US Fed minutes reveal dissent detail but no real surprises. Watchdog warns on 'unsustainable course' of US budget deficit. Bond rates with small upward bias. Merkel challenges Johnson on Irish border solution

Currency markets remain listless. The NZD shows a slight downward bias and trades near 0.64, while the other majors show modest movements as well.

The US 10-year rate is up 1bp at 1.57% after a peek above 1.60%, while US equities have been boosted by some decent earnings reports.

The S&P500 is up 0.7%, led by the Consumer Discretionary sector, with strong results from Target and Lowe’s, highlighting that the US consumer was spending up large in Q2, defying fears that the economy is heading into economic recession.  US data also showed existing home sales rising to a 5-month high, slightly higher than market expectations, no doubt fuelled by lower mortgage rates.

The minutes of the Fed’s end-July meeting, where it cut rates by 25bps and saw a couple of dissenters, have just been released and didn’t move the dial. They said that a number of Fed officials stressed the need for policy flexibility, while most officials viewed the cut as a mid-cycle adjustment. A couple of officials had favoured a 50bps cut while several wanted to keep rates on hold. The minutes are consistent with Chair Powell’s “mid-cycle adjustment” view espoused at the FOMC press conference. All eyes turn to his Jackson Hole speech early Saturday morning NZ time to see if the view has changed, following the escalation of the US-China trade war and the yield curve showing more ominous signs of pending recession.

President Trump continues to cajole the Fed into cutting interest rates via twitter with a series of tweets, including “…Doing great with China and other Trade Deals. The only problem we have is Jay Powell and the Fed. He’s like a golfer who can’t putt, has no touch…”, and “…Highest dollar in US history. No Inflation. Wake up Federal Reserve”.

The US 10-year rate trades this morning at 1.57%, up 1bp for the day, after an earlier move up to 1.60% in late-Asia trading wasn’t sustained. The Congressional Budget Office, an independent arm of the government, said that the US fiscal outlook was “challenging” with debt on an “unsustainable course”. It projected that the US budget deficit was set to rise to $960bn this year (4.5 % of GDP), on the back of lower-than-expected tax revenues, and warned that over the next decade the deficit would be $809bn larger than previously forecast, following the bipartisan deal on spending last month.

European rates have had a slight upward bias, with Germany’s 10 year rate up 2bps to minus 0.67%. Germany’s auction of a “juicy” zero-coupon 30-year bond was a bit of a failure, selling €824m bonds at an average yield of -0.11% after seeking €2b. The ratio of bids to the offer size was the weakest since at least 2011.

In currency markets, the NZD continues to be tightly range bound. It currently trades just below 0.64, where it sat not long after the NZ close yesterday. The high overnight was around 0.6420. The range it has traded for the week is not much more than 40pips, even as US equity market whipsaw in the background. The AUD has seen some slightly upward pressure, although has met some resistance just below 0.68.  NZD/AUD continues to track lower, now down to 0.9435.  The short NZD-long AUD trade is a favoured play by many, including ourselves, and the path of least resistance is for further depreciation.

GBP has been on the soft side and is down 0.4% to 1.2120. UK PM Johnson met German Chancellor Merkel, and Merkel set Johnson the challenge of resolving the Irish Border issue in 30 days by putting forward concrete alternatives. Good luck with that. The French government said that it expects the UK to leave the EU without a withdrawal agreement which will mean the immediate imposition of controls on the EU’s borders with the UK. Indeed, the risk of a no-deal Brexit seems to be rising by the week.  JPY is also on the soft side, with USD/JPY up 0.3% to 106.60, while EUR is flat a just below 1.11

CAD is slightly stronger. Canada CPI data showed the average of the three core measures remaining at 2.0%, making it the only major central bank meeting its inflation target. The data tempered the view of any urgency for the BoC to cut rates alongside other central banks and, despite inflation being on target, the market continues to almost fully price a chance of a 25bps cut by the December meeting.

Tonight sees the release of PMI data, with the market consensus not hopeful of any improvement for August – indeed most indices across the euro area and US are expected to show further falls.