• Asian indices are somewhat subdued after Fed speakers tempered the prospect/magnitude of rate cuts
• US is reportedly considering suspending the next round of tariffs as US-China prepare for trade negotiations to resume
• RBNZ left rates unchanged but noted downside risks to employment & inflation; adding that a lower rate may be needed over time
• Looking ahead highlights include, German GfK, US Durable Goods, ECB’s Mersch, BoE’s Carney, Cunliffe, Tenreyro & Saunders, Fed’s Daly. Supply from the US

ASIA-PAC

Asian equity markets were mostly subdued following the headwinds from Wall St where stocks posted their worst performance in nearly a month as Fed speakers tempered rate cut bets. This was after Fed Chair Powell said many on the Fed see a case for more accommodation but also stressed the importance of not overreacting, and Fed’s Bullard who was the lone dovish dissenter at the last meeting, stated that he does not prefer a 50bps rate cut in July. ASX 200 (-0.1%)and Nikkei 225 (-0.5%) weakened with Australia led lower by gold miners after a pullback in the precious metal although resilience in healthcare, materials and industrials limited the downside, while sentiment in Tokyo was also downbeat with Japan Display among the laggards in the spotlight after several other groups withdrew from the Co. bailout. Elsewhere, Hang Seng (Unch.) and Shanghai Comp. (-0.1%) were indecisive amid further PBoC liquidity inaction and ongoing uncertainty heading into the Trump-Xi meeting at this week’s G20, with the US said to be unwilling to give concessions on trade at the meeting and that no broad deal is expected, although it was also reported that the US is considering suspending the next round of tariffs on an additional USD 300bln of Chinese imports as the sides prepare to resume trade discussions. Finally, 10yr JGBs tracked the late losses seen in T-notes as market pricing of a 50bps Fed cut in July declined to 25% from around 43% the prior day, although the downside for Japanese bonds was cushioned by the negative risk tone and BoJ Rinban operation for JPY 775bln of JGBs concentrated in 1yr-5yr maturities.

PBoC skipped open market operations for a net neutral daily position. (Newswires)

PBoC set CNY mid-point at 6.8701 (Prev. 6.8580)

US is reportedly considering suspending the next round of tariffs on an additional USD 300bln of Chinese imports while US and China prepare to resume trade negotiations, according to sources familiar with the plans. (Newswires)

US administration official said the goal for US-China G20 talks is to reopen trade negotiations and that it is possible that the sides could agree on no new tariffs as a goodwill gesture, but it is unclear if that will happen. Furthermore, the US is said to be unwilling to give concessions on trade at the meeting and no broad deal is expected, while the official also noted that China's Vice Premier Liu He is still leading the Chinese trade delegation, although new names including possible "hard-liners" may also be in the running. (Newswires)

China Q2 Beige Book stated that the domestic economy showed modest improvement. (Newswires)

UK/EU

ECB suggested an amendment to League's law proposal on Italy's gold reserves in which it asked the League to remove the reference to Bank of Italy holding gold as an "exclusive title of deposit” and asked Italy to consult with Bank of Italy if it plans to continue with the bill to ensure its independence is respected, while it made no objection to thrust of the League's law proposal to clarify that the Bank of Italy's gold belongs to the state. (Newswires)

FX

In FX markets, the greenback was firmer as it sustained the Fed-induced gains, in particular from comments made by dovish dissenter Bullard who distanced himself from the notion of a 50bps cut in July which he suggested would be ‘overdone’. This helped the DXY snap a 4-day losing streak and pressured its major counterparts across the pond with EUR/USD subdued near 1.1350 and which saw GBP/USD give up the 1.2700 handle. Elsewhere, USD/JPY was spurred by the strength of the greenback and approached the 107.50 level where there are a cluster of nearby large option expiries for today’s New York cut, and antipodeans were resilient overnight with AUD/USD kept afloat by multiple DMA levels near 0.6950. NZD/USD was initially pressured in a knee-jerk reaction to the RBNZ rate decision where the OCR was maintained at 1.50% as expected and the central bank stated that lower rates may be needed over time. However, NZD/USD then recouped the losses after the dust settled as members also noted 2 largely offsetting developments affecting the domestic growth outlook which were softer house price inflation and additional fiscal stimulus.

RBNZ kept the OCR unchanged as expected and stated that a lower OCR may be needed over time, while it noted downside risks to employment as well as inflation but also sees inflation rising to 2%. RBNZ stated that the committee discussed the merits of lowering OCR at this meeting and noted risk of ongoing subdued domestic growth, while it added that risks to achieving CPI and sustainable employment objectives are tilted to the downside relative to the May statement. However, the members also noted 2 largely offsetting developments affecting the outlook for domestic growth which were softer house price inflation and additional fiscal stimulus. (Newswires) 

COMMODITIES

Commodities were mixed with WTI crude futures higher on the session and back above the USD 59.00/bbl level after the API inventory report which showed a much larger than expected draw in headline crude inventories and bullish figures across the components of the release. In terms of the US supply side, Exxon Beaumont, Texas refinery (366 bpd) suffered multiple upsets due to a power loss and the largest east coast refinery in the US is expected to be closed down after a recent fire. Elsewhere, gold prices were heavily pressured as the greenback strengthened after Fed rate cut bets were tempered, while copper was lacklustre due to the risk averse tone and amid weakness in Chinese iron ore prices.

API Weekly Energy Inventories Crude -7.55mln vs. Exp. -2.5mln (Prev. -0.8mln). (Newswires)

Exxon Mobil reported multiple upsets due to a loss of power at its Beaumont, Texas refinery. In other news, Philadelphia Energy Solutions is expected to close its oil refinery following the recent fire, while the refinery is the largest in the east coast of the US with a capacity of 335k bpd. (Newswires) 

GEOPOLITICS

US Acting Defence Secretary Esper said the US wants to get on a diplomatic path with Iran and that Iran needs to be held accountable for its actions, while he hopes all allies support any range of activities to deter conflict with Iran. (Newswires)

Iranian President Rouhani said Iran is not seeking a war with the US but added that its armed forces will react decisively and conclusively to any US incursions into their air space. Furthermore, there were also comments from the Deputy Foreign Minister that the country has no reason left to carry out its nuclear deal commitments unilaterally, while a government spokesperson said that sanctioning Iran's Supreme Leader is an attack against the nation. (Newswires)

North Korea said US extension of sanctions against North Korea is a direct challenge to Singapore summit agreement and an extreme act of hostility. (KCNA)

US

Yields were lower by 0-3bps across the curve. Attention in early trade was on the 10-year yield, which once again breached 2% to the downside around the cash equity open, as well as the negative US 2-year swap spread, which saw a negative reaction in stocks too; the data slate helped support the complex. Later in the session, Fed’s Bullard leaned back in the notion of a 50bps rate cut in July. Powell’s comments were balanced, but the Fed Chair offered little to suggest a 50bps rate cut was coming, instead Powell choosing to adopt a more circumspect approach. The US 2-year auction was solid, stopping through the screens, while cover was above recent averages. There was little of note in the bidder breakdown. US T-note futures (U9) settled 6 ticks higher at 128-04.

Fed Chair Powell (Neutral) said many on the Fed see a case for more accommodation but don't want to overreact to single data points, while he noted that rates are low and are likely to remain so. Powell also suggested that in a general matter, it is better to act pre-emptively and not let any economic downturns gain steam, while he sees the market’s tepid inflation expectations as a reason for lowering rates but also repeated it is important for the FOMC not to overreact. (Newswires)

Fed’s Bullard (Voter, Dove) said he does not prefer a 50bps rate cut in July and stated that he voted for a rate cut at the last meeting since inflation is running below target and inflation expectations are deteriorating. Bullard added that by not cutting, the Fed has put higher probability on the July meeting and that he does not like that tactic as he suggested that if the conditions are right today, you should move today. Furthermore, Bullard said that a 50bps cut would be ‘overdone’ but doesn’t want to prejudge the meeting and that he thinks 2 rate cuts by end of the year would ensure a soft landing and shift policy from slightly restrictive to slightly accommodative, while he also stated that he was approached by the Trump administration in recent months about a seat on Fed board, but said he was happy in his current job. (Newswires)

Fed's Barkin (Non-Voter, Hawk) said there are risks the US could talk itself into a recession although he doesn’t see any signs this is happening yet and commented that inflation expectations are very anchored, while Barkin added that he doesn't know if a rate cut or cuts are needed this year and that Fed policy is still modestly accommodative. (Newswires)

US administration official said USD would be less strong and the EUR would be less weak if the Fed took back rate hike from last fall, while the official added that there are many opinions in the White House about the President's authority to demote Powell but also stated that the White House has no plans to demote Fed Chair Powell. (Newswires)

US House approved USD 4.5bln in aid to address migrant surge at US-Mexico border. (Newswires)

Former US Special Counsel Mueller agreed to testify in Congress. (Newswires)