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Major US stock indexes rose moderately, as hopes for lower interest rates in late July increased after the statements of the Fed.

Powell said that the Central Bank is ready to “act properly” to sustain growth, while uncertainties continue to cloud economic prospects. “Since our meeting in May, contradictory trends have reappeared,” said Powell in his report to Congress. “Many FOMC members have seen that arguments in favor of somewhat more adaptive monetary policy have intensified. Since then, based on incoming data and other events, it is clear that the uncertainties surrounding trade tensions and concerns about the strength of the global economy continue to put pressure on the US economic outlook. ” He also noted that overall growth in the second quarter “slowed down”, while “there is a risk that weak inflation will be even more stable than we currently expect.”

Investors also analyzed the minutes of the June Fed meeting, which indicated that central bankers were more concerned about the prospects for the economy and discussed what reasons might justify a reduction in rates in the next few months. Based on the protocols, many executives were willing to cut rates in the event of a deterioration in the prospects for US GDP growth due to a slowdown in the global economy, weak inflation and uncertainties around foreign trade. "Many believed that additional monetary stimulus in the short term could be justified if (the above) negative effects continue to influence the outlook for the economy over a long period," the protocols said.

Most of the components of DOW finished trading in positive territory (20 of 30). The top gainers were Chevron Corporation (CVX; + 1.69%). Caterpillar Inc. shares turned out to be an outsider. (CAT; -1.05%).

Most sectors of the S & P recorded an increase. The raw materials sector grew the most (+ 1.1%). The largest decline was shown by the conglomerate sector (-0.2%) and the industrial goods sector (-0.2%) ..

At the time of closing:

Dow 26,860.20 +76.71 +0.29%

S & P 500 2,993.07 +13.44 +0.45%

Nasdaq 100 8,202.53 +60.80 +0.75%

The U.S. Energy Information Administration (EIA) revealed on Wednesday that crude inventories declined by 9.499 million barrels in the week ended July 5. Economists had forecast a fall of 2.900 million barrels.

At the same time, gasoline stocks decreased by 1.455 million barrels, while analysts had expected a drop of 2.000 million barrels. Distillate stocks rose by 3.729 million barrels, while analysts had forecast an increase of 0.800 million barrels.

Meanwhile, oil production in the U.S. increased by 100,000 barrels a day to 12.300 million barrels a day.

U.S. crude oil 7.3 million barrels per day last week, down by 284,000 barrels per day from the previous week.

The Commerce Department announced on Wednesday the U.S. wholesale inventories increased 0.4 percent m-o-m in May, after advancing a revised 0.8 percent m-o-m in April (originally a gain of 0.9 percent m-o-m).

Economists had forecast wholesale inventories growing 0.4 percent m-o-m in May.

On a y-o-y basis, wholesale inventories surged 7.7 percent.

According to the report, wholesale auto stocks rose 1.8 percent m-o-m in May, following a 3.9 percent m-o-m climb in the previous month. Gains were also recorded in professional equipment, furniture and hardware inventories. Meanwhile, electrical goods inventories dropped by the most since January 2016 and metal inventories showed their biggest decline since October 2016.

Wholesale sales edged up 0.1 percent m-o-m in May, following an unrevised 0.4 percent m-o-m decrease in April.

The Bank of Canada (BoC) left its benchmark interest rates unchanged at 1.75 percent on Wednesday, as widely expected.

In its policy statement, the Canadian central bank notes that evidence has been accumulating that ongoing trade tensions are having a material effect on the global economic outlook. Trade conflicts between the United States and China, in particular, are curbing manufacturing activity and business investment and pushing down commodity prices, the BoC added.

Meanwhile, Canada’s economy is returning to growth around potential, following temporary weakness in late 2018 and early 2019. The country’s Q2 growth appears to be stronger than predicted due to some temporary factors, including the reversal of weather-related slowdowns in Q1 and a surge in oil output. However, the outlook is clouded by persistent trade tensions, the BoC notes. Taken together, the degree of accommodation being provided by the current policy interest rate remains appropriate, the BoC said.

It also notes that inflation remains around the 2 percent target, with some recent upward pressure from higher food and automobile prices. However, CPI inflation will likely dip this year because of the dynamics of gasoline prices and some other temporary factors.

Analysts at ANZ are expecting the U.S. core inflation is to rise by a 0.2% m/m in June after four consecutive months of just 0.1%.

• “Underlying pricing pressures remain subdued. Domestic demand could use an extra bump to boost cyclical inflationary pressures.
• We look to FOMC Chair Powell and the minutes to the June meeting on guidance for the timing of easing. With the market pricing a 25bp cut in July as a done deal, Fed speakers need to push back if this is unwarranted.
• A further deterioration in global manufacturing and lacklustre domestic inflation suggest that a cut is warranted soon.”

U.S. stock-index futures rose on Wednesday after Fed’s Chairman Jerome Powell stated the central bank was ready to “act as appropriate” to sustain expansion, bolstering expectations of an interest rate cut later this month. 

Global Stocks:

Ned Rumpeltin, the European head of FX strategy at TD Securities, notes that the overwhelming consensus is that the Bank of Canada (BoC) to keep rates unchanged at 1.75% today.

• “In terms of the details, we think the changes to the BoC’s forward guidance will be limited. Policymakers will need to balance the strong domestic economic data seen recently against growing global uncertainty. Interestingly, we think they may be approaching a crossroads in their communication strategy.
• In the April MPR, they presented a very cautious profile for economic growth. They stated they were paying special attention to developments in household spending, oil markets, and international trade tensions. We are about to find out how the Bank will manage the trade-offs between and among these factors. In particular, we expect them to state that domestic conditions have improved but global uncertainty is weighing on growth projections. At this stage, data dependence will remain paramount. This all should translate into a fairly mild reaction in both rates and FX markets, which may look more to Powell for inspiration unless we get a very clear directional push from the BoC.
• We think we could see a touch of upside risk in USDCAD on a move above resistance at 1.3151, but we think 1.3200/30 may cap if our base case is confirmed. That said, we think CAD longs are starting to look a bit crowded.”

(company / ticker / price / change ($/%) / volume)

Initiations before the market open

FedEx (FDX) initiated with a Buy at Goldman and added to 'Conviction Buy List'; target $200

• It appears training uncertainties and concerns about global economy continue to weigh on US economic outlook
• Fed will act as appropriate to sustain US economic growth
• Baseline outlook for US economic growth remained solid, labor markets to stay strong and inflation to move back up to central bank's 2% target
• There is a risk weak inflation will be even more persistent than Fed currently anticipates
• US consumer spending growth was weak in first-quarter data shows it has bounced back and is running at a solid pace
• US economy's long-term challenges include high and rising federal debt and relative stagnation of middle and lower incomes
• Housing manufacturing look to have dipped again in 2Q
• Economy performed reasonably well over 1H, jobs healthy
• Many of June FOMC soft case for somewhat easier policy
• Inflation pressures remain muted
• Investment seems to have slowed notably on trade fears
  

National Institute of Economic and Social Research (NIESR) reported on Wednesday it saw the UK’s economy is on course to contract by 0.1 percent in Q2. It also added that two quarters of contraction would mean that the economy is in a technical recession, but the initial outlook for Q3 is for growth of 0.2 percent.

Economist had forecast a 0.1 percent decline.

Analysts at TD Securities note that the UK's GDP came in on top of consensus at 0.3% m/m in May, leaving us still on track for a negative q/q print for Q2.

• “Looking at the details, we didn't see as much rebound from the auto sector as we had anticipated, with manufacturing production +1.4% m/m in May after -4.2% in April.
• The services index was also weaker at flat m/m, with all the main sub-sectors flat or near-flat on the month.
• So we're still looking at an economy with no real momentum, as uncertainty around Brexit and global trade really seems to be weighing on activity.”

Hu Xijin, editor-in-chief of Chinese and English editions of the Global Times, tweeted: "Chinese and US negotiators held a phone conversation. Chinese side only confirmed the phone conversation, without mentioning the conversation is “constructive” as described by the US side. So cautious it seems Chinese side has learned lessons from previous changes."

The Mortgage Bankers Association (MBA) reported on Wednesday the mortgage application volume in the U.S. fell 2.4 percent in the week ended July 5, following a 0.1 percent decrease in the previous week.

According to the report, refinance applications declined 6.5 percent, while applications to purchase a home climbed 2.3 percent.

Meanwhile, the average fixed 30-year mortgage rate dropped to 4.04 percent from 4.07 percent.

“Borrowers have been less sensitive to low rates as many borrowers have either recently refinanced or are likely waiting for rates to fall even further,” said Joel Kan, MBA’s associate vice president of economic and industry forecasting. “Other mortgage rates in our survey were unchanged or slightly higher than in the previous week.”

Arjen van Dijkhuizen, the senior economist at ABN AMRO, notes that CPI inflation in China was stable at 2.7% yoy in June, and still below the 3% ‘target’ following a pick-up in preceding months driven by swine flu effects on food prices.

• “Food price inflation jumped from 0.7% yoy in February to 8.3% in June, the highest level since January 2012. Core inflation has been quite stable, coming in unchanged at 1.6% yoy in June.
• Meanwhile, producer price inflation has fallen back again, to 0.0% yoy in June, after a short-lived pick-up in March/April. That is putting downward pressure on industrial profits and leads to higher debt repayment pressures. Falling producer prices in China also have the potential to spark global deflation fears.
• We should add that the current developments are not at all comparable with the sharply negative PPI numbers in 2012-2016 (during the commodity slump). All in all, we think that the latest inflation figures are in line with our view that the PBoC will continue with easing monetary policy through (significant) RRR cuts and (modest) rate cuts as well as through targeted measures to support bank liquidity and bank lending, particularly to the private sector.”

James Smith, the developed markets economist at ING, notes the UK's economy rebounded by 0.3% during May, albeit this was predominantly driven by production.

• "Manufacturing output had plummeted back in April, for two main reasons. Firstly, various car producers brought forward their usual summer factory shutdowns to the start of April. Now that these are over, car production returned to more normal levels during May. Secondly – and more importantly – new orders have slumped as firms grapple with what to do with the stockpiles they built up during the first quarter, in anticipation of a possible ‘no deal’ Brexit. We expect this latter trend to continue into the summer months, which partly explains why manufacturing production failed to fully recover its April losses (-4.2%) during May (+1.4%).
• While all of this is ultimately a temporary phenomenon, the underlying growth story doesn’t look a whole lot better. Recent PMIs indicate that the service sector – which makes up the lion’s share of the UK economy – has struggled to regain momentum amid mounting Brexit uncertainty. Attention within firms will be increasingly turning back to contingency planning for a possible ‘no deal’ Brexit in October, which is often a costly exercise and will inevitably draw some resources away from possible investment projects. We expect investment to resume its downward trend over the summer.
• Consumer activity has also looked more disappointing so far this quarter. Despite a modest improvement in real wages, consumer sentiment remains depressed and shoppers appear reluctant to make non-essential purchases.
• All of this suggests that overall second-quarter growth will come in flat, or possibly slightly negative. With the growth story unlikely to improve dramatically in the third quarter, we think the Bank of England is likely to keep policy on hold this year."

Arjen van Dijkhuizen, the senior economist at ABN AMRO, notes that China’s FX reserves for June were reported at USD 3.12 trillion, up by USD 18 billion compared to May and also higher than consensus expectations.

• “FX reserves are now back at the highest level in fourteen months. According to the State Administration of Foreign Exchange (SAFE), the rise of FX reserves was partly driven by valuation effects.
• Seen over a slightly longer term, the 25% drop witnessed in 2015-16 (when yuan devaluation fears fed capital outflows) is clearly behind us. Since January 2017, FX reserves have risen by 4%. That partly reflects a fading of yuan depreciation fears: even a 10% CNY depreciation versus USD last year on escalating US-China tensions did not cause renewed pressures on FX reserves.
• Off course, the tightening of capital restrictions in 2016 is an important factor in this respect. Last but not least, the ongoing inclusion of certain Chinese equity and bonds in global indices is a structural factor supporting portfolio inflows from abroad. According to Bloomberg estimates, foreign investors bought at least USD 75bn of Chinese bonds in June (with foreign investors now owning 8.3% of total government bonds).”

According to Chris Turner, global head of strategy at ING, suggests that the market is firmly of the opinion that the Federal Reserve will still cut 25 basis points on 31 July.

“We’ll hear more on this today from: i) the release of the text of Fed Chair Powell’s House testimony (12:30 GMT), ii) the testimony itself (14:00 GMT) and then iii) the release of the FOMC June minutes at 18:00 GMT. The dollar has been performing well over the last week but we would not chase it higher as Powell will presumably focus on the reasons why the Fed will cut in late July. (We doubt he’ll push back on easing expectations for fear of damaging business confidence and the stock market). DXY may stall around the 97.70/80 area.”

• EU commission lowers eurozone GDP growth forecast for 2020 to 1.4% from 1.5% previously estimated, keeps outlook unchanged for 2019 at 1.2%.

• European commission cuts eurozone inflation forecast to 1.3% this year and next from 1.4% previously estimated for both years.

• EU Commission sees uncertainty over US trade policy as a major risk for the European economy.

• EU Commission keeps unchanged UK GDP growth forecast at 1.3% in 2019 and 2020.

• Germany 2019 GDP growth forecast - 0.5% (unchanged)

• Germany 2020 GDP growth forecast - 1.4% (previously 1.5%)

• France 2019 GDP growth forecast - 1.3% (unchanged)

• France 2020 GDP growth forecast - 1.4% (previously 1.5%)

• Italy 2019 GDP growth forecast - 0.1% (unchanged)

• Italy 2020 GDP growth forecast - 0.7% (unchanged)

U.S. inflation is unlikely to surge anytime soon, though keeping interest rates too low for too long creates risks for financial stability, Kansas City Federal Reserve Bank President Esther George said.

George said that inflation expectations, which have recently been falling, could change quickly if, say, investors or the public more generally became alarmed about rising government spending on an aging population.

“They can move quickly,” said George. “It doesn’t look like it will happen in the near term, but I never say never ... because you don’t know how those expectations might shift.”

Aila Mihr, senior analyst at Danske Bank, suggests that the Bank of Canada is widely expected to keep rates unchanged at today's monetary policy meeting.

“Consequently, focus will turn to the bank's forward guidance and its monetary policy report amid rising speculations of a rate cut in neighbouring US. We expect unchanged rates over the next 12 months going into the meeting, whereas markets price a roughly one-third probability of a 25bp cut until next summer.”

According to the report from Office for National Statistics, production output rose by 1.4% between April 2019 and May 2019 due to rises from all four main sectors; the manufacturing sector provided the largest upward contribution, rising by 1.4%. Economists had expected a 1.5% increase of production output. Within manufacturing over half of the subsectors fell, so overall growth is due to transport equipment, which rose by 12.4%; this is the strongest rise since April 2005 and is a partial bounceback from the fall of 13.8% during April 2019.

Production output rose by 0.3% for the three months to May 2019, compared with the three months to February 2019, due to rises from all four main sectors, led by mining and quarrying (1.6%), and manufacturing (0.1%). The three-monthly increase in manufacturing is due mainly to widespread strength with 9 of the 13 subsectors increasing; however overall strength is partially offset by a strong fall of 4.6% from transport equipment.

For the three months to May 2019 compared with the same three months to May 2018, production output increased by 0.4%, with notable rises in manufacturing of 0.6% and mining and quarrying of 4.1%; partially offset by a fall of 3.7% from electricity and gas.

Office for National Statistics said that monthly gross domestic product (GDP) growth was 0.3% in May 2019, following negative growth in April 2019. Consistent with the latest Quarterly national accounts, monthly GDP in March 2019 has been revised up by 0.2 percentage points to 0.1% as a result of new survey estimates.

Rolling three-month growth was 0.3% in May 2019, the second consecutive slowing in growth since the 0.5% seen in March 2019 (Quarter 1 (Jan to Mar) 2019), when there was a change in the timing of activity around the originally planned departure date of the UK from the EU. This growth was on par with the moderate growth rates seen at the start of 2019.

Commenting on today’s GDP figures, Head of GDP Rob Kent-Smith said: “GDP grew moderately in the latest three months, with IT, communications and retail showing strength. Despite this, there has been a longer-term slowdown in the often-dominant services sector since summer 2018. The economy returned to growth in the month of May, following the fall seen in April. This was mainly due to the partial recovery in car production.”

Analysts at TD Securities are expecting the FOMC minutes from the June meeting to offer more clarity on what would lead the Fed to lend support to the US economy following the notable dovish shift by several Fed officials: almost half of them are looking for an easier policy stance by the end of this year.

“We look for discussions regarding the risks to the economic expansion (crosscurrents) and a characterization of the inflation outlook given the revisions to the downside for those projections. We also expect the minutes to expand on the decision adopted by some Fed officials to lower their long-run rate projections (the median now stands 25bp lower at 2.50%).”

Lurking beyond traders’ apparently unwavering confidence that the Fed will cut interest rates this month is a more nebulous outlook about what the central bank will do after that.

Traders are still pricing a full quarter-point reduction in July, yet they have slowly scaled back views on how much easing will take place for all of 2019 -- lowering expectations to 64 basis points from around 80 basis points two weeks ago. At the same time, options traders are still adding to bets the Fed will embark on a series of cuts, rather than a one-and-done approach.

“The market collectively thinks there’s a cut coming this month because the Fed has basically said there will be,” said Kit Juckes, a strategist at Societe Generale SA. “But to think there’s a big string of cuts coming after that you have to believe in a serious economic downturn and that’s not clear -- especially after the June labor data.”

The addition of a higher-than-expected 224,000 jobs in June seems to make it less urgent for the Fed to take aggressive action. That means it’s even more crucial for traders to scrutinize guidance on the policy path this week as Fed Chairman Jerome Powell starts his two-day testimony to Congress Wednesday, the same day the central bank will publish the minutes of its June meeting.

TD Securities analysts are expecting the US Fed Chair Powell to use his two-day testimony before Congress to reiterate the view that the Fed will "act as appropriate to sustain the economic expansion".

“We do not anticipate the Chair will want to communicate to the market any major changes regarding the FOMC's posture put forward at the June meeting, although that is a non-zero risk. Expect Powell to once again highlight the crosscurrents that are currently threatening the US economic outlook (weak global growth, trade uncertainties) and persistent below-trend inflation and low inflation expectations.”

Automobile sales in China fell 9.6% in June from the same month a year earlier, marking the 12th consecutive monthly decline in the world's largest vehicle market.

Sales fell to 2.06 million vehicles, the China Association of Automobile Manufacturers (CAAM) said. That followed declines of 16.4% in May and 14.6% in April, as well as the first annual contraction last year since the 1990s amid slowing economic growth and a crippling trade war with the United States.

Sales in the first half of the year fell 12.4% from a year earlier to 12.3 million vehicles.

A slowing economy and China's trade war with the United States have been blamed for the year-long slide in auto sales, but more recently, much of the blame has been laid on the fast-tracking of new vehicle emission rules by 15 cities and provinces, which account for over 60% of car sales in China.

According to the report from Insee, in May 2019, output increased in the manufacturing industry (+1.6%, after a virtual stability in April), as well as in the whole industry (+2.1%, after +0.5%). Economists had expected a 0.3% increase in the whole industry.

Insee said that manufacturing output increased slightly over the last three months (+0.2%), as well as in the whole industry (+0.5%).

Over the last three months, output grew strongly in the manufacture of machinery and equipment goods (+2.5%), in mining and quarrying, energy, water supply (+2.0%) and more moderately in “other manufacturing” (+0.2%). Conversely, it decreased in the manufacture of transport equipment (−1.2%), in the manufacture of food products and beverages (−0.7%) and in the manufacture of coke and refined petroleum products (−1.0%).

Manufacturing output of the last three months increased compared to the same three months a year ago (+1.4%), as well as in the whole industry (+1.4%).

According to Karen Jones, analyst at Commerzbank, EUR/USD pair remains on the defensive and below the 55 day moving average at 1.1232.

“It will shortly encounter the March and mid-June lows at 1.1181/76, we look for these to hold. While this area underpins on a daily chart closing basis, the 200 day moving average and early June high at 1.1328/48 will remain in sight. Above the 1.1412 June high we look for a test of the 1.1570 2019 high. Slightly longer term we target 1.1815/54, the highs from June and September 2018. We regard the April and May lows at 1.1110/06 as a turning point and continue to view the market as based longer term and target 1.1990 (measurement higher from the wedge).”

Danske Bank analysts suggest that in the US, markets will look out for two interesting events on the agenda: the release of the June FOMC minutes and Fed chief Powell's semi-annual testimony before the House Financial Services Committee.

“In his prepared remarks, Powell will not address monetary policy but he is sure to face questions about the Fed's view on the economy in the Q&A afterwards. The central question remains when and by how much the Fed will cut interest rates. After a strong jobs report on Friday, markets have scaled back expectations of an aggressive 50bp cut already in July. Apart from the timing and preconditions for Fed easing, the minutes will also shed some light on the different stances within the Fed. We stick to our view of a 25bp 'insurance' cut in July and a total of 75bp in the second half of 2019 (i.e. July, September and December).”

CIBC Research discusses its expectations for BoC July policy meeting.

"In Canada, all eyes will be on the Bank of Canada, which will release a new set of forecasts alongside a likely neutral statement. The Bank will have to acknowledge the weaker external environment since the last set of projections, but will also be able point to a domestic economy which has rebounded more sharply than their prior outlook. While not a stunner for markets, the tone will tend to be a bit more optimistic than what markets are now assuming. We’ll need to see disappointments in growth towards year end and a firming of the Canadian dollar to swing the Bank into a view that matches market expectations for a small 2020 ease," CIBC adds.

EUR/USD

Resistance levels (open interest**, contracts)

$1.1351 (1181)

$1.1324 (855)

$1.1291 (237)

Price at time of writing this review: $1.1206

Support levels (open interest**, contracts):

$1.1165 (2735)

$1.1129 (3444)

$1.1088 (2861)

Comments:

- Overall open interest on the CALL options and PUT options with the expiration date August, 9 is 51205 contracts (according to data from July, 9) with the maximum number of contracts with strike price $1,1150 (3444);

GBP/USD

Resistance levels (open interest**, contracts)

$1.2649 (543)

$1.2618 (448)

$1.2591 (323)

Price at time of writing this review: $1.2453

Support levels (open interest**, contracts):

$1.2416 (2400)

$1.2387 (2560)

$1.2353 (1955)

Comments:

- Overall open interest on the CALL options with the expiration date August, 9 is 14407 contracts, with the maximum number of contracts with strike price $1,3000 (2052);

- Overall open interest on the PUT options with the expiration date August, 9 is 14387 contracts, with the maximum number of contracts with strike price $1,2450 (2560);

- The ratio of PUT/CALL was 0.99 versus 0.99 from the previous trading day according to data from July, 9

* - The Chicago Mercantile Exchange bulletin (CME) is used for the calculation.

** - Open interest takes into account the total number of option contracts that are open at the moment.