• Asian equity markets traded lower across the board amid headwinds from Wall St where stocks faltered in the aftermath of the less accommodative than expected FOMC Minutes
• FOMC minutes mentioned the ongoing framework review but lacked any timing of its release and there also appeared to be no clear consensus regarding forward guidance
• There was also opposition to YCC as most members judged yield caps and targets would likely provide only modest benefits in the current environment
• US and Chinese trade negotiators plan to confer by video in the coming days over Phase One progress and US actions against Chinese tech firms, according to officials
• In FX, the DXY reclaimed 93.00, pushing EUR/USD further away from 1.1900 and GBP/USD below 1.3100
• Looking ahead, highlights include Norges Bank & CBRT policy announcements, ECB minutes, US initial jobless claims, Philadelphia Fed Business Index, Fed's Daly, supply from France and the US

FOMC MINUTES

FOMC Minutes stated that participants continued discussions on the monetary policy strategy review and in light of recent changes, participants agreed refining the statement could be helpful in increasing the transparency and accountability of monetary policy. Furthermore, participants noted that the Statement on Longer-Run Goals and Monetary Policy Strategy serves as the foundation for the Committee's policy actions and that it would be important to finalize all changes to the statement in the near future.

Participants commented on outcome-based forward guidance and also touched on calendar-based forward guidance, in which various participants mentioned using thresholds calibrated to inflation outcomes, unemployment rate outcomes, or combinations of the two in the context of outcome-based forward guidance, as well as combinations with calendar-based guidance. A majority of participants commented on yield caps and targets as a monetary policy tool in which most judged that yield caps and targets would likely provide only modest benefits in the current environment, as the Committee's forward guidance regarding the path of the federal funds rate already appeared highly credible and longer-term interest rates were already low, while many of these participants also pointed to potential costs associated with yield caps and targets.

Minutes also noted that although the staff assumed additional fiscal stimulus measures would be enacted beyond those anticipated in the June forecast, the positive effect on the economic outlook was outweighed somewhat by the staff's assessment of the likely effects of several other factors which include the increasing spread of the coronavirus in US since mid-June, the reactions of many states and localities in slowing or scaling back the reopening of their economies and some high-frequency indicators that pointed to a deceleration in economic activity. In addition, the staff still judged that a more pessimistic projection was no less plausible than the baseline forecast in light of the significant uncertainty and downside risks associated with the course of the pandemic and how long it would take the economy to recover.

CORONAVIRUS UPDATE

US COVID-19 cases: +39,318 (prev. +40,117) and deaths +1,172 (prev. +520), while a major newswire tally stated that US coronavirus cases increased by at least 44,043 to a total of 5.55mln and deaths rose by at least 1,297 to a total of 173.2k. California COVID-19 cases +6,164 (prev. +4,636) and deaths +181 (prev. +100), Texas cases +6,474 (prev. +7,282) and deaths +309 (prev. +216), while New York cases +631 (prev. +655) and deaths +6 (prev. +8). (Newswires)

New York Governor Cuomo warned NYC restaurants may have to close again in the fall. (CNBC)

UK is to place Croatia in its quarantine 'red list' after infection rates tripled in a week. (Telegraph)

ASIA

Asian equity markets traded lower across the board amid headwinds from Wall St where stocks faltered in the aftermath of the less accommodative than expected FOMC Minutes which triggered a pullback in the S&P 500 and the Nasdaq from record highs, while Apple shares also retraced the majority of the early gains that had briefly pushed the tech giant to the unprecedented USD 2tln market cap status. ASX 200 (-1.0%) was pressured by a slate of weak earnings and with underperformance seen in energy names, while Nikkei 225 (-1.1%) retreated below the 23,000 level with Tokyo exporters dragged by a predominantly firmer currency. Hang Seng (-2.2%) and Shanghai Comp. (-1.1%) conformed to the downbeat tone after the US State Department either suspended or terminated three bilateral agreements with Hong Kong and reports also suggested the likelihood of a RRR cut this year has declined with the central bank expected to inject liquidity through reverse repos and MLF operations instead. In addition, the PBoC maintained the 1-year and 5-year Loan Prime Rates at 3.85% and 4.65% as expected, while there were reports US and Chinese trade negotiators plan to confer by video in the coming days regarding the Phase 1 trade deal progress and US actions against Chinese tech firms, although this failed to provide any support for stocks. Finally, 10yr JGBs were initially kept afloat by the risk averse tone but with the upside restricted following the post-FOMC pressure in T-notes and with participants sidelined heading into the 5yr JGB auction which turned out to a be a weaker than previous auction and subsequently weighed on prices.

PBoC injected CNY 160bln via 7-day reverse repos for a net injection of CNY 10bln at a rate of 2.20% PBoC set USD/CNY mid-point at 6.9274 vs. Exp. 6.9317 (Prev. 6.9168)

PBoC 1-Year Loan Prime Rate 3.85% vs. Exp. 3.85% (Prev. 3.85%) PBoC 5-Year Loan Prime Rate 4.65% vs. Exp. 4.65% (Prev. 4.65%) 

US and Chinese trade negotiators plan to confer by video in the coming days over Phase One progress and US actions against Chinese tech firms, according to officials on both sides, while Chinese negotiators are expected to seek adjustments of the agreement in regards to agricultural purchases to take into account price fluctuations, according to reports in WSJ. There were also separate comments from White House Press Secretary McEnany that US and China representatives are to speak, but they don't have an official date for the talks. (Newswires/WSJ)

US State Department said it has notified Hong Kong that the US has suspended or terminated three bilateral agreements with Hong Kong, according to a statement. Furthermore, it was later report that the Hong Kong government issued a severe reprimand against US actions on Hong Kong and said it will take action against the US at the WTO. (Newswires)

US intelligence report stated that top officials in Beijing were unaware of the dangers associated with the coronavirus in January and that local officials hid the risks from Beijing. (NYT)

The likelihood of the PBoC lowering RRR this year has declined, with the central bank expected to inject liquidity through reverse repos and MLF. (China Securities Journal)

UK/EU

German Finance Ministry monthly report states they expect industrial output to rise further in approaching months and that tax revenues stabilized in July with overall tax decline less drastic than feared. (Newswires)

Politicians in Germany express outrage over US Senator calls for legal and economic sanctions against a German port owner if it continued supporting the development of Nord Stream 2. (FT)

FX

The DXY briefly reclaimed 93.00 in the wake of the FOMC Minutes which disappointed those anticipating a more dovish standpoint from the Fed as the minutes mentioned the ongoing framework review but lacked any timing of its release and there also appeared to be no clear consensus regarding forward guidance, while there was opposition to YCC as most members judged yield caps and targets would likely provide only modest benefits in the current environment and participants also pointed to potential costs associated with such policies. This weighed on its major counterparts and dragged EUR/USD firmly below the 1.1900 handle which saw the single currency approach its 200-Hour MA level of 1.1827 and is surrounded by over EUR 3bln of option expiries between 1.1800-1.1850 for today’s New York cut, while GBP/USD momentarily extended its pullback to beneath the 1.3100 handle, not helped by the pessimism surrounding Brexit discussions with the EU said to view a post-Brexit deal as more likely than no deal, but only just. Elsewhere, JPY-crosses were mostly subdued by the glum sentiment, which also kept AUD/USD and NZD/USD languishing beneath the 0.7200 and 0.6600 handles respectively owing to their high-beta statuses and amid a reiteration of dovish rhetoric from RBNZ Assistant Governor Hawkesby.

RBNZ Assistant Governor Hawkesby said the balance sheet will continue to expand as it supports the economy while the size and composition of the balance sheet will become a more active instrument for monetary policy decisions. Furthermore, Hawkesby added that it is not necessarily the case that the central bank's balance sheets should revert to their former levels and reiterated the view that a lower or negative OCR, funding for lending programme, foreign asset purchases and interest rate swaps remain possible options. (Newswires)

COMMODITIES

WTI crude futures October contract pulled back from the USD 43.00/bbl level to pare the mild gains seen in the wake of the OPEC+ JMMC where Saudi’s Energy Minister stressed that members which exceeded production quotas must fully with addition cuts by end of next month at the latest which Argus Media noted would require 2.3mln bpd of compensatory cuts. Nonetheless, the gains were faded as the USD strengthened and the risk tone soured in the aftermath of disappointing FOMC Minutes. Gold prices nursed post-FOMC losses but remained below the 1950/oz level as the greenback held firm overnight and copper was pressured in tandem with the broad risk-averse tone.

Reports stated that OPEC+ needs 2.3mln BPD of compensation cuts and that it agreed to compensation cuts in August and September, according to Argus Media citing the individual monthly volumes that members exceeded their quotas in the first three months of the output agreement. However, some separate journalists have refuted this figure and noted it was not mentioned in the communique, while other reports noted that OPEC+ stressed the need for better compliance and made no recommendation to change oil output targets. (Argus/Newswires)

GEOPOLITICAL

US President Trump said he is directing Secretary of State Pompeo to notify the UN that the US will snapback Iran sanctions and that the US intends to restore nearly all UN sanctions on Iran, while Secretary of State Pompeo separately commented that the US will hold China and Russia accountable if they attempt to block sanctions snapback on Iran. (Newswires/Fox News)

Turkey started gunnery exercises Northwest of Cyprus and back to back drills which will run through August 28th. (Newswires)

US

Treasuries ultimately steepened after the FOMC minutes reversed earlier strength. By settlement, 2s unch. at 14.5bps, 10s +1bps at 68bps, and 30s +2bps at 142bps. Duration had been modestly bid in Europe, although after cash equities opened up to again print new ATHs, the sovereign complex began paring earlier strength. Furthermore, participants likely had been gearing up for the 20-year bond auction (read below), which similar to last week’s bond auction, saw lacklustre demand, although not to the same degree, failing to ignite the same cross-asset reaction that was seen last Thursday. However, the largest catalyst came later in the wake of the FOMC minutes, where the curve bear steepened amid comments that many Fed members were against yield curve control/targeting (YCC/YCT), as well as more uncertainty than expected over the state of the framework review, although Bullard today said that the review is close to completion. As the dust settled, USTs pared some of their losses. Participants now look to Thursday’s Jobless Claims print, ahead of the flash PMIs on Friday. T-note (U0) futures settled half a tick lower at 139-12.

US NEC Director Kudlow said we are not going to accept giving USD 3.5tln to get the COVID-19 stimulus relief bill done and that the Trump administration is willing to talk to the Democrats. Kudlow also suggested we should "step down slowly" in terms of stimulus for the US economy and that President Trump is looking at many ways to make the payroll tax cut forgiven, in which they could stretch out the pay back for the tax cut over a long period so that it is essentially forgiven. (Newswires)

Fed's Barkin (non-voter) said he is seeing some evidence of tightening standards by banks, while he added zero is the right place to be given the jobless rate but rates at zero do have costs. (Newswires)

Fed’s Bullard (non-voter) said he sees rates low for a very long time and that there is no need to offer further guidance yet, while he added there is a growing realisation that 2% inflation target has not been adequate to keep expectations at that level. (Newswires)

Source: Newsquawk