Powell stresses two-sided risks to economy

Fed Chair Jerome Powell noted risks around the labour market in his commentary to chambers of the US Congress overnight. Chair Powell said that “labor market conditions have now cooled considerably” and highlighted the two-sided risks the Fed is dealing with on inflation and jobs. Powell did not give an explicit timeline for when rate cuts would start and said that the Fed would make its decisions “meeting by meeting.” Labour market conditions in the US remain relatively sound though they have cooled from the exceptionally strong levels seen over the last two years. Unemployment has been trending higher and has already hit the Fed’s end-of 2024 target level by June. Markets are pricing in roughly a 75% chance of a 25bps rate cut in September with a second one almost 70% priced in for December.

Inflation in China stayed positive in June at 0.2% y/y though it was slower than the 0.3% recorded a month earlier and fell short of market expectations. Producer price inflation, however, remains in deflation with prices there falling by 0.8% y/y. China is targeting inflation of 3% this year and headline price moves have substantially under-performed that level.

Today’s Economic Data and Events

• 11:00 TU industrial production m/m May: forecast 3.8%
• 18:00 US wholesale inventories m/m May: forecast 0.6%

Fixed Income

• Treasury markets oscillated as they tracked Fed chair Jerome Powell’s comments to Congress this week though markets are still expecting an easing in rates by the end of the year. The 2yr UST yield closed near unchanged after some sharp intra-day swings while the 10yr yield nudged higher by about 2bps to 4.2959%.
• Turkiye priced a USD 1.75bn 8yr bond at 7.3%, tighter than initial guidance. Turkiye has tapped international markets three times this year for funding.
• Aramco has mandated banks for a 10, 30 and 40yr issuance of benchmark bonds.
• FAB priced a 10.5NC 5.5 deal at +155, raising USD 750m.

FX

• The US dollar extended gains for a second day running overnight even as markets didn’t take a clear direction from Fed chair Jerome Powell. EURUSD dipped 0.1% to 1.0813 while GBPUSD dropped by 0.16% to 1.2787. USDJPY also moved higher, adding 0.3% to 161.33.
• Commodity currencies closed near unchanged.

Equities

• Global equity markets were in general softer overnight. The Euro Stoxx 50 fell 1.3% while the FTSE dropped by 0.7%. In the US the Dow Jones fell by 0.1% while the S&P 500 closed near unchanged while the NASDAQ managed a gain of 0.1%.
• Asian markets are trading stronger in early sessions today with the Nikkei up 0.1% while the Hang Seng has added about 0.8%.

Commodities

• Oil markets remained offered for a third day in a row overnight with Brent futures down 1.3% at USD 84.66/b while WTI dropped 1.1% to USD 81.41/b. Data from the API showed a draw in crude stocks of 1.9m bbl last week along with a draw in gasoline inventories. Distillate stockpiles were higher, however.
• The EIA revised up its US oil supply forecast for 2025 to 13.77m b/d which will take the pace of supply growth to 520k b/d, up from 470k b/d previously. They also revised up their natural gas supply forecast for 2024 and 2025.