• FOMC Minutes stated a couple of policymakers would have preferred a 50bps rate cut to address low inflation and that several favoured maintaining rate
• A reference to the “mid-cycle adjustment” suggests that Fed Chair Powell's use of the phrase was not an off-the-cuff remark
• German Chancellor Merkel said she would welcome a negotiated Brexit deal but is ready for all outcomes and challenged UK PM Johnson to come up with a solution to avert a no-deal Brexit
• Looking ahead, highlights include EZ & US Flash PMIs, US Initial Jobless Claims and EZ Consumer Confidence (Flash), Jackson Hole Symposium Begins, ECB Minutes & French President Macron meeting UK PM Johnson
• Earnings: Antofagasta, Salesforce.com, HP

FOMC MINUTES

FOMC Minutes stated that a couple of policymakers would have preferred a 50bps rate cut instead of a 25bps to address low inflation, although most saw a 25bps cut as part of a recalibration of policy stance or mid-cycle adjustment in response to recent outlook changes, while several policymakers favoured maintaining the same target rate at the July meeting. (Newswires)

Furthermore, the minutes stated policymakers generally preferred an approach that avoided any appearance of the Fed being on a preset course and that policymakers who favoured a rate cut noted a decelerating economy as well as elevated risks such as the global economic outlook, international trade and the US inflation outlook, while a few expressed concern over the persistent 3-month/10-year yield curve inversion.

Traders suggested the key from the minutes was the reference to the mid-cycle adjustment which suggests that Fed Chair Powell's use of the phrase was not an off-the-cuff remark at the post-meeting press conference. As such, traders said this would likely continue putting pressure on the 2s10s part of the curve, into inversion once again. In the wake of the minutes, Fed funds futures saw a 98% chance of a 25bps cut (vs 93% before the minutes) and money markets priced around 27bps of easing at the September meeting vs. around 30bps at the end of last week, markets priced 110bps of easing through the end of 2020 which is unchanged vs. end of last week. 

ASIA-PAC

Asian equity markets traded mixed as the region failed to sustain the early momentum from Wall St where sentiment was underpinned by strong retailer earnings and after the FOMC minutes did little to alter the landscape as they showed a divide among officials on rate cuts. ASX 200 (+0.3%) and Nikkei 225 (-0.1%) were both higher at the open with tech and energy the outperformers on the busiest day of the earnings season in Australia, while Tokyo trade was less decisive as price action eventually reflected a choppy currency and after a lack of progress in talks between Japanese and South Korean Foreign Ministers to resolve the ongoing spat. Hang Seng (-1.0%) andShanghai Comp. (-0.2%) were subdued amid CNY weakness and as Hong Kong’s property sector suffered the brunt of the Hong Kong protests with developers said to be reducing prices to support sales, although losses in the mainland have been cushioned by the PBoC’s liquidity efforts. Finally, 10yr JGBs were initially unchanged amid similar uneventful trade in T-notes, but later saw mild support after firmer demand at the enhanced liquidity auction for long end JGBs and as risk tone began to deteriorate.

PBoC injected CNY 60bln via 7-day reverse repos for a daily net injection of CNY 30bln. (Newswires) PBoC set CNY mid-point at 7.0490 vs. Exp. 7.0519 (Prev. 7.0433)

Canadian PM Trudeau said he will defend Canada’s interests in China dispute and stated “we do not escalate, we also do not back down”, while he also urged dialogue and respect for fundamental freedoms in Hong Kong. (Newswires)

UK/EU

UK PM Johnson reiterated the UK wants a deal with the EU and believes the UK can get a deal but cannot accept the current withdrawal agreement, while he added we do need the backstop removed and can move forward if it is removed. Furthermore, PM Johnson replied there is scope to do a deal when asked if he would make any compromises. (Newswires)

UK opposition Labour Leader Corbyn invited leaders of other parties and senior lawmakers to discuss ways to stop a no-deal Brexit on August 27th. (Newswires)

German Chancellor Merkel said she would welcome a negotiated Brexit deal but is ready for all outcomes and challenged UK PM Johnson to come up with a solution to avert a no-deal Brexit in the next 30-days. Merkel stated that the European offer stands to negotiate a deal after Brexit as their goal is to continue having tight relations with Britain post Brexit. (Newswires)

Italian President Mattarella will meet with the Democratic Party at 1000BST, Forza Italia at 1100BST, Salvini’s League at 1500BST and the 5-Star Movement at 1600BST today in order to decide the next steps for Italian politics. (Newswires)

German Finance Ministry said early indicators suggest sustained slowdown in the industrial sector and that external risks have risen significantly which is fuelling business uncertainty, while there were separate reports the German government is reportedly considering a ban on negative interest rates for retail savers. (Newswires/FAZ)

FX

DXY traded rangebound overnight with only mild support seen in the aftermath of the FOMC Minutes. The greenback’s major counterparts traded uneventfully with EUR/USD and GBP/USD relatively unchanged at the 1.1000 and 1.2100 handles respectively, while talks between UK PM Johnson and German Chancellor Merkel were seen to be amicable in which PM Johnson stuck to his guns regarding the removal of the backstop, but accepted the challenge to come up with a viable solution in 30 days. Elsewhere, USD/JPY was somewhat whimsical as it retreated below 106.50 and antipodeans were lacklustre with the initial support in AUD/USD nullified as CNY depreciated to its lowest since early 2008 following a weaker CNY reference rate, which spurred speculated intervention by China state-owned banks to support the currency.

South Africa Treasury has instructed government departments to draft budget reductions of 5% for 2020, then 6% and 7% for the respective years after. (Newswires) 

COMMODITIES

Commodities were lacklustre overnight with WTI crude futures subdued after it met resistance at the USD 56.00/bbl level and with prices reeling from the prior day’s declines despite the wider than expected draw in DoE crude inventories, as the gasoline and distillate components were bearish while there were also reports that construction restarted at Canada’s Trans Mountain expansion project which would eventually raise capacity to 890k from 300k bpd. Elsewhere, gold was subdued after the greenback got a mild bid post-FOMC minutes but with price action contained as participants still await the Jackson Hols Symposium, and copper was pressured as risk appetite gradually dwindled throughout the session.

GEOPOLITICS

North Korea has carried out live fire drills by bombing replicas of South Korea's F-15K fighter jets, surface to air missiles and a radar. (Newswires)

French President Macron said he will hold talks with Iranian officials ahead of the G7 to make proposals and that he previously proposed some sanction relief or a compensation mechanism, while he added that in return for the offers, Iran must fully commit to the 2015 nuclear deal and broader negotiations on other issues. (Newswires)

Russian President Putin said the US could deploy new land-based cruise missiles in Romania and later Poland, which is a threat to Russia, while he added Russia will take appropriate, reciprocal steps and are ready to talk with the US. (Newswires) 

US

The Treasury curve flattened on Wednesday; major curve spreads were mixed/little changed in the early part of the session, as traders awaited the FOMC's July meeting minutes. In wake of the minutes, there was more modest flattening; the minutes themselves were mostly as expected, although it did make a reference to the 3-month/10-year part of the curve (policymakers concerned over the persistent inversion). Interestingly, the "mid-cycle adjustment" comment made its way into the minutes, suggesting it was not an off-the-cuff remark by Chair Powell at the July presser. The 2s10s part of the curve narrowed modestly in wake of the minutes, but at settlement, had just about avoided entering inversion again. Attention now shifts to Thursday's ECB minutes, survey data, and the start of the Jackson Hole conference, all ahead of the weekend's G7 meeting; traders will be looking to policymakers for clues about both monetary and fiscal policy easing (and any indication of a quasi-coordinated effort). US T-note futures (U9) settle 6+ ticks lower at 130-17.

US President Trump said he is not looking at indexing on capital gains nor at a payroll tax cut right now as the economy is strong and it is not needed, while he added that he looked at capital gains indexing and that it helps high income people but he would prefer to focus on the workers. (Newswires)

US President Trump reiterated his criticism on the Fed in which he alleged that they “totally missed the call” and raised rates "too fast and too furious", while he also stated that Germany is being paid to borrow money whilst they have zero interest, whereas the US is far stronger and is paying interest and just stopped quantitative tightening. (VOA)