Markets Churn Amid Cacophony Of Catalysts

WHERE WE STAND – Quite tough to pick a starting point this morning.

Tuesday proved to be a catalyst-packed day where, Nvidia were permitted to resume chip exports to China; US inflation showed the first signs of tariffs being passed through to the consumer; a US-Indonesia trade deal was announced; banks kicked-off earnings season in solid fashion; and, once again, President Trump threw a tantrum about the Fed not delivering the rate cuts he’s so desperate for.

At this point, I’m not even going to bother with the last of those points. The FOMC are absolutely right to maintain a ‘wait and see’ approach on policy and, if (big IF) Trump were to get the “3 points” worth of rate cuts he’s so desperate for, all it would do is massively steepen the curve, hence massively increasing the US’ debt interest bill. It’s counter-intuitive, illogical, and frankly downright dumb for Trump to continue with these calls. Not that that’s going to stop him, sadly.

As for Trump’s protestations that consumer prices are “low”, that’s simply not true, at least judging by yesterday’s CPI report. Headline inflation rose 2.7% YoY in June, the fastest rate since February, while both core and ‘supercore’ metrics ticked higher by 0.1pp apiece to 2.9% YoY and 3.0% YoY respectively. Furthermore, in pretty obvious evidence of tariffs being passed-through, core goods prices rose 0.7% YoY, the fastest pace in almost 24 months, with more of that to come in the coming months.

There remains no chance that the Fed move in July, and in my mind almost as little chance that the FOMC plump for a cut in September, given the likelihood that those tariff-induced price pressures persist for the next quarter or so. My base case, so long as the labour market remains resilient, is that we get just one 25bp cut this year, probably in December.

Amid all of that, stocks ended the day pretty marginally softer, giving up early gains, with higher Treasury yields pressuring sentiment as the day went on. Anyway, yesterday’s developments do pretty much tick all the boxes of reinforcing my bull case – solid earnings growth, strong underlying economic growth, and continued progress towards trade deals being made. In short, the path of least resistance leads higher, and dips are there to be bought.

That deal, incidentally, is TACO in action – last week, the letter to Indonesia said they’d pay a 32% tariff, this week, they’ve agreed a 19% levy. I’d imagine, also, that this solidifies 20ish% as a ceiling for these tariffs, given where both Indonesia and Vietnam have ended up in each of their agreements.

As for that move in Treasuries, it took some time after the CPI print for the bears to wrestle control, but wrestle control they did, with benchmarks softer across the curve, as the 30-year yield rose north of the all-important 5% mark.

I say “all-important”, but that’s really only because everyone has been watching it like a hawk in recent weeks, and because psychologically we all love round numbers! Still, this sort of area, along with 4.50% in the 10-year, has been the region where dip buyers have started to emerge in recent weeks. I’d imagine that they do once more, but if they don’t, then we could well be in for another round of Treasury market angst, all of which would probably shorten the timeline to the next TACO moment.

At least that Treasury sell-off was good news for the dollar, which built on recent gains yesterday, as cable dipped back below 1.34, the EUR touched its lowest level in three weeks, and USD/JPY tested the 148 figure to the upside for the first time since mid-May. There are some election jitters creeping into that last one, which ought to be borne in mind, and do help to explain the JPY’s notable underperformance in recent weeks.

In any case, I find it very tough indeed to be betting on a sustained USD rebound at a time when President Trump, and his acolytes, are doing their utmost to every last shred of monetary policy independence. I’d expect that a decent chunk of this recent rebound has been driven by a bit of a short squeeze, given how stretched that position became.

Given that it seems more likely the sun will rise in the west tomorrow, than Trump will join my J-Pow ‘superfan’ club, selling USD rallies remains my preference for the time being.

LOOK AHEAD – After yesterday’s busy docket, things are somewhat less inspiring today.

The latest UK inflation figures highlight proceedings, with headline CPI set to have held steady at 3.4% YoY in June, while the closely-watched services CPI metric is seen slipping 0.2pp to 4.5% YoY. Figures of this ilk, or better, will cement the case for a 25bp BoE cut at the August meeting, with the accompanying guidance, and pace of further reductions, hinging largely on how rapidly the labour market continues to weaken. The next UK jobs report is due tomorrow.

Besides that, it’s a very US-focused day. Tariff headlines will, of course, continue to be watched closely, while the data docket also brings last month’s PPI and industrial production figures. From the Fed, we not only have four speakers, but also the release of the latest ‘Beige Book’ of anecdotal economic evidence.

Finally, Q2 earnings season rolls on today. Banks continue to report before the open, with figures from Bank of America, Goldman Sachs & Morgan Stanley due, while the after hours highlight will be United Airlines – time will tell whether the stock takes off, or encounters turbulence, in post-market trade.