Asia cautious as everything rides on dovish US Fed chairman

Darnell Taylor
July 11, 2019

SYDNEY, July 10 ― Asian shares inched ahead today while higher Treasury yields lifted the dollar as markets wondered if the world's most powerful central banker would confirm or confound expectations for United States policy easing this month.

The MSCI Asia Pacific Index increased 0.1%. Europe's subdued start reflected pre-event caution rather than how the day would pan out. Yet the robust jobs report released on July 5 has scaled down expectations on more aggressive interest rate cuts.

Federal Reserve Chair Jerome Powell testifies before the US Congress on Wednesday and Thursday and investors have a lot riding on him sounding suitably dovish.

A key measure of US inflation - the core consumer price index, due Thursday - is expected to have increased 0.2% in June from the prior month, while the broader CPI is forecast to remain unchanged.

According to the CME Group's FedWatch Tool there is now a 31 percent chance of a 50 basis-point rate cut and a 69 percent chance of a 25 basis-point cut.

"I think the market seems to be veering towards a less dovish message from Powell than was the prevalent a couple of weeks ago", said Bank of New York Mellon senior strategist Neil Mellor.

An elementary reading of just the first two bullet points solidifies the case for an interest rate cut later this month: if "many" central bankers already saw the case for "somewhat easier policy" in June, and "uncertainties" since then "continue to dim" the outlook, then the case for a cut should be very strong indeed.

"The real interest is what happens thereafter", Mellor said.

South Korea edged up 0.4%, but Japan's Nikkei lagged with a loss of 0.1 per cent E-Mini futures for the S&P 500 were flat, while EURO STOXX and FTSE futures pointed to small opening gains in Europe.

Overnight, Atlanta Fed president Raphael Bostic said the Fed was debating the pros and cons of allowing the world's largest economy to run "a little hotter".

CBO Analysis: $15 Minimum Wage Would Boost Incomes, Trigger Job Cuts
Seven states and the District of Columbia are on track to increase their wage minimums to $15 in coming years. And the weight of current research indicates that CBO's estimate for job losses is overstated.

Meanwhile, US and Chinese trade officials held "constructive" talks on trade by phone on Tuesday, White House economic adviser Larry Kudlow said.

On Wall Street, the S&P 500 lost 0.48 percent while the Nasdaq Composite dropped 0.78 percent, led by fall in Apple after a brokerage downgraded the stock to "sell".

The cooling in U.S. rate fever has seen bonds give back just a little of their huge rally, with yields on two-year Treasuries rising to 1.917% from the recent trough of 1.696%.

The yield on 10-year Treasuries fell two basis points to 2.04%.

The dollar index versus a basket of six major currencies was little changed at 97.374.

The yen was last 0.28% stronger against the dollar at 108.53, while the euro rose 0.31% against the greenback to $1.1241.

The Mexican peso was nursing a few bruises after sliding yesterday when the country's moderate Finance Minister Carlos Urzua suddenly resigned, citing "extremism" in economic policy.

The dollar's gains took the shine off gold, which eased 0.3 per cent to $1,393.68 per ounce.

Elsewhere Wednesday, oil prices jumped more than two percent after a closely watched industry report showed a massive drop in U.S. stockpiles last week, while traders also cheered reports that Russian output fell in July to its lowest in almost three years. US West Texas Intermediate (WTI) crude futures shed 0.42% to $57.42.

Brent crude futures rose 64 cents to $64.80, while United States crude gained 82 cents to $58.65 a barrel.

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