Markets shrug off FOMC minutes, improved backdrop for Italian politics

Summary:

• Although most of Fed members saw a July rate cut as a mid-cycle adjustment, the central bank seems to be looking for other easing options in its toolkit
• A snap elections scenario in Italy has become less probable as smaller parties opposed to such an option when met with Mattarella
• Weaker manufacturing and stronger services - preliminary PMIs from Japan paint cautious optimism

Mid-cycle adjustment

Minutes from the July Fed meeting, when the US central bank cut rates by a quarter percentage point for the first time since 2008, did not bring too much volatility to financial markets. According to the account most of FOMC members viewed a cut last month as a mid-cycle adjustment, the same statement which Jerome Powell tried to tell market observers during his post-meeting press conference. On the other hand, a number of them also underlined the need to be flexible in reacting to incoming macroeconomic data. While several members favoured no change in rates last month, a couple policymakers would have preferred even a 50 bps rate reduction aimed at addressing too low inflation. Among reasons justifying a dovish tone from the Fed in July we may find decelerating economic growth, subdued inflation and elevated risks related to global trade. On top of that, several members expressed their uncertainties when it comes to efficacy of quantitative easing suggesting that a resumption of this program could face a high hurdle. Last but not least, many participants suggested that appropriate forward guidance combined with QE might not be enough to eliminate protracted risks when interest rates came to a lower bound. The last line appears to signal that the Federal Reserve may look deeper into its toolkit when attempting to tackle a zero lower bound issue. Markets largely shrugged off the minutes and US indices finished yesterday’s trading close to the levels from before the release.

As risk sentiment has deteriorated in recent hours (some declines in Asian equities despite the strong session in the US), the NZ dollar is taking a hit the most being down 0.4% against the US dollar. From a technical standpoint, the pair may be en route to its pivotal demand zone localized nearby 0.6230. Source: xStation5

Green shoots of recovery in Italian politics

The prospects for forging a new government improved on Wednesday when a number of smaller parties were against snap elections eventually favouring a new coalition. Wednesday was the first day of consultations between parties and Italy’s President Sergio Mattarella. Today, he is expected to meet other bigger parties including PD, Forza Italia, League and Five Star Movement. Ultimately, Mattarella could give two parties, PD and Five Star Movement, several days more to enter into formal discussions before making his final decision. Thus, it is uncertain whether his decision comes before the end of August. Either way, market participants looked sanguinely at yesterday’s revelations from Italy and as a result we saw both Italy’s bonds and stocks outperforming euro area peers.

In the other news:

• Japanese manufacturing PMI rose to 49.5 from 49.4, services PMI rose to 53.4 from 51.8 - preliminary readings for August showed

• Australian manufacturing PMI fell to 51.3 from 51.6, services PMI fell to 49.2 from 52.3 - preliminary readings for August showed