US Mid-Day Update: Trade Tensions, FOMC countdown, Oil and Gold rally

US stocks soften as President Trump and China exchange political posturing blows.  President Trump reiterated his frustration that China has not come through on last month’s promise to deliver agricultural purchases and for dragging their feet with trade talks. China is accusing Americans for the unrest in Hong Kong as some of the demonstrators reportedly looked American and waved US flags. 

The situation remains tense between both sides and this round of talks seems to be a critical juncture that could signal a deal by the fall or a delay until after the election.  China appears to be adding hawks to their negotiating team that could support some optimism that they are heading in the right direction.  If we don’t see a positive step in trade talks this week, we will see Trump return to his ‘tariff man’ alter ego. A trade deal combined with a dovish FOMC will support a significant rise with the US stocks into uncharted territory.  

US stocks are softening, but remain near record territory, while the dollar and Treasury yields remains little change on the day.

Fed

The Fed is about to go full dove and signal the beginning of an easing cycle as they try to avoid a disinflationary disaster.  With the way inflation is trending, the Fed does not want to become the BOJ or the ECB and have to deal with negative rates.  They are running out of weapons and we could see Powell signal more cuts are coming.  Financial markets are not convinced we will get such a dovish message as the economy continues to deliver strong economic readings.

Today’s release of the Fed’s preferred measure of underlying US inflation, core PCE came in softer than expected but still close to the Fed’s 2.0% target, all while we continue to see near record low levels of unemployment and strong economic growth and forecasts.  If you can’t get inflation with this strong of an economy, the Fed could be in trouble if they don’t act now.  Anything less of a firm commitment that more cuts are coming should be viewed as a policy mistake. 

Oil

Oil remains stuck in the upper boundaries of a tight range ahead of tomorrow’s Fed meeting.  Energy traders are waiting for a clear dovish signal from the Fed that should support other central banks case for lower rates.  Easy money is about to prop up commodity prices and this week we may not see too much of a reaction if we continue to see drawdowns with US inventories won’t matter. 

Gold

It seems portfolio managers are more confident that gold will remain bullish even if we see Powell disappoint without a strong easing message, as negative interest rates everywhere else will support the precious metal.  Gold-backed ETFs are hitting some serious high levels that show that markets are most confident in higher gold prices, followed by higher equities and lastly a weaker dollar. The bullish gold trade is starting to get overcrowded, as many macro traders become overly confident with the current trend.  

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