Wait a minute
Minutes of the Fed's July 28-29 policy meeting were released on Wednesday. They show that a growing number of officials are increasingly worried about the persistence of elevated price pressures and the inflation outlook. The three weeks since the 9-3 vote to keep rates on hold have been action-packed — energy prices, especially diesel, are popping higher again, but inflation and employment data have been on the soft side; long bond yields have surged to multi-year highs, but Treasury is taking measures.
The minutes suggest the center of gravity on the FOMC is shifting in a more hawkish direction. "Several" members favored raising rates by 25 bps at the meeting, and "many" said borrowing costs will have to rise if inflation doesn't come back to the Fed's 2% target. That was before the July inflation and payrolls data though, which appear to have taken a hike in September off the table. It might still be a close call.
Carried away
One consequence of the dollar's slide following the U.S. Treasury's surprise bond buyback announcement is the uncertainty it suddenly casts around the FX carry trade, especially the Japanese yen and Swiss franc. Short yen positions had already gotten blitzed by the recent U.S.-Japan intervention — the CFTC net short yen position had its biggest one-week pullback on record — and this is likely to encourage more short covering.
The short Swiss franc position isn't quite as extreme, but it's still historically large. The Swiss franc on Wednesday surged nearly 2% against the dollar, its biggest rise since January and among the biggest in recent years. If the U.S., Japan and others are becoming more active in FX and bond markets, what is the obvious carry trade funding currency of choice now?
What could move markets tomorrow?
- Japan trade (July)
- China interest rate decision
- Germany PPI inflation (July)
- U.S. Treasury sells $8 billion of 30-year TIPS at auction
- U.S. Philly Fed index (August)
SPY•
