There were worries about too much of a good thing yesterday as everything shot higher. Those worries are looking well-founded as markets turn lower in a big way. The Nasdaq is down 1% and the Russell 2000 down 3% as early gains reverse. Treasury yields are down 13-8 bps led by the front end.
Today's economic data on initial jobless claims and the ISM manufacturing survey have the market worried that a recession is coming and that the Fed is behind the curve. Tomorrow we get the non-farm payrolls report and that will be a big test.
Powell was certainly open yesterday to cutting rates but he offered a strong endorsement of the economy.
"Recent indicators suggest that economic activity has continued to expand at a solid pace," he said.
The Fed chair was also asked about the chances of a hard landing and said.
"I think they're low. I think this is -- you don't see any reason to think that this economy is either overheating or sharply weakening. That's just not in the data right now."
Now the market is pricing in a 20% chance of a 50 basis point cut at the upcoming meeting in September. That's not the kind of thing you do if a hard landing isn't in the cards. The market is also priced for cuts at 5 straight meetings in a sign the Fed could behind the curve.
In the FX market, these moves are coming through via commodity currency selling, though it's a choppy trade as US weakness (and wide rate differentials) are competing with similar weakness elsewhere.
Today, we initially saw USD/CAD selloff on falling Treasury yields but it's reversed on worsening risk appetite and global economic worries, along with a drop in oil prices.
It's a similar dynamic in AUD/USD and NZD/USD. All of the commodity currencies have struggled lately as the market sniffed out the softening of the global economy and lack of sufficient stimulus coming from central banks or China.
