TacticalPowell, FOMC Minutes signal July rate cut; Trade negotiators to find ways to implement Xi-Trump agreement; Trump aides asked to find ways to weaken USD

Powell, FOMC Minutes signal July rate cut; Trade negotiators to find ways to implement Xi-Trump agreement; Trump aides asked to find ways to weaken USD       

• USD trades weaker as Fed Chair Powell delivers his key semi-annual testimony on the US economy to Congress and builds the case for a July rate cut. Key highlights – (1) trade tensions and concerns about global growth continue to weigh on the economy; (2) data since the June meeting has continues to disappoint; (3) June jobs report, even as it is positive and “great news” does not shift our policy outlook. FOMC minutes follow later to also build the case for Fed rate cut (s). Key highlights – (1) While the full spectrum of FOMC participants do not have the same conviction in the necessity of a near-term rate cut as Chair Powell, a majority do as the inflation outlook sees a more material downgrade – consistent with downward revisions to headline and core in the summary of economic projections; (2) “Several” cite alternative inflation metrics as indicating the underlying pace continues to run around 2%, but a “number” see the undershoot as more persistent. Low inflation expectations are also cited as a concern.         

• Citi analysts - Chair Powell’s prepared remarks not only fail to push-back against a July rate cut that is fully-discounted, but also strengthen the rate cut narrative by indicating that despite a solid domestic economy, trade and global growth concerns continue to hang over the outlook. As a result, Citi analysts now expect a 25bp rate cut in July with a 50bp cut a real possibility, but given that even a 25bp cut is likely to provoke 2 or more dissents, 25bp may be the compromise policy outcome.

• Also in news overnight, according to the Chinese Commerce Ministry is Chinese Vice Premier Liu He having spoken with US Trade Representative Lighthizer and Treasury Secretary Munchin via phone to implement consensus reached by the US and Chinese Presidents during their meeting on the sidelines of the G20 summit in Japan. A US official confirms the call while White House economic adviser Larry Kudlow says the talks "went well" and are "constructive," adding that a face-to-face meeting would make "good sense."       

• Last but not least, President Trump reportedly tasks aides to find a way to weaken USD…. "The president also asked about the greenback while interviewing Federal Reserve board nominees Judy Shelton and Christopher Waller”, people familiar with the matter tell Bloomberg.       

French, Italian industrial production gain; UK GDP on track for flat Q2’19; EC president nominee sees possible further delay in Brexit  

• In a show of just how skewed positioning is currently towards excessive pessimism, EURUSD manages to trade up some 20 pips while Bund yields rise a massive 10bp to -30bps as French Industrial Production for May beats expectations at 2.1%MoM (vs a lowly 0.3% expected) and with the prior month also revised higher to 0.5% from 0.4%, followed by Italian industrial production beating at 0.9%MoM vs. expected 0.2%. However, the data is not enough to prevent EU from cutting its GDP projection for the euro zone for 2020 (updated quarterly) to 1.4% from 1.5% amid what it says are increased downside risks. On inflation, both this year and next are also lowered modestly to 1.3%.   
• UK Q2 GDP rebounds 0.3% MM in May (consensus 0.3, Citi 0.0), partly reversing the 0.4% MM decline in April which now leaves average monthly GDP in April and May unchanged compared to Q1 and in line with the latest BoE 2Q GDP growth estimates. But Citi analysts see Brexit risks, but increasingly also the global manufacturing crisis, forcing the UK economy into stagnation or even recession this summer on heightened “No-Deal” Brexit uncertainty.      

• Ursula von der Leyen, the European Council’s favorite to replace Jean-Claude Juncker as president, says overnight the UK could be granted another extension but insists that there would be no change to the Irish “backstop”. Citi analysts see the recent Grieve amendment to stop the new UK PM from dismissing UK Parliament to avert blocking a “No Deal” Brexit as ineffective as it only makes it slightly more difficult for new PM to shutdown parliament and let UK drift towards “No Deal”. It however does not change the legal default position that in the absence of an agreement or an A50 extension request, the UK will leave the EU on October 31 without a deal.         

BoC more dovish overnight but rate cuts still unlikely 

• BoC leaves rates unchanged as widely anticipated, but the policy statement reads slightly more dovish, acknowledging strengthening domestic activity but putting more emphasis on global trade uncertainties that are creating “strong headwinds keeping interest rates where they are”. However,  Governor Poloz pushes back against the idea of insurance rate cuts as downside risks to inflation have decreased and growth appears to be heading back towards potential. Citi analyst base case remains for unchanged rates through this year and into 2020 even as the Fed cuts rates in July.       

China - Inflation results support PBoC flexibility    

• China’s CPI inflation stands at 2.7%YoY in June, flat from May and in line with market expectations (Citi/Mkt: 2.7%). Meanwhile, China PPI sees sequential deflation with headline PPI inflation sliding from 0.6%YoY in May to 0.0%YoY in June, below market expectations (Citi/Mkt: 0.2%YoY) and the sequential PPI change turns negative after 3 months of modest inflation, from 0.2%MoM in May to -0.3%MoM in June.  Looking forward, Citi analysts’ preliminarily forecast CPI inflation to soften to ~2.5%YoY on seasonal and base effects and PPI to start posting headline deflation at ~-0.2%YoY in July. These developments would allow the PBoC to continue to support the economy by cutting short-term policy rates, following an expected Fed cut in July.          

This is an extract from the Daily Currency Update, dated July 11, 2019. Please approach a Citigold Relationship Manager if you would like more information.