Market 07/10: What did Powell say before the CPI report day?

Powell's second hearing session

Summary of key points from Powell's 2nd hearing day:

On the current situation:

• Fed has made progress in reducing the balance sheet size (balance sheet runoff), but there's still much to do.

• Current monetary policy is still restrictive (“restrictive”).

• Neutral rate has risen, at least in the short term, before the hearing…

  • … neutral rate is driven by slow-moving forces (‘driven by slow-moving forces’).

• Fiscal path is unsustainable (“unsustainable”).

• Inflation has decreased due to reduced demand and increased supply.

• Economy growing ~2% => positive figure.

On interest rate decisions:

• Fed wants to see more good inflation data to confidently cut rates: "We want to have greater confidence, and that means more good inflation ratings,"

• No need to wait for inflation to reach 2% before cutting rates.

• … but Fed has no specific inflation milestone to start cutting rates.

• Fed does not consider political factors in interest rate decisions.

• Fed is unlikely to return to extremely low rates like pre-Covid (“unlikely we are going to very low rates of the pre-crisis”)

• Fed's dual mandate (inflation + employment) is still working well (‘dual mandate has served us well’)

• Possible housing supply shortage (vs demand) when Fed cuts rates

On the banking system:

• Stress tests show large banks can withstand commercial real estate crisis (“large banks will be ok on CRE） 

• Changes to reserve requirements for banks in the BASEL II endgame are being managed tightly.

  • (FYI: Basel III, the end game basics and detailed Basel III agreement.)

Viet Hustler’s opinion:

• Compared to yesterday's hearing today Powell provided a lot of information, but showed little stance on interest rate and monetary policy.

  • … he only emphasized waiting for more good data + Fed decisions independent of political factors.

  • … that future borrowing costs won't be as low as before was predictable — not hawkish.

• Powell emphasized that the neutral rate has risen (though possibly lagged due to factors in Fed's model) — however, this is quite puzzling given current economic data.

(Linh Ha)

39 billion USD 10Y Treasury auction positive

• High Yield: 4.276% (market yield: 4.286% | previous session: 4.438%)

  => Stop-through: 1bsp

  • High Yield successful bid ratio: 1.16% (previous session: 43.69%)

• Bid-to-Cover: 2.58 (previous session: 2.67)

Competitive award components:

• Dealers: 11.53% (previous session: 11.59%)

• Indirect bidders: 67.61% (previous: 74.6%)

May wholesale inventories increased as expected

• May wholesale inventories (wholesale inventory) increased +0.6% MoM (prior: +0.2% M/M | expected +0.6% M/M).

  • Sales also increased accordingly +0.6% MoM (prior: +0.1%).

Crude oil inventories continue to decline more than expected

API report:

• Crude: -1.9 million (-1.3 million expected)

• Cushing: -1.2 million

• Gas: -3.0 million

• Distillates: +2.3 million

DOE report:

• Crude -3.44 million (-1.3 million expected)

• Cushing: -702,000

• Gas: -2 million

• Distillates: +4.88 million

• Biden administration continues to add +477,000 barrels to SPR oil reserve.

• Crude oil production rises back to record high 13.3 million barrels/day.

June CPI inflation forecasts

• TD Securities: 3.0%

• Barclays: 3.1%

• Citigroup: 3.1%

• Factset Consensus: 3.1%

• Kalshi: 3.1%

• UBS: 3.1%

• Bank of America: 3.2%

• Goldman Sachs: 3.2%

• Morgan Stanley: 3.2%

Average June CPI inflation expectations: 3.1% | Core CPI: 3.4%.

=> If as expected, inflation will reach the lowest level since January 2024.

Construction layoffs reach highest level since September 2023

• Construction sector records 4,613 workers laid off in June, highest since the 2008 financial crisis.

  • Annual layoff level also increased +20% YoY, largest since September 2023.

• Meanwhile, 1.858 million people receiving unemployment benefits, highest since 2021.

• This trend is also returning to tech companies due to the AI wave:

  • Intuit - TurboTax parent company laid off 1,800 workers (~10%) as the company shifts focus to AI.

Crypto market: Germany no longer a "Bitcoin billionaire"

1. German government sold additional 2,000 BTC (~117 million USD), only remaining 13,360 BTC, equivalent to 26.8% of the initial seized Bitcoin from the Movie2k website.

• Despite concerns from the US and German governments, Bitcoin ETF investors continue to buy at a fairly rapid pace.

2. Grayscale expected to launch Ethereum ETF on 07/18.

   • Holders of Grayscale Ethereum Trust (ETHE) shares will receive Ethereum ETF shares on a 1-1 basis.

Some other news:

1. Microsoft and Apple decide not to join OpenAI's board of directors, as major AI tech companies are under tight scrutiny by global regulators.

2. Biden may forgive millions in student loan debt weeks before the election. This could be a key factor in Biden's campaign.

3. US imposes 25% tariff on steel and 10% on aluminum transshipped through Mexico from other countries, mainly China.

4. Samsung launches Galaxy Ring and seeks to integrate its products to provide health tracking features - competing with Apple.

5. Chinese real estate group Vanke warns of 1.2 billion USD loss due to housing market downturn.

6. China's GDP likely to slow: only at 5.1% in Q2 (slowing from the first 3 months) due to weakening consumption.

7. Bank of Japan (BOJ) cuts growth forecast for this year, forecasts inflation to remain around the 2% target in coming years.