China Acts, Powell Next

Less than  two hours before Powell's speech at Jackson Hole, China announced 5% tariffs on US oil and soya beans, sending S&P and Dow futures down by 10 pts and 150 pts respectievly. A handful of comments emerged from Mester and Bullard indicating their willingness to ease further in the event of further deterioration. The pound was the star mover yesterday after markets misinterpreted Merkel's comments. 2 out of the 3 Premium trades are firmly in the green. Powell up next at the top of the hour. No Q&A after the speech. 

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The market is trying to figure out what the Fed is going to do next. A quarter point cut is fully priced in at the Sept 18 meeting with the odds of a 50 bps move falling to just 3.0%.

That sense of confidence from markets was not confirmed by Fed talk on Thursday. KC Fed President George will again likely dissent against a rate cut to leave rates unchanged, saying it's not the time for accommodation. On the other side was Dallas Fed President Kaplan who said risks were to the downside and that if they wait for consumers to slow down it might be too late. At the same time, he said that he doesn't want to cut rates unless they have to. Finally, Philly Fed President Harker said he doesn't see the case for further easing and would rather take some time to see what unfolds.

Harker and Kaplan are currently non-voters but will vote in 2020. Mester (non-voter) and Bullard (voter) will both speak Friday before Powell's 1400 GMT speech.

The comments from the Fed chairman will be critical. The market is expecting a strong signal or at the very least something akin to what Kaplan said. If Powell's speech fits more the frame of Harker, expect a dive in risk trades and a rally in the yen. It's extremely unlikely that Powell would close the door on a Sept cut but the market is pricing in a series of cuts. After Sept, an Oct move is already 63% priced in and yet another move in Dec is at almost 40%. That's aggressive but it may be counting on kicking and screaming in equity markets if there's anything less than a dovish message.

In other news, cable leaped to the highs of the month after Merkel cracked open the door to changes on the Irish border backstop. She had sent mixed signals after first talking about a 30 day deadline, then noting that was only symbolic and that they have until the end of October. None of it was game-changing and the price action may have said more about the market than her words – it's a market that's deeply short GBP and anything upbeat risks a squeeze.