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Fed’s Bullard signals a rate cut may be warranted soon; bonds rally as the dollar falls

June 5, 2019 Business News No Comments Email Email

A massive rates rally across the curve occurred on Monday as rate cut bets grew following both very dovish comments from the St Louis Fed Chief Bullard and concerns that global trade wars will continue to worsen. dollar fell against all its major trading partners after rate cut expectations surged for the Fed to cut rates at the July FOMC meeting. The Dow Jones Industrial Average finished unchanged, while the S&P 500 was down 0.3% and the Nasdaq fell by 1.6%, entering into correction territory. In just one month, the Nasdaq has fallen 11%, with today’s decline largely stemming from the launch of the House Judiciary Committee’s antitrust probe into the tech industry, including Facebook, Amazon and Google.

  • RBA – One cut now and the promise for more
  • Bullard – May need rate cut soon
  • Apple – DOJ probe overshadows WWDC success
  • Oil – Trade fears keep crude near 4-month lows
  • Gold – Surging as recession risks rise


On Tuesday, the Reserve Bank of Australia (RBA) is widely expected to cut the cash rate by 25 basis points to 1.25%, with investors focusing on how many more cuts will be queued up. Only 5% of economists – two specifically – see the RBA keep rates steady. At the last meeting, the RBA surprised many when they kept policy following disappointingly weak first-quarter inflation. The RBA may decide on holding off on confirming any additional rate cuts, preferring to see how the global growth slowdown hits their domestic economy.

The recent global bond rally took the Australian 10-year yield below the RBA’s cash rate of 1.5% for the first time since 2015. Analysts are piling on the rate-cut bets. JP Morgan sees rates falling to 0.50% by mid-2020 while Westpac and Capital Economics see cuts targeting 0.75%. With tame inflation, the RBA’s easing decision should be an easy one.

The Australian dollar however may have limited downside as markets appear more focused on the Federal Reserve’s potential capitulation in cutting their own rates.


The St Louis Fed Chief Bullard gave the sound bite bond traders wanted to hear, saying a Fed rate cut may soon be warranted. The lowering of the central bank’s short-term rate target could be done to prop up inflation and counter downside economic risks from an escalating trade war. Bullard is a known dove, a voting member this year, and a big supporter for keeping the cost of borrowing low. What made this so important was that he was the first Fed member to publicly state a rate cut is needed since the Fed put rates on hold in January.

Before Bullard’s comments the market was pricing in three rate cuts over the next 12 months, with the first possibly happening in September. After his comments, the expectation for the first rate cut moved up dramatically to the July meeting.

We may be starting to see more officials fall in line, last week, Vice-Chair Clarida highlighted the downside risks to the outlook, which supported the recent bond market rally. On Tuesday, all eyes will be on Fed Chair Powell’s discussion on monetary policy strategy, tools and communication practices at the Fed’s framework review conference in Chicago.


Apple’s big annual software event was overshadowed by a report that the Department of Justice was given jurisdiction for a probe as part of broad study of technology companies by antitrust regulators. Earlier in the session, technology stocks were weighed after the FTC were given jurisdiction to review Inc and Facebook Inc.

The Worldwide Developer Conference (WWDC) gave developers iOS 13, independent features for Apple Watch, the breakup of iTunes, iPad receives its own OS, and Project Catalyst, which allows iPad third-party developers to run on the Mac. Today, developers have been eagerly awaiting the ability to allow developers to re-work their iPad applications for the Mac, which could be a game changer for the company’s success. Apple shares were higher early into the conference, but quickly reversed course on the expansion of the report that the DOJ probe on anti-competitive amongst the tech giants would include Apple.

Crude prices shrugged an early rally and settled lower as trade fears continue to weigh on the demand outlook. Crude reversed from the session highs after the ISM manufacturing report, which gathered data and comments before the recent Trump Mexican tariff threat, highlighting the importance of doing business with Mexico. Respondents noted they are shifting business from China to Mexico, and that ongoing tariffs are providing multiple strains in doing business. Since the situation is tense with Mexico, the demand outlook is likely to get a massive downgrade if we do not see a quick resolution before the 10 June deadline.

Oil is extremely oversold, but the demand side risks support further weakness. Geopolitical risks from the Middle East, Libya and Venezuela should provide some short-term support, but WTI crude prices remain vulnerable to perhaps a test of the USD50 a barrel level.


Gold prices rose 1.4% as trade tensions remain elevated between China and the US. Recession risks are also growing after a wrath of manufacturing data suggests the escalation in trade tariffs with Mexico removes a safety net that was supposed to absorb lost business from China. Trade fears appear here to stay, with the latest ramp up in tariffs stemming from Mexico and the US. Gold bulls appear to be firmly in control, with both fundamental and technical traders in agreement.

Melinda Earsdon Melinda Earsdon
Global Head of Public Relations at OANDA

+65 9109 4944

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