Assuming the Fed remained (economic) “data dependent, last week provided few reasons to cut rates next week and no reason at all to cut by more than the 25bps implied by the Fed’s pre-committed stance. Q2 GDP came out with a stronger than expected +2.1% growth rate (vs. +1.8% expected), admittedly down from the +3.1% reported in Q1. Consumption rose by +4.3% annualized in Q2 (vs. 0.9% in Q1). Personal income rose by +5.4% with employee compensation rising +4.7% annualized. June durable goods orders also came up stronger than expected up +1.9% (vs. +0.7% expected). Mitigating this rosy outlook were a sharp drop in exports (-5.2%), weakness in global manufacturing…and government expenditures jumping +7.9% annualized in Q2 (from 2.9% in Q1), the strongest reading since Q2 2009. In contrast gross private investment declined by 5.5% annualized. So, the economic picture is mixed but does not warrant the 50bps rate cut that we the Fed could still deliver this week (just a guess). The problem is that the Fed pre-committed to cut rates…and markets are like kids. Do not promise what you cannot deliver. Why did the Fed pre-commit at the first place? It did so after D. Trump opened a trap at the beginning as he threatened, on a Friday evening, after the market had closed and at the lows of May’s market setback (which had investors quickly remembering last December’s cathartic market response to troubles in leveraged loans) and just days prior to the ratification of the new USMCA, to impose fresh tariffs on Mexico (see weekly wrap from June 2d, 2019 here). This forced several Fed officials to quickly come to the rescue early the ensuing week starting to precommit to cut rates. This came on top but was much more efficient than the daily Presidential tweets bashing and firing at the Fed. The risk of course is that the Fed (and other central banks) are now engaged not only to accommodate but to directly stimulate speculative excesses (and bubbles in everything …and hyperinflation in bond prices!). Over the past week, the S&P500 rose +1,6% (20,8% YTD) while the Nasdaq100 rallied 2,2% (26,6% YTD). The US small cap index added 2,2% (17,4% YTD, Z-score 2,1). Following good earnings results, GOOG rallied 10,6% (20,7%, Z-score 5,6) and MSFT rallied 3,5% (39,2%, Z-score 2,3). The Eurostoxx50 gained 1,4% (19,8%), underperforming the S&P500 by-0,2%. Diversified EM equities (VWO) dropped -0,3% (11,9%), underperforming the S&P500 by-1,9%.

The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies gained 1,0% (4,3%, Z-score 2,1) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) dropped -0,4% (2,1%). USDZAR rallied 2,6% (-0,4%, Z-score 2,3) after being downgraded by Fitch on some political concerns. AUDUSD dropped -1,9% (-2,0%, Z-score -2,1). Our assumption is for the dollar to weaken at some point but timing is everything and it might not be from here. D. Trump reiterated last week that the dollar was too strong and contradicted L. Kudlow on Friday when he said the US would not do anything to try to weaken the dollar. 10Y US Treasuries dropped 2bps (-61bps) to 2,07%. 10Y Bunds dropped -5bps (-62bps) to -0,38%. 10Y Italian BTPs dropped -4bps (-118bps) to 1,57%. Last week, D. Trump endorsed a bipartisan budget deal with Congress that will do nothing to cut federal spending. It will send the US budget deficit over the USD1trn bar and way higher in the following years which by itself is the ultimate reason why the Fed and major other central banks will now embark on more rate cuts to inflate away an otherwise unbearable and rapidly climbing stock of debt. Any talk of a brewing currency war is carefully avoided but at times (and in the worse cases) the heat goes up a lot without any flames… Statistically last week (in terms of Z-score), the strongest movement was seen in the compression of credit spreads ahead of the Fed rate cut. US High Yield (HY) Average Spread over Treasuries dropped -20bps (-162bps) to 3,64%. The High Yield of worst quality played catch up last week in a statistically meaningful way in response to expectations of more Central Bank easing as US High Yield (HY) Caa (the worst segment of the High yield) Average Spread over Treasuries dropped -24bps (-195bps, Z-score -2,4) to 7,94%. US Investment Grade Average OAS dropped -5bps (-54bps, Z-score -2,4) to 1,18%. In European credit markets, EUR 5Y Senior Financial Spread dropped -4bps (-53bps) to 0,57%. Gold dropped -0,5% (10,6%) while Silver gained 1,2% (5,8%). Major Gold Mines (GDX) sold off by -2,5% (29,4%). By not renewing the Central Bank Gold agreement for a third time, European Central banks have de facto confirmed that there is no risk of disorderly Central Bank gold sales because Central banks as a whole have turned net buyers of Gold. Bitcoin sold off by -6,6% (167,7%). Goldman Sachs Commodity Index gained 0,2% (9,7%). WTI Crude gained 1,0% (23,8%). DBA dropped -1,5% (-3,5%, Z-score -2,2). 

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