FOMC minutes stated trade dispute poses downside risk to the US economy, adding it would soon be appropriate to raise rates

DXY whipsawed and briefly fell below 95.00 in a knee-jerk reaction to the trade-wary FOMC minutes

Looking ahead, highlights include Norwegian GDP, EZ and US flash PMIs, US New Home Sales, and US-China trade talks in Washington

FOMC MINUTES

FOMC minutes stated that escalation of trade disputes was potentially a consequential downside risk for the US economy, while the Fed pointed to ongoing trade disagreement and proposed trade measures as an important source of uncertainty and stated that any large-scale and prolonged trade dispute would likely have an adverse impact on business sentiment, investment and employment.

The minutes added that many participants said it would soon likely be appropriate to raise rates and that participants expect it will soon be appropriate to no longer refer to monetary policy as 'accommodative' in the not too distant future, while participants also expect US GDP to slow in H2 2018 but will remain above potential.

The minutes were interpreted as slightly dovish in which the USD softened slightly and T-Notes increased by 2 ticks, although the moves were pared shortly after given that the minutes did little to suggest a change in the pace of the Fed’s tightening cycle and with attention on the Fed now shifts towards the Jackson Hole economic symposium, and specifically, will the Fed participants there (Powell, Rosengren) express similar warnings that could hint that the FOMC was mulling a slowing in its trajectory of rate hikes.
 

ASIA

Asia-Pac stock markets traded subdued with the region cautious amid political turmoil in Australia and as the 2nd round of Trump tariffs on China took effect. ASX 200 (-0.3%) was negative as a mega-storm brewed on the political front with PM Turnbull’s future in office highly doubtful after 3 cabinet members resigned including Finance Minister Cormann who advised the PM, no longer has party support, although losses in the index have been stemmed as participants reacted to a slew of earnings and with miners underpinned by recent strength in commodities. Elsewhere, Nikkei 225 (+0.2%) remained afloat on the back of a weaker JPY, while Shanghai Comp. (-0.3%) and Hang Seng (-0.8%) were jittery as the 2nd round of US tariffs on China took effect today and after the PBoC refrained from liquidity operations again. Finally, 10yr JGBs were relatively unchanged with only minimal gains seen from the cautious risk tone in the region and with demand also subdued amid weaker results at the enhanced liquidity auction for longer-dated bonds.

US tariffs of 25% on additional USD 16bln of Chinese goods took effect. There were also comments from China Commerce Ministry that it resolutely opposes the latest US tariffs and will file a complaint to WTO, while Mofcom added it will continue to fight back against US. (Newswires)

PBoC skipped open market operations for a net daily drain of CNY 40bln. (Newswires)
PBoC set CNY mid-point at 6.8367 (Prev. 6.8271)
 

UK/EU

UK Brexit Secretary Raab is reportedly to say that EU is being irresponsible regarding the Brexit but is to also state he remains confident a good deal is within horizon. (Newswires/Times)

UK government reportedly plans to impose duties on imports from EU in the event of a no-deal Brexit. (Telegraph)

Brexiteer Jacob Rees-Mogg has written a letter with a point-by-point rebuttal of UK PM May’s Chequers compromise, describing it as “the wrong deal for Britain”, the letter is being sent to Conservative Associations across the country. (Telegraph)

German Chancellor Merkel has reportedly set her sights on backing a German head for the European Commission rather than backing Weidmann for head of the post-Draghi ECB. (Handelsblatt)

FX

In FX markets, the DXY whipsawed and briefly fell below 95.00 in a knee-jerk reaction to the trade-wary FOMC minutes, but then recovered as the statements did little to change the outlook for the Fed’s tightening path as many members viewed it would soon likely be appropriate to raise rates. AUD/USD was the worst performer amongst the major pairs and slipped below the 0.7300 handle amid the leadership crisis in Australia with parliament now suspended until September 10th, while Australian Treasurer Morrison and former Minister for Home Affairs Dutton were touted as leadership candidates to replace PM Turnbull who will not contend if a vote is called. This added fuel to the USD-comeback which coincided with EUR/USD retreating further away from 1.1600 and GBP/USD relinquishing the 1.2900 handle, while commodity-linked currencies also gave back yesterday’s oil-driven gains. Elsewhere, the PBoC set a weaker fix and ZAR was pressured on US scrutiny of South Africa’s farm and land seizures, which all contributed to the tailwinds overnight for the greenback.

Former Australian Home Affairs Minister Dutton requested a 2nd party room meeting which was turned down by PM Turnbull, while Dutton also reportedly told Turnbull majority of the party doesn't support his leadership. Following this, 3 cabinet ministers submitted resignations including Finance Minister Cormann who advised the PM he does not have party support and that there should be a party room meeting to resolve leadership. Australian PM Turnbull later provided a press conference and stated he is waiting for the petition with signatures of majority of party and once received will call for party meeting, while he added will not stand if the party seeks a vote. (Newswires)

US President Trump stated he has asked Secretary of State Pompeo to closely examine the South Africa land and farm seizures, as well as expropriations and large scale killing of farmers. (Twitter)
 

COMMODITIES

Commodities were mixed overnight with WTI crude futures flat as prices took a breather from yesterday’s gains of over 3% which was fuelled by the larger than expected draws in the latest API and DoE inventory reports. Elsewhere, the metals complex declined with gold pressured by a resurgence of the greenback and with copper dragged lower by the predominantly risk-averse tone.

There were initial reports that Saudi Arabia is said to have called-off Saudi Aramco IPO and has disbanded advisors according to sources. However, Saudi Energy Minister Al Falih later denied reports Aramco IPO will be called off. (Newswires)
 

GEOPOLITICAL

Turkish President Erdogan spokesman stated there is rule of law in Turkey and the case regarding Pastor Brunson is an ongoing legal issue, while the spokesman also stated Turkey has no intention of beginning an economic war but cannot stay silent. (Newswires)
 

US

US Commerce Secretary Ross said now is a good time for a trade spat because of the booming economy and that it will take time to resolve the trade imbalances. Ross also stated there could be retaliation from China on tariffs and that there is some hope anytime there is interaction with China. Furthermore, Ross added there is no deal with Mexico yet, but one is within reach and they hope to get a deal done with Mexico soon. (Newswires)

Mexico Incoming Trade Negotiator Seade said they still working on aspects of rules of origin and was doubtful when asked if there would be an announcement on NAFTA on Thursday but was said to be optimistic that they are coming to an end on NAFTA process. (Newswires)

Canada’s Foreign Minister Freeland said she is very encouraged by the progress in NAFTA talks and is hearing optimism from the US & Mexico, while she also hopes to rejoin talks once US & Mexico issues have been resolved. (Newswires)