caught the OBS, the Office of Budget and Responsibility report that's come out on Brexit, they're not even talking about worst-case scenarios, and it's a pretty, It's a pretty damaging report on the prospects of UK economy under if a no-deal scenario was to happen. Point being, that happened yesterday. Of course though, was that the government defeat means then that this idea of proroguing Parliament is pretty much done now, because without going into too much detail, what's happened means that they're going to have to come back through the periods of of the coming months to discuss a lot of Northern Irish issues, which means they have to come back to discuss those in Parliament, which means then proroguing Parliament, trying to then stop MPs coming to work essentially, is nigh on now close to impossible. So this idea of no deal is pretty much dead in the water, of what Boris Johnson has tried to kind of threaten, if you like, from a political point of view. I don't think that that's that surprising. I think actually Boris Johnson taking a bit of a leap of faith out of the Trump book, talking about things that he knows full well are very unlikely to go through. And anyone who did catch that BBC documentary last night, I think Laura Kuenssberg, the very influential BBC correspondent, I think she's pretty much summed it up that everyone's coming to the conclusion pretty quickly that Boris Johnson is going to find himself in a very similar situation as Theresa May. Where she— where he's gonna have to deal with the Parliament, which is split. The one strategy that I have read though, if you are more of a Brexiteer, is that perhaps this is the strategy in the fact that now you're kind of forcing the Brexiteers who want a no deal to swallow your maybe potentially slightly amended withdrawal bill of what Theresa May has already done. To then have to vote through an unpalatable Brexit in their mind in order to just deliver Brexit at all. So perhaps then, if he can withdraw some kind of concession from Europe, if he goes back— given the fact that we heard about a week ago that Europe still potentially has some under the table that they could bring forward that they held back when they knew May wasn't going to get her deal over the line— if Boris could withdraw some of that and then bring it back to Parliament and say to those other Brexiteers, well, look, you're gonna have to back this even though it's a watered-down version of what you want. And then if the democratic process— if he can get those Remainers to say, well, the people of Britain did vote for Brexit after all, then that's the only way I can see that deal getting over the line. But at the moment, I do think that this is going very much down the route of of being exactly where Theresa May was. And with that is why my base case still is that Brexit will be delayed beyond October 31st for the same reasons it was delayed in March. So at the moment, I would say main things you're looking for fundamentally in the pound is— there's not really too much political stuff now. We're looking out for the appointment of Boris Johnson at the beginning of next week. As he gets confirmed. Obviously there's a very outside chance, I mean, of what the bookies were priced when I last looked at, 5% that Jeremy Hunt wins. If Jeremy Hunt wins, you know, let's not forget that the e-referendum was 90-10 to remain, and that didn't happen. If Hunt is, if it's against Hunt, 95% for 5. Well, look, let's just have a quick look. If Hunt wins, pound's gonna rally quite sharply at the— when that result comes out. And yeah, let's not detract from the point that he's still going to be pursuing a negotiation to leave. That doesn't mean that Brexit is, is off the table completely, but you get a complete unwind of that risk of no deal, and the pound's got to come up pretty quickly to 1.2728. I'd say the pound's got to come back and reverse most of that June move the no-deal threat as BoJo's really ramped it up, the rhetoric. If I change over my screen, that's up here of when Boris Johnson started really banging the drum. We have fallen and repositioned about a good 6, 7 points. So kind of the targets there would be a push back up to 28 and 130 under a Hunt scenario, I'd say. But let's be absolutely clear, the base case is, is that he's nowhere near going to win if it would be a shock result if that did happen, uh, but we've seen shocks happen before, of course. Okay, quick look at the, uh, the calendar. What have we got on the agenda for today's session? Let's have a look. Remember, from an earnings perspective, always the same case— Monday and Friday tend to be the most quiet. So let's just quickly jump to the earnings section. Amex, Schlumberger, BlackRock, State Street, Yeah, nothing major if you're an index trader. If you're looking at earnings to potentially shift the needle on, on intraday sentiment, that's not going to happen from any of these earnings. Sure, they'll move the single stock, probably not the indices as a whole. So earnings pretty quiet today. So what do we have? Well, pretty quiet for the morning. You've got public sector net borrowing out of the UK. I wouldn't really say that's going to be much to look at in in terms of, you know, shaping the direction for the, for the pound today. I would say from a currency point of view, uh, it's really the dollar that's seen quite large fluctuations, a lot of flip-flopping at the moment, and a real lack of clarity at this point on the 25-50 question at the Fed. So actually, I'd be more alert to any further commentary on that matter, and so I'd be looking at more dollar movement than that of euro or sterling. We did have that ECB source report on Bloomberg talking about potentially shifting their inflation mandate, but I think that's a little bit of drip feeding in ideas ahead of the ECB interest rate meeting, which we're going to get of course next week. So I wouldn't be expecting much more on that front for the moment. Going into the afternoon then, you've got Canadian retail sales data, so obviously a mover for the for the, for the loonie. If you're looking in the FX, broader FX markets, University of Michigan, this is the preliminary number, so the more important of the two that we get from the US. Then you've got Baker Hughes rig count for any oil traders sticking around later into the session. So in terms of scheduled Fed speakers, there is actually two. There's only one really talking during the hours of which we're trading, which is Fed's Bullard. Now I think Fed's Bullard could be quite interesting, although he's speaking off topic. He's speaking more on technology and the future of money and financial system. Bullard is the most dovish member. Um, obviously there is Kashkari, is another guy who's particularly dovish, but Bullard is a voting member. Kashkari is not. So Bullard, if he's not backing quite explicitly 50 basis points, then again, I can't see 50 basis points happening at this point. Bullard's current rhetoric over just a few days ago is 25, not 50. As long as that remains the case, uh, that I see as the outcome. But if he comes out and starts saying more clearly 50 basis points, you could see a more positive finish to Wall Street. Perhaps equities continue to remain supported by this idea of a, of a continuation of a dovish Fed. All right, that is it from me. Um, I think we have portion of our summer interns finishing today. So I know I've not been with you the last few weeks, but been a pleasure working with you. Do stay in touch. Anything I can do to help in future, just let me know. Otherwise, for the guys here, I'll be around all day. And for the guys in the chat room, I'll be available in the chat. Just feel free to message me if you have any questions. Thanks very much, guys. Have yourself a good session ahead and a great weekend.