Written Commentary
STOCK INDEX FUTURES
Stock index futures are higher.
The July ADP employment report showed an increase of 122,000 when a gain of 154,000 was expected.
The second quarter employment cost index increased 0.9% when up 1.0% was anticipated.
The 8:45 central time July Chicago PMI is estimated to be 44.3, and the 9:00 June pending home sales index is forecast to show an increase of 1.1%.
Today is the second day of the two-day Federal Open Market Committee meeting. A statement will be released at 1:00 and Federal Reserve Chair Powell will hold a press conference at 1:30.
It is widely expected that the FOMC will keep its fed funds rate unchanged at today’s meeting. However, the statement will probably hint that the central bank will lower its fed funds rate at the September 18 policy meeting, starting a rate cutting cycle. In addition, Powell’s press conference will likely have a dovish tone.
Coming easier credit policies from the Federal Reserve will underpin futures.
CURRENCY FUTURES
The U.S. dollar index is lower as traders liquidate long U.S. dollar – short Japanese yen carry trades after the Bank of Japan raised its key short-term interest rate at its the policy meeting to near 0.25% from the prior range of 0 to 0.1% it set in March.
Longer term, the greenback is likely to drift lower due to prospects of a more aggressively accommodative Federal Reserve.
The annual inflation rate in the euro area unexpectedly increased to 2.6% in July from 2.5% in June, compared to forecasts that it would decline to 2.4%.
Australian consumer price index inflation increased as expected in the second quarter, while weaker-than-expected core inflation increased expectations that the Reserve Bank of Australia will not hike interest rates any further.
INTEREST RATE MARKET FUTURES
The 2-year, 5-year, and 10-year U.S. Treasury note futures, and the 30-year U.S. Treasury bond futures advanced to new highs for the move.
In light of the bullish ADP employment and employment cost index reports, futures are mostly higher.
There is a 96% probability that the Federal Open Market Committee will keep its fed funds rate unchanged at 5.25% to 5.50% at its policy meeting today.
However, financial futures markets are pricing in three 25 basis point cuts in the fed funds rate later this year.
There is almost a 100% probability that the FOMC will lower its fed funds rate by 25 basis points at its September 18 meeting. In addition, the probability of an additional rate reduction from the FOMC at the November 7 meeting is 67%, and there is a 65% chance of another 25 basis point rate cut at the December 18 meeting.
Higher prices are likely for futures.
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