There were worries about too much of a good thing yesterday as everything shot higher. Those worries are looking well-founded as markets turn lower in a big way. The Nasdaq is down 1% and the Russell 2000 down 3% as early gains reverse. Treasury yields are down 13-8 bps led by the front end.
Today’s economic data on initial jobless claims and the ISM manufacturing survey have the market worried that a recession is coming and that the Fed is behind the curve. Tomorrow we get the non-farm payrolls report and that will be a big test.
Powell was certainly open yesterday to cutting rates but he offered a strong endorsement of the economy.
“Recent indicators suggest that economic activity has continued to expand at a solid pace,” he said.
The Fed chair was also asked about the chances of a hard landing and said.
“I think they’re low. I think this is — you don’t see any reason to think that this economy is either overheating or sharply weakening. That’s just not in the data right now.”
Now the market is pricing in a 20% chance of a 50 basis point cut at the upcoming meeting in September. That’s not the kind of thing you do if a hard landing isn’t in the cards. The market is also priced for cuts at 5 straight meetings in a sign the Fed could behind the curve.
In the FX market, these moves are coming through via commodity currency selling, though it’s a choppy trade as US weakness (and wide rate differentials) are competing with similar weakness elsewhere.
Today, we initially saw USD/CAD selloff on falling Treasury yields but it’s reversed on worsening risk appetite and global economic worries, along with a drop in oil prices.
It’s a similar dynamic in AUD/USD and NZD/USD. All of the commodity currencies have struggled lately as the market sniffed out the softening of the global economy and lack of sufficient stimulus coming from central banks or China.
This article was written by Adam Button at www.forexlive.com.
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