Morning Commentary: Keeping Things in Perspective

Foreign Exchange - Morning Commentary
Keeping Things in Perspective
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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
As we arrive this morning, markets are consolidating after factoring in all of its new information.  The Federal Reserve is reversing course and is imminently close to cutting interest rates at their next meeting in July, with the potential for another cut in Q4. As we have pointed out on numerous occasions, markets can react quite powerfully and emotionally and then almost as abruptly, run out of momentum and consolidate again or reverse course.
 
We think we have now entered another consolidation zone and will be trading sideways ahead of the G20 meeting next week. The main focus of that meeting will be the opportunity for President Trump and President Xi from China to jump-start their stalled trade talks. For U.S. and global equities to continue to press to all-time highs, there will need to be clear signs of forward progress on trade talks. Markets are hoping for much more than a photo-op of the two men shaking hands and speaking in broad generalities.
 
U.S. interest rates have collapsed since November. The yield on U.S. 10-year yields has fallen from nearly 3.25% to as low as 1.97% yesterday…an almost unprecedented move of 128 bps in less than eight months. Market positioning expecting higher U.S. interest rates (Fed indicated three rate hikes in 2019 in November 2018), weakening U.S. economic data and the Fed shifting gears away from its hawkish bias has sent short, medium and longer term U.S. interest rates on a sharp downward path.
 
To keep things in perspective as to how low U.S. interest rates are today, U.S. 10-year yields are currently around the same levels they were at during the height of the Great Recession in 2008 when 10-year yields bottomed . Keep in mind that the current U.S. economy continues to grow and we are in the longest U.S. economic expansion in our history with the UR at 3.6%....a multi-decade low. The 3.6% UR today is exactly half of what it was in December 2008 at 7.2% when U.S. 10-year yields finally bottomed. The UR went on to peak at 10% in 2009 but 10-year yields never went lower than 2.00% until a number of years later. It is a frightening thought to think how low U.S. interest rates could go now if we should enter another recession!
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
  • European currencies continue to be the main beneficiary of the Fed’s dovish turn with many of the key currencies up for the third day in a row. Today’s EZ June flash PMI readings are showing that the EZ is stabilizing as the composite reading of 52.1 came in better than expected with both France and Germany coming in slightly better than expected.
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