There has been a sense of panic spreading through markets in recent sessions. With fears over the long term impact of Donald Trump’s international trade policy, investors are flooding into the safety of Treasuries. In less than two weeks, the 10 year Treasury yield has fallen from 2.44% to yesterday’s low of 2.06%, or 38 basis points. The shorter, 2 year yield has fallen 45 basis points in the same time. Expectations of a rate cut for this year (not even guided by the Fed) are now not just whether one will be seen, but how many. Could there even be two rate cuts this year? The decline in bond yields certainly hints as much. A December cut is now 97% probable according to CME Group FedWatch, whilst one as soon as September is 90% probable. This sharp accelerated move into Treasuries has hit the dollar hard in recent days. Yesterday’s disappointment in ISM Manufacturing certainly did not help. Neither did the comments from VFOMC voting member James Bullard who suggested that a rate cut could be seen soon. Bullard being dovish is nothing new, but if this is reflected across other more centrist Fed members, then the market could really be impacted. However, this re-pricing already looks to be maturing, and bond yields are beginning to find some stability today. Markets have a tendency to over-react and this could start to see a pullback on this move in the days ahead. It is though interesting to see the market accepting the Reserve Bank of Australia cutting rates by 25 basis points to 1.25% today (-25bps exp to +1.25%, +1.50% last). For now the dollar is still slipping against the G4 majors, but the traction of the sell-off of recent days has dissipated.
Wall Street closed mixed yesterday with a 4 tick gain on the Dow, whilst the S&P 500 fell a further -0.3% to 2744. US futures are steady around the flat line today whilst Asian markets have also been mixed (Nikkei flat, Shanghai Composite -1.0%). In Europe, the outlook is still looking corrective today with FTSE futures -0.4% and DAX futures -0.5%. In forex, there is a continued push higher for EUR, with GBP also edging higher. With little move on the commodity currencies, it is interesting to see AUD ticking mildly higher despite the RBA rate cut. In commodities, there is a degree of consolidation on gold after breaking through the March high yesterday, whilst oil is slipping half a percent lower although the selling pressure has dissipated slightly.
Eurozone inflation comes as key focus on the economic calendar, but first up the UK Construction PMI at 0930BST will be interesting after yesterday’s disappointment from the manufacturing PMI. Consensus expects mild expansion at 50.5 (50.5 in April). However, then attention turns to Eurozone flash inflation which is expected to unwind again following April’s jump. Headline Eurozone HICP at 1000BST is forecast to fall to +1.3% (down from +1.7% in April), with Core Eurozone HICP back to +0.9% from April’s final reading of +1.4%. Eurozone unemployment is expected to have remained at 7.7% in April (7.7% in March). US Factory Orders at 1500BST are expected to fall by -1.0%. There is also another key event, with Fed chair Powell who speaks at 1455BST. Given the sharp move out of risk, Powell’s comments will certainly be key for markets.