Wednesday August 5

Markets are mixed as dovish comments are made by a FOMC member. The S&P500 owe 0.3% to 2,099 while the Dow fell marginally to 17,540. Economic data was weak while Jerome Powell follows up Dennis Lockhart’s hawkish comments with a more dovish attitude. Data today showed that only 185k jobs were added compared to the estimated 210k. In addition the trade deficit was larger than expected as imports rose. On the other hand the ISM non manufacturing index reflected the highest level in 10 years with a reading of 60.3 compared to the estimated 56.2. The Treasury yield was up 6 basis points in spite of today’s dovish comments. Oil fell again close to $45 for WTI in spite of inventories falling more than expected. The German bund yield increased 12 basis points to 0.76% as the Eurozone services PMI was revised higher than the initial reading.

Dovish and hawkish members of the FOMC have been weighing in regarding when the Fed should tighten. Yesterday Dennis Lockhart said he was ready to tighten in September. The spread between the 2 year US and German bonds widened to more than 100 basis points which is the highest since 2007. The 2 year bund currently yields negative 25 basis points while the equivalent Treasury yields 75 basis points. The US 2 year was as low as 0.54% in July. In contrast to Lockhart’s comments yesterday, Jerome Powell said today that inflation is “still well below our target.” Today’s disappointing jobs numbers are not an ideal sign for the labor market but not necessarily connected to the more important numbers that will come out on Friday.

The IMF does not yet support the renminbi’s use as a reserve currency around the world. The fund has been positive on China’s financial reform so far, and will make the decision on the composition of reserve currencies later this year. Reserve currencies receive special drawing rights. SDR’s allow member countries to borrow these currencies at low rates to solve balance of payments problems. Funds are allocated to various governments in proportion to IMF funding quotas. Reserve currencies currently include dollars, euros, pounds, and yen. China wants the renminbi to be a reserve currency because that would be a sign to the world that it is a stable asset. Lagarde expects the process to go through as some point, calling it “a matter of when, not if.” The decision will depend on financial market development, China’s capital account, exchange rate flexibility, and foreign access to equity and fixed income markets. China’s recent support of equity markets does not affect the IMF’s decision. While Germany, France, and the UK support the renminbi as a reserve currency, the US is currently against it and has the largest voting share. Jack Lew wants to see a more deregulated international investment atmosphere and interest rate environment.

Wednesday August 5

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