WTI Fails To Extend Gains Despite Huge Crude Draw

Oil prices have extended their gains overnight after the much bigger than expected crude draw suggested by API, and helped by an uber-dovish Powell and a re-emergence of tensions with Iran (Trump threatening more sanctions imminently).

“The crude draws reported by the API yesterday were much larger than the market was expecting,” said Warren Patterson, a senior commodities strategist at ING Bank NV. “That is the key catalyst behind the move higher.”

API

  • Crude -8.129mm (-2.5mm exp)

  • Cushing -754k

  • Gasoline -257k

  • Distillates +3.690mm

DOE

  • Crude -9.50mm (-2.9mm exp)

  • Cushing -310k

  • Gasoline -1.46mm

  • Distillates +3.729mm

After API, and the market’s surge, analysts shifted their expectation for a bigger crude draw than before, and rightly so as DOE reported a massive 9.50mm crude draw – the fourth weekly draw in a row. Gasoline also drew for the 4th week as distillate stocks rose.

Production is perhaps rolling over but its a little too soon to tell yet (aside from the signaling from rig counts)…

 

WTI traded around $59.50 ahead of the DOE data (having surge overnight), spiked on the big crude draw print before algos sold the news…

“The declining American inventories and Iran’s warmongering rhetoric pave the road further for bulls to make a comeback,” said Howie Lee, an economist at Oversea-Chinese Banking Corp. in Singapore.

“But it promises to be a bumpy road ahead as there’s still a lot of concern about declining energy demand.”

via ZeroHedge News https://ift.tt/2xEbAYV Tyler Durden

Blain: Is Boeing About To Trigger The Next Market Crash

Blain’s morning porridge, submitted by Bill Blain

All eyes on what Powell tells Washington today, but a number of Porridge Readers called to tell me I’m wrong about summer risks! They think my expectation for a long worried nervous but stable summer before markets are bailed out by accommodative central banks in late Q3 is way too optimistic.

A number feel markets are ripe for a sudden and painful rollover in bonds and stocks – and much sooner than I think. What they did agree with was my assessment the likely trigger for a market shock will be a “no-see-em”, something so obviously hidden in plain sight it catches us completely and painfully by the short and curlies. And “Plane” sight might be a good way to put it. I’m wondering if Boeing might be the trigger! (See what I did there..?)

Hang on? We all know the next market collapse isn’t booked till October? Well maybe not. What if someone tries to start the market apocalypse early? That would shock the many market participants who think the perception of a Global Central Bank put means there is nothing to worry about. Complacency is a terrible thing.

Smart bond gurus are shouting bubble! Although US junk bonds have not tightened as much as treasuries through the last uptick, they are still at incredibly tight spreads. European sub-investment grade is rallying in the expectation a tide of new ECB investment grade purchases will lift all boats. Yet, with yields so low as to completely discourage any dealer inventory (which is too high a capital cost anyway), liquidity has never been so thin. As I say in my new book, The Fifth Horseman – How to destroy to Global Economy, (yes, I am going to plug it remorselessly), “Taking higher risk and less liquidity for lower returns is not a winning strategy.” (That is so good I’m adding it to my list of Blain’s Market Mantras.)

If the bond market is finally waking up to the bubble then we’re in trouble. All it took to fire the last crisis were concerns about sub-prime mortgages and a liquidity shut-down. What happens this time if we get a tri-fecta of junk bonds and covenant-lite CDOs, a resumed sovereign debt crisis, and overleveraged zombie corporates sinking the whole bond market? Ouch. That’s going to hurt. I confidently predict the current problems of funds that have had to gate because of illiquidity will be as nothing compared to what may come.

This morning I read Greek bonds yield less than US treasuries! Italy got €17 bln demand for a 50-year bond, basically because investors want convexity and think the ECB is going to ease. (And they want to repeat the spectacular returns garnered by the Austrian Century bond.) Italy has caught a bid because, apparently, the ECB is not going to sanction the country over its breach of GDP/Debt fiscal rules, and the appointment of Christine Lagarde as new ECB president means “do-what-ever-it-takes-for-ever” is nailed on. Even Czech bonds are in negative territory.. It all sounds far too good.

And what about Stocks – surely they will remain insanely optimistic on the back of central bank easing? That’s why they have been hitting new records. UBS is on the wires this morning warning the new US Earnings season that starts on Monday could be a big disappointment. Every 3 months, regular as a bowl of All Bran) some investment bank warns Earnings will disappoint. Maybe this time they will.  UBS say “the bad news is good news” dynamic is set to end. Earnings growth expectations have slumped to 3% from 20% last year. They say “rate-cut rallies” often prove short-lived.

At the start of this morning’s Porridge I said Boeing might be the trigger that unravels the current market complacency.  Why?

Many readers may not be aware Boeing is the largest component stock of the Dow Jones – 11.6% weighting in the index. That means its potential for unbalancing sentiment across the market is huge. Boeing stock is down 20.5% since it hit a high in early March, and down 17% since the second Boeing B-737 Max Air Ethiopia crash on March 10th. Since that crash, despite increasingly negative new flow and rising legal and regulatory pressure, Boeing is only down 6.5%. That’s pretty stable for a company that could be in serious trouble from a host of demand issues (ie not selling many planes,) regulation, legal (lots of people going to sue), cash, a loss of confidence, and a growing perceptions the company lost sight of safety in search of profit.

I am concerned the market is underestimating just how bad things could go for Boeing, and when it does, the whole equity market will knee-jerk aggressively, triggering pain across all stocks. I noticed yesterday the number of negative posts and comments on Boeing has risen dramatically in recent days. The crunch might be coming.

Let’s consider Boeing’s issues.

Despite the assurances from company HQ in Chicago, it looks increasingly unlikely it will get the B-737 Max back in the air this year. Boeing has just announced its H1 deliveries in 2019 are down 54%. It has only delivered 90 new aircraft this year. Yet, it is producing 42 new B-737 Max’s each month, and is having to store them on airport parking lots! It isn’t getting paid for these aircraft, but it still has supply chain commitments to meet. Boeing is haemorrhaging cash to build an aircraft no-one can fly – not a great strategy.

Why is it taking so long to get the B-737 Max back in the air? Part of the problem is fixing the problem to a level pilots, airlines and importantly, passengers are happy. Quick work arounds – Boeing’s initial response – are not acceptable. The second problem is a belated regulatory kickback by the US Federal Aviation Authority. They are running scared – under weak leadership they’d let Boeing self-regulate itself for years. Now the agency is playing catch-up and it doesn’t help Boeing has been caught out on a host of other certification issues across its whole production since the 2 Max crashes. Even though Donald Trump is now tweeting about his support for Boeing and new orders being imminent from his good friends in Qatar, the FAA is not going to rush to approve any MAX fix.

Boeing is trying to rush deliveries of other aircraft types to buyers to make up for the B-737 Max cash slack. But there have been problems with B-787 Dreamliners built at its state of the art Charleston factory – “shoddy production and weak oversight” said the New York Times.  At least one airline is said to be refusing to accept aircraft built outside Seattle. The US Airforce stopped deliveries of new KC-46 Tankers for a while when they found engineers had left hammers and other tools in wing and control spaces – a clear indication of “safety standards gotten too lax” said Defense News! 

Part of Boeing’s problem is its decision not to design new aircraft, but to upgrade old ones. The venerable B-737 is nearly as old as me, first flown in the early 1960s. It made commercial sense for Boeing to keep upgrading and upscaling the design because it kept the factories delivering and they could tell regulators it was just an upgrade not a new design saving billions on testing and training. It’s now clear the Boeing 737 Max was compromised to save money. 2 of them crashed killing 346 people. Someone has calculated 1 in 8 million aircraft passengers die in accidents. It’s about 1 in 300,000 on the B-737 Max. So much for Boeing and Safety.

This has massive implications for Boeing. Its next big upgrade is the B-777X, an “upgrade” of the old B-777. It will be lighter and more efficient for operators, and a new experience for passengers. But, there is now no-way it’s going to get a fast-track path to airline service as a “upgrade”. It’s going to be tested, stressed and pilots trained. Forget next year deliveries. We are looking at years down the road before any of us fly it. Boeing must rue the day they didn’t go with completely new design – which would have been hugely expensive and killed the stock performance of recent years, but would have left Boeing dominating the larger aircraft space and reaping the kinds of returns it could have made on the Dreamliner. It would have been a far more valuable company long-term.

Now the B-787 Dreamliner is tarnished with the botched Boeing brush. The winner is the relatively new Airbus 350 which can do exactly what the Dreamliner does in terms of efficiency and passenger experience. It can also do the B-777’s job. Airbus wins by default.. but what does a beaten Boeing mean for markets?

Crashing minor chords.

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From Lap Of Luxury To Prison Cell; Inside Jeffrey Epstein’s New Reality

Jeffrey Epstein has had quite a rude awakening. 

After being nabbed at Teterboro airport last Saturday and charged with sex trafficking underage girls, the wealthy financier has gone from bouncing between his six homes around the world on his private Boeing 767, to a comparatively tiny jail cell at the Metropolitan Correctional Center (MCC) in lower Manhattan, according to Reuters

“When you have someone that’s allegedly a sexual predator like Jeffrey Epstein, he’ll need to be in protective custody,” said lawyer Andrew Laufer, who has represented MCC inmates. And because of Epstein’s high profile, he’s likely in solitary confinement. 

This unit is completely isolating,” said Jeffrey Lichtman – an attorney for Joaquin “El Chapo” Guzman, who has been at the jail’s “harshest” 10 South wing for over two years, according to Bloomberg. There are approximately 800 inmates at MCC, most of whom are awaiting trial and have not been convicted. In addition to El Chapo, other prominent inmates have included New York Mafia bosses and Bernie Madoff. 

The jail’s harshest unit, known colloquially as “10 South”, has been compared unfavorably to the U.S. prison camp Guantanamo Bay. In 2011, rights group Amnesty International said the unit, which has also been used to house people accused of terrorism, flouts “international standards for humane treatment.”

One defense lawyer, who asked to remain anonymous, said that Epstein is likely in “9 South,” a separate special housing unit. –Reuters

“The sex offenders have a hard time,” said former BOP employee Jack Donson. “He’s definitely going to get ostracized.” 

While Epstein could be granted permission to leave the MCC as soon as his next bail hearing on July 15, federal prosecutors have argued that he poses an “extraordinary risk of flight, particularly given the defendant’s exorbitant wealth, his ownership of and access to private planes capable of international travel, and his significant international ties.”

Bloomberg posits that if US District Judge Richard M. Berman does grant bail, it would likely be under strict conditions. 

Possibly a “substantial” cash amount (guesstimates are in the tens of millions of dollars), a home-confinement mandate and an electronic-monitoring device strapped to one of his ankles, said Brandon Sample, a defense attorney and sentencing-reform advocate who served more than 11 years in federal prison after he and others bought postage stamps with counterfeit and stolen checks and resold them. –Bloomberg

That said, until Judge Berman makes that decision, Epstein will be doing ‘fairly hard time,’ according to the report. 

“The contrast between his recent gilded existence and his life at the MCC is like “night and day,” said Alan Ellis, a consultant and criminal defense lawyer who wrote a guidebook on federal prisons. “And that would be understating it.” –Bloomberg. 

The 66-year-old is likely being held for 23 hours a day in a cell no larger than 100 square feet, equipped with just a bed, a toilet with an attached sink, according to the report. He likely gets one hour of daily recreation in an indoor cage – a privilege which can be denied. 

MCC isolated cell via the Daily Mail

In comparison, Epstein’s seven-story 1920s Manhattan home is 21,000 square feet and worth over $77 million. He’s also got a $12.4 million two-story Palm Beach home just down the road from President Trump’s Mar-a-Lago resort. 

This is quite the difference from Epstein’s last stint in the can. In 2008 as part of his sweetheart plea deal, the wealthy pedophile was sentenced to serve in the Palm Beach County Jail – where he was allowed to hire his own security detail and didn’t spend much time actually locked up, according to the Miami Herald. He was also allowed to work at his West Palm Beach office for as many as 12 hours a day for up to six days a week. 

Epstein is accused of making young girls perform nude “massages” and other sex acts, while he paid some of the victims to recruit others between at least 2002 and 2005 in his New York and Florida properties. 

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Watch Live: Fed’s Powell Explains Why He’s Cutting Rates In ‘Greatest Economy Ever’

With the Fed’s critical July meeting – where equity bulls hope to see the central bank deliver the 50 bp cut to the Fed funds rate that President Trump has demanded – just weeks away, Fed Chairman Fed Powell will sit for his biannual testimony before Congress this week, starting with the House Financial Services Committee on Wednesday.

His testimony begins at 10 am. Watch it live below:

Powell’s opening remarks, released at around 8:30 am on Wednesday morning, left analysts with the impression that a July cut is still very much on the table despite Friday’s robust jobs report. The consensus was that Powell sounded very dovish, and equity futures spiked in response, and have remained in the green ahead of the open.

As one analyst pointed out, if Powell was looking to push back against the notion that the Fed will cut rates at the FOMC’s meeting later this month, this was his chance to do it. And the fact that he didn’t is significant. Since the release, Morgan Stanley has called for a 50 bp rate cut to save the ‘faltering economy’, and July rate-cut odds have tricked higher.

Cut

Another said it’s remarkable how little Friday’s jobs report had impacted Powell’s economic view. That, and a spate of other stronger-than-expected data over the past month, have helped spark a turnaround in Citi’s economic surprise index.

Powell’s key comments, via Bloomberg:

  • Baseline case is still for solid growth and for labor market to stay strong but notes uncertainties have increased in recent months

  • Notes many officials at June FOMC saw stronger case for somewhat easier monetary policy

  • Powell points to risk weak inflation may prove more persistent, says inflation pressures remain muted

  • Says housing investment and manufacturing look to have dipped again in 2q

Then again, there’s still plenty of time in the Q&A both on Wednesday and on Thursday (when Powell will appear before the Senate Banking Committee) for Powell to misstep (like he’s done a few times in the not too distant past) or for Democrats – Maxine Waters is the chairwoman of the committee, and Alexandria Ocasio Cortez, who has criticized the central bank in the past and has been one of the loudest advocates for ‘Modern Monetary Theory’ – to aggressively push back against the Fed’s dovish turn, which would risk turning the fate of the central bank’s monetary policy into a political dogfight.

Summing it all up perfectly:

*  *  *

Read Powell’s prepared remarks in full below:

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Mission Accomplished? S&P Tops 3.000 For First Time Ever

Presented with little comment, aside to note, how many more times can the same rate-cut be priced into stocks (with tumbling macro and micro economic data) before this farce falls apart?

This seemed to sum things up perfectly…

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It’s Recession, Not No-flation, That Is Scaring The Fed

Via Bloomberg’s Richard Breslow,

What a unique situation we get to witness over the next two days. The market assumes that the FOMC meeting is being held early. And that is largely true. With the one caveat that if the reaction of asset prices isn’t to their liking they will get a second bite at the apple to adjust the message. Which is one big reason, even among those who fear Fed Chairman Jerome Powell just might be less dovish than expected [ZH: he wasn’t!], there remains a strong buy the dip mentality.

All eyes, as they say, will be on the gaps to lower yields from the end of May.

Whether the gaps get filled at all, or hold if tested, will tell you a lot about market dynamics. The real answer comes down to whether investors conclude prices got too far ahead of the economic data or have faith that the year-long trend will continue.

What happens in the very short-term is anyone’s guess, and largely irrelevant. But it will take a lot, lot, lot to turn long-term bond bulls into anything else. And that certainly won’t be his, or any other central banker’s, intention. If anything, willing to openly concede that supporting financial conditions is part of the game plan has fully emerged into the mainstream. The practice of doing so no longer has to be a poorly kept secret.

With fewer monetary resources at their disposal than they would like, they need the market to continue doing a chunk of their work for them. Which is understandable given the lack of faith that effective fiscal policy will be on hand.

There are a couple of things to keep in mind.

Should we come out of the testimony with the 25 basis point cut, or even a bigger one, seemingly baked in the cake, assume that the chances of them taking it back in the foreseeable future are exceedingly small. That is true whatever the explanation for the move. And no talk of data-dependence is going to change that.

Take it as confirmation that, whatever the projected pace of rate changes, the market correctly understands, and will continue to price this, as merely the prelude of things to come. Talk of inflation is a red herring. The subtext of all of this is how to ward off a potential recession.

It doesn’t even matter if the debate about whether one is imminent or not is unsettled. Because their keep-them-up-at-night reality is worrying about what they can effectively do should one happen. And the fact of life with recessions, all of the predictive models notwithstanding, is they are, in fact, notoriously difficult to predict. And don’t require an aging economic cycle to occur.

The term “global headwinds” has become unfortunate. It’s too broad as to be useful and risks just being a cliche. Because in today’s world, credit events in Europe or Asia, trade disputes and a lot of other risks are just as likely to be the cause. These are things the Fed has no control over. And don’t have to rise to the level of black swans to be the trigger.

The Fed’s struggle is all about trying to figure out if there is any way to make a potential recession as mild as possible. They probably feel they can deal with a mild one with the resources at hand. But a bad one is going to be a problem. Especially because their unspoken reality is that QE loses its oomph over time. And that sell-by date is rapidly approaching. They have to figure out when, and how fast, they should spend the rate room they have. And, perhaps, reconsider whether they should have been hiking a lot earlier than they had the gumption to do.

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Morgan Stanley Calls For 50bps Of Rate Cuts In Three Weeks

Now that Powell telegraphed a rate cut at the July 30/31 FOMC meeting is virtually certain, the question is whether the Fed will cut once or twice. And while many still believe that the Fed’s “insurance” cut will be just 25bps, or 1 rate cut, as Bloomberg’s Elena Shulyatyeba writes, “we do not see support for a 50-bp cut given limited interest-rate ammunition compared with previous economic cycles”, noting that the current level of the fed funds rate gives policy makers the capacity for 9 rate cuts compared to 20 at the start of the last recession and 25 ahead of the 2001 downturn, others disagree.

Case in point, Morgan Stanley’s Chief Economist Chetan Ahya, who is bucking the trend and writes this morning that “a  strong policy response is necessary to guard against risks of a further, sharper loss of economic momentum.” Specifically, the “weak incoming data” – which is an odd statement for an economy which just added so many jobs it surpassed even the most optimistic forecast – “lingering trade tensions, and preventing both financial conditions from tightening and a non-linear adverse impact on growth are key reasons for a front-loaded adjustment.”

Echoing what Powell lamented in his prepared remarks, MS writes that “corporate confidence and the capex cycle have remained weak”, even if that means that the stock buyback cycle has never been stronger. Furthermore, “uncertainty over trade tensions – the key overhang on the macro outlook – lingers. Against this backdrop and in the context of preventing the downside risks and attendant non-linear impact from materializing” Morgan Stanley argues that a strong policy response is necessary to arrest the recent sharp decline in economic momentum.

A response in the form of 50bps of rate cuts in just three weeks.

To justify its uber dovish outlook, Morgan Stanley lays out the following four arguments why a strong policy response is needed:

1. The global economy has lost significant momentum in the past 9 months

Global GDP growth has slipped quickly from a peak of 4.0%Y in 2Q18 to 3.1%Y in 2Q19. High-frequency indicators, for instance PMIs and trade, are currently close to or below the previous cycle (2015-16) lows. Of particular concern is the dip of the global new orders sub-index (the more forward-looking component) within the manufacturing PMIs to well below 2015-16 lows, suggesting that the outlook for aggregate demand remains anemic.

The slowdown is also broad-based across regions. While the rest of the world began to slow from the middle of 2018, the US economy appeared to have weathered the headwinds as the tailwinds from fiscal stimulus were still supporting growth then. However, as the global slowdown has deepened and the impact from fiscal stimulus is fading, growth momentum in the US is also beginning to slow. As a case in point, the US manufacturing ISM index has weakened sharply over the last eight months and is now converging rapidly in line with global aggregates after a period of outperformance. We expect US growth to slow further, to 1.6% in 2H19 on a sequential quarterly average rate from a pace of 2.8% in 2H18.

2. Lingering trade tensions remain an overhang on corporate confidence

One of the key factors behind the current global slowdown is trade tensions – their impact on corporate confidence and the capex cycle. Corporate sentiment has already weakened significantly and the capex cycle has ground to a halt. While the G20 meeting did not result in an immediate escalation in trade tensions, it did not provide a clear path toward a comprehensive deal either. This “uncertain pause” therefore does not remove the uncertainty created by trade tensions and it remains an overhang on corporate confidence and the macro outlook. As a result, the corporate sector is unlikely to get back to investing unless and until we see a complete resolution on US-China trade policy and that no other major trade disputes are being pursued (for instance with the EU or Mexico).

3. Inflation expectations are slipping again

Actual incoming inflation data, market-based measures of inflation expectations, and the bank’s outlook for inflation all suggest there is room for further policy accommodation. In the US, core PCE is currently at 1.6%Y, below the Fed’s 2% symmetric inflation goal. Market-based measures of inflation expectations have also softened, to close to a 3-year low. With wage growth softening again and overall growth set to slow to a pace below potential, MS is not expecting inflation pressures to build up in a significant way that would constrain easing today. Similarly, in the case of Europe, growth is set to remain sub-par, and headline inflation has been well-below the ECB’s target and has softened more recently. Additional stimulus by the ECB is thus warranted.

4. Protecting against the risk of a non-linear tightening in financial conditions

The economic backdrop is not encouraging and the risks to the outlook remain skewed to the downside. A sharper slowdown in growth will bring corporate credit risks to the fore, particularly in the US as leverage has picked up significantly in the corporate sector, especially among the riskier borrowers. If downside risks were to materialize, it could result in a non-linear tightening of financial conditions. We believe a strong policy response is therefore warranted to keep financial conditions easy and provide support to the cycle. As a reminder, in the last quarter of 2018, growth had slipped but the policy stance had not shifted pre-emptively. This created a situation where financial conditions tightened in a non-linear fashion.

Hence, in the context of managing the risks to the outlook, we think there is a case to be made that policymakers should proceed with a strong policy response. As Chair Powell said at the June FOMC press conference, “an ounce of prevention is worth a pound of cure”. In today’s context, this means it would be better to act more quickly and more aggressively up front, to prevent a sharper and prolonged weakening of the economy

Translation, the Fed must do everything to prevent the market from dropping in a “non-linear’ fashion.

In conclusion, Morgan Stanley expects “the policy-easing cycle to move into full swing and expect a stronger policy response from central banks than what markets and consensus currently expect.” As a result, the bank expects the Fed to cut rates by 50bps at its July meeting and assigns a higher probability to the ECB restarting QE than consensus.

In response, and following Powell’s prepared remarks, the odds of a 50bps hike jumped from 0 to 12.5%…

… and rising.

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Warning Bells Sound For Europe’s Biggest Exporter

Via Bloomberg Taking Stock

Europe’s largest economy is attracting bad news as companies are entering the earnings season. While Germany’s DAX Index has managed to shrug off bad economic indicators and trade worries that had hit shares in May, yesterday’s profit warning from BASF was harder to ignore. And dividend futures indicate traders are pricing in payout cuts at companies such as BASF, Bayer and Lufthansa.

The DAX’s performance has broken away from macro fundamentals this year. Within the main European economies, Germany is the bottom country when it comes to manufacturing PMI, with data indicating a contraction since January. Yet, the equity benchmark has climbed near a one-year high and has entered a bull market again.

Although trade tensions have faded for now amid bets of looser monetary policy, no resolution has been reached between the U.S. and China. Given the German gauge is a manufacturing-heavy index, and suffered more than peers as tariff worries grew last year, any new developments will be keenly watched.

While the DAX is a total return index, looking at its performance minus the dividend effect shows it’s actually underperforming most of the main European indexes this year, with the exception of U.K. and Spanish benchmarks.

Carmakers BMW and Daimler have already warned about their outlook earlier this year and underwhelming results from Geely yesterday did not bode well for the auto sector. BASF’s profit warning surprised analysts with its magnitude and rippled through the sector. Unfortunately for the DAX, autos and chemicals account for more than a quarter of the index.

Since dividend levels are very relevant to the benchmark, they should be closely monitored as warnings accumulate for high dividend yield shares. Deutsche Bank already said it will omit a payout next year after restructuring, while swaps show Lufthansa’s dividend could be at risk as its outlook is darkening. More bad news could end up weighing on the DAX’s performance. The dividend swap market has started to price a potential cut for BASF, while Covestro could also be impacted. The table below shows the difference between dividend swaps and estimated dividends.

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Stocks, Bonds, & Gold Spike As Dollar Dives After Powell’s Dovish Remarks

A ‘dovish-er’ than expected set of prepared remarks from Fed Chair Powell has sparked a bid in bonds, stocks, and gold as the dollar takes a dive ahead of his testimony late this morning.

Dow futures love the bad economic news… are up 150 points on Powell’s promises…

 

The dollar is rapidly pulling back from the pre-FOMC levels it has recovered to…

And as the dollar dives, investors are buying gold…

And bonds (also yields diving from the pre-FOMC levels)…

Powell’s remarks suggest he is comfortable with market pricing of an interest rate cut at the end of July. This was an opportunity to push back against those expectations if he wanted to, and he did just the opposite. July rate-cut odds are back at 100% (from 92.5% pre-remarks).

 

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“Outlook Continues To Dim” – Powell Prepared Remarks Signal Dovish Bias Persists

With all eyes on today’s testimony, watching for strawman hawkishness ahead of the FOMC meeting, Fed chair Powell’s prepared remarks offer some signal that he is in fact just as dovish.

Powell TL/DR: The economic news is terrible enough to send the S&P back over 3,000

Powell begins by noting that uncertainties since June’s FOMC continue to dim their outlook, which is odd because macro data has surprised to the upside since then…

Federal Reserve Chairman Jerome Powell says:

Baseline case is still for solid growth and for labor market to stay strong but notes uncertainties have increased in recent months

Notes many officials at June FOMC saw stronger case for somewhat easier monetary policy

Powell points to risk weak inflation may prove more persistent, says inflation pressures remain muted

Says housing investment and manufacturing look to have dipped again in 2q

Powell also notes that “growth in business investment seems to have slowed notably” … which is great news as investment in stock buybacks has accelerated notably.

The punchline is that Powell warns that “a number of government policy issues have yet to be resolved, including trade developments, the federal debt ceiling, and Brexit. And there is a risk that weak inflation will be even more persistent than we currently anticipate.”

Ahead of the release, July rate-cut odds had slid to 92.5% from 100% (with zero percent chance now of a 50bps cut).

Powell comments in text of testimony prepared for delivery to House Financial Services Committee, which is scheduled to start at 10 a.m. in Washington

*  *  *

Full Prepared Remarks below (link to statement)

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