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Housing starts and permits surpass estimates, but completions drop significantly, raising concerns about trends.
US housing starts in June hit 1.321 million, surpassing the estimated 1.300 million. Last month’s figures were updated to 1.263 million from 1.256 million. Building permits also exceeded expectations, reaching 1.397 million instead of the predicted 1.390 million.
For building permits, the total came to 1.397 million SAAR, which is a 0.2% increase from last month but a 4.4% drop from last year. Single-family permits were at 866,000, down 3.7% from the month before, while multi-family unit permits (5+ units) were at 478,000.
The USD falls against major currencies, while US stock indices see slight gains as earnings reports surpass expectations.
The US dollar has decreased in value against major currencies like the euro, yen, and pound. Today’s important data releases include US building permits, housing starts, and the University of Michigan’s preliminary sentiment index, which is expected to rise to 61.5 from last month’s 60.7.
Fed official Waller supports a 25 basis points rate cut in July because of increasing risks and a weakening labor market. He warns that waiting too long may require stronger actions later. Waller anticipates GDP growth around 1% and believes the policy should aim for a neutral position, with the labor market being “on the edge.”
US Stocks Update
US stocks have shown slight increases, with the S&P and Nasdaq reaching record highs. The Dow is up by 71 points, the S&P has increased by 8.39 points, and the Nasdaq is up by 15.96 points. Despite positive earnings, Netflix shares have fallen by 2.15%. Key earnings reports today: Charles Schwab exceeded expectations with an EPS of $1.14 and revenue of $5.85 billion. American Express reported an EPS of $4.08, surpassing forecasts, while 3M posted an EPS of $2.16 but missed revenue targets. After the market closed, Netflix shared strong Q2 results with an EPS of $7.19, also beating future outlook estimates. US Treasury yields have dropped, with the 30-year yield falling below 5.00%. The current yields are 3.877% for the 2-year, 3.960% for the 5-year, 4.425% for the 10-year, and 4.985% for the 30-year. We see the current USD weakness as a trend that has more room to develop, especially after recent comments from a key Fed figure. The market is now anticipating an over 85% chance of a rate cut in July, according to the CME FedWatch Tool. This situation makes buying call options on pairs like EUR/USD and GBP/USD a promising strategy for the upcoming weeks.Labor Market Outlook
The warning about the labor market being “on the edge” is an important signal. Recent data shows weekly jobless claims rising to 238,000, indicating a potential slowdown. A weaker job market supports the case for a pre-emptive rate cut, which may further pressure the dollar. While stock indices are reaching new heights, this creates a confusing picture that may suggest future volatility. The CBOE Volatility Index (VIX) is currently low at around 13, making options relatively inexpensive. We believe it’s wise to consider buying protective puts on major indices as a safeguard against any unexpected negative data. This “insurance cut” narrative reminds us of the mid-1990s when the central bank successfully managed a soft patch without causing a recession. That historical insight indicates a single rate cut could stabilize the markets for several meetings. This supports a short-term trading outlook rather than a long-term bearish shift. The bond market strongly reflects this outlook, with yields dropping across the board. The 30-year yield falling below 5.00% is a significant psychological and technical milestone. For traders, the movement in rates suggests that betting on continued or stable low yields through interest rate futures aligns with the Fed’s expected direction. Create your live VT Markets account and start trading now.Waller pointed out a weaker private sector, noting cautious views on tariffs and rising inflation expectations.
Federal Reserve Governor Waller highlights that while job market numbers look decent, they could easily become unstable. Business leaders say they are neither hiring nor firing, indicating a sense of stability, but also underlying worries.
Discussions on monetary policy are lively, focusing on economics rather than politics. Waller advises caution when opposing interest rate decisions, suggesting that rate cuts can happen anytime, although there’s no strong reason to wait.
Impact Of Tariffs On Inflation
Tariffs act like a tax, spreading costs among various groups. The short-term effects of tariffs on inflation should be looked at over three to six months. While some costs may reach consumers, they likely won’t cause long-term inflation unless tariffs continue. Waller wants to prevent a sharp economic decline and mentions that long-term inflation expectations are stable. He stresses the need for credibility to keep inflation expectations in check. Recently, Waller, known for being more lenient, indicates possible rate cuts or concerns about risks. However, his influence is less significant than before. He might be the only one against rate decisions at the July meeting, alongside Bowman, due to their softer views.Market Reaction And Economic Slowdown
From the Governor’s comments, we think the market undervalues the risk of a near-term economic slowdown. His worry that the job market could easily “tip” suggests we should prepare for a downturn. We are looking at buying put options on major indices that expire after the upcoming job reports. The focus on the delicate state of the private sector is clear, even with positive headline numbers. Recent JOLTS data shows job openings have dropped to 8.059 million, the lowest since early 2021, supporting his cautious viewpoint. This strengthens our belief that our investments should lean towards potential economic weakening. His comments about rate cuts reflect a strong reliance on data, which creates uncertainty heading into the July meeting. The market currently expects about an 85% chance of a rate cut by September, according to the CME FedWatch Tool. Any unexpectedly weak data may shift those expectations much sooner. As a result, trading in short-term options or straddles on interest rate futures could be a good way to navigate this rising volatility. Internal disagreements within the central bank, especially between a practical member like Waller and a more hawkish member like Bowman, add to the unpredictability. This healthy debate indicates less certainty in policy, and we should avoid being too committed to one outcome. Our approach is to stay adaptable, using derivatives to express our views instead of taking large direct positions. Waller’s view of tariffs as a temporary tax rather than a cause of ongoing inflation is crucial for our inflation expectations. With the latest annual core PCE inflation rate down to 2.6%, the central bank has more flexibility to respond to growth concerns than the market realizes. Therefore, we are cautious about betting on rising inflation and are instead positioning ourselves for falling yields if growth data weakens. Create your live VT Markets account and start trading now.US and Japan negotiations ongoing, with elections playing a key role in potential trade agreements
US Treasury Secretary Scott Bessent highlighted that a successful trade deal with Japan is still possible. He stressed the need for a careful agreement instead of rushing into one.
Right now, negotiations show that no final deal has been reached. The results of the upcoming Japanese election are seen as crucial for any potential agreement.
Focus on USD/JPY and Nikkei 225
Bessent’s comments suggest that the timeline for a trade deal is uncertain and may take longer than expected. In this situation, it’s wise to prepare for ongoing volatility rather than betting on a specific outcome. Derivative traders should concentrate on the USD/JPY currency pair and the Nikkei 225 index in the coming weeks. With no rush for a deal, we expect the USD/JPY to react dramatically to any news, whether good or bad. We recommend buying straddles or strangles on this currency pair since one-month implied volatility has risen to 8.7%, indicating market anxiety. This strategy will benefit from significant price changes in either direction, taking advantage of the risks that Bessent mentioned. The Japanese election’s significance is essential for our timing. Prime Minister Fumio Kishida’s approval ratings recently dropped to a record low of 21% in a Jiji Press poll, making the political situation unstable. We think this instability may lead to stalled negotiations, which could strengthen the yen as investors seek safer options.Opportunities in Derivatives
Historically, the Nikkei 225 has shown large movements during crucial trade talks, like the TPP negotiations, where daily changes of 2-3% happened based on rumors alone. Therefore, we should consider using options to protect long-term Japanese equity investments from a sharp decline if talks seem to fall apart. This approach safeguards capital while we await a clear direction. In addition to the main indices, there are opportunities in sector-specific derivatives. Japan’s Ministry of Finance data confirms that automobiles are a top export. We could buy put options on major Japanese car manufacturers as protection against potential tariffs. On the other hand, if negotiations go well, call options on US agricultural companies could be appealing, as Japan is the third-largest export market for American farm products, valued at over $13 billion last year. Create your live VT Markets account and start trading now.The dollar weakens after Waller’s comments, while European markets show mixed performance amid changing yields.
The dollar is facing challenges in trading, mainly due to comments from Fed Governor Waller about a possible rate cut in July. The Euro is up 0.4% against the US Dollar, now at 1.1646. The US Dollar is stable against the Japanese Yen, around 148.40-50. The British Pound has risen 0.3% to 1.3450, moving above its 100-hour moving average. Commodity currencies are also making gains, with the US Dollar down 0.2% to 1.3720 against the Canadian Dollar, and the Australian Dollar up 0.5% to 0.6520 against the US Dollar.
Although there’s no immediate expectation for a rate cut, Waller’s comments indicate there may be discussions on this topic. Bond yields are lower, with 10-year yields at 4.43% and 30-year yields below 5%. European stocks started the day active but have since calmed, with the DAX and UK FTSE moving back from record highs. US futures remain flat after earlier increases.
Precious Metals and Cryptocurrencies Update
Gold has risen 0.5% to $3,355.82, staying within a broader range. Bitcoin is slightly down by 0.3% to $119,062 but remains near record highs. Other cryptocurrencies are showing some momentum. Changes are happening at ForexLive, as team members shift to InvestingLive. Following Waller’s comments, we can expect increased volatility in dollar-related currency pairs. Considering this uncertainty, buying options on the EUR/USD or GBP/USD may be a smart trading strategy. This approach reminds us of late 2023, when the market anticipated the Federal Reserve’s dovish turn, causing a sharp dollar decline before any official rate cut. The drop in US 10-year yields indicates that the bond market is seriously considering the possibility of rate cuts. We can use derivatives on Treasury futures to bet on falling yields. For instance, call options on ZN futures would profit if bond prices keep rising. The MOVE index, which measures bond market volatility, is recently hovering near 100, a historically high level, making options premiums a controlled way to navigate this uncertainty.Equity Market Tensions
Despite flat equity futures, underlying tensions create opportunities. The CBOE Volatility Index (VIX) is near a historically low level of 14, which often indicates upcoming sharp market moves as complacency is disrupted. Setting up a long straddle on the SPX before the next Fed meeting could capture potential breakouts, no matter the direction. Political pressure on Powell and ongoing trade talks with Japan add layers of complexity that could weaken the dollar further. News about Beijing and Nvidia presents targeted opportunities, suggesting that call options on semiconductor ETFs could do well even if the broader market hesitates. The rise in gold prices reflects falling real yields, reinforcing our cautious view on the greenback. Create your live VT Markets account and start trading now.Trump criticizes Powell and the Fed for harming the housing market, blaming all policymakers
Trump is criticizing Powell and the Federal Reserve for high interest rates that are hurting the housing market. He believes these rates make it tough, especially for young people, to buy homes.
He views Powell as one of his worst choices and claims the Federal Reserve isn’t taking action. Trump argues that the US economy is doing well with low inflation and recommends a 1% interest rate to save one trillion dollars each year.
Market Response and Strategies
Despite Trump’s comments, other policymakers have not shown interest in changing their approach. The financial markets are stable, with no signs of a possible rate cut in July, apart from Waller’s remarks. We should consider the political talk as just that: talk. The market’s stability, shown by the VIX index staying below 15 for most of June, indicates that experienced traders are focusing on data rather than drama. Our strategy should stay rooted in economic facts and Federal Reserve signals, rather than political statements. The claim of “VERY LOW INFLATION” isn’t backed by the central bank’s data, so we shouldn’t base our trading on it. Although the May Consumer Price Index dropped to 3.3%, it’s still much higher than the 2% target that policymakers aim for. Therefore, we should not expect any major rate cuts until the data shows a consistent downward trend towards that target. High interest rates are indeed straining the housing market, creating pressure that could lead to changes in policy. With 30-year mortgage rates near 7% and existing home sales declining, we see clear signs of weakness. This makes options on homebuilder ETFs a smart way to respond to potential changes in sentiment or unexpected economic data in the coming weeks.Focus on Federal Reserve Actions
Traditionally, the Federal Reserve has resisted political influence to maintain its credibility, and we expect this to continue. In June, their meeting showed that the median forecast now suggests just one rate cut this year, down from three in March. We need to base our trades on the committee’s actions, not on what politicians want. Given the current situation, our derivatives strategy should concentrate on volatility and the nuances from Fed speakers. Since implied volatility is relatively low, purchasing options to guard against a hawkish surprise or to position for a potential dovish shift from influential speakers could be wise. We will closely monitor Fed Funds futures for any changes in expectations following key board members’ speeches. Create your live VT Markets account and start trading now.Akazawa is arranging a trip to the US to focus on tariff discussions.
Japan’s trade negotiator, Akazawa, is planning another trip to the United States next week. This visit will focus on discussions about tariffs, as the deadline is approaching on August 1.
This will be Akazawa’s tenth visit for these ongoing talks, with only two weeks left to reach an agreement.
Binary Outcome and Currency Volatility
With the upcoming visit, it’s clear we should prepare for a binary outcome around the August 1st deadline. The best play is on currency volatility. The one-month implied volatility for USD/JPY has risen to about 8%, up from roughly 6% last month. This indicates that the options market expects a big move. We recommend buying straddles or strangles to be ready for significant changes in either direction. The uncertainty from these tariff discussions is also affecting equities, making it crucial to protect against potential losses in the Japanese market. We have observed an increase in the put-to-call ratio on Nikkei 225 futures, now over 1.0. This suggests that traders are purchasing more protection against declines than betting on gains. Buying puts on the index or major export-driven ETFs is a smart way to shield portfolios from a negotiation breakdown. Historically, these intense negotiations stem from ongoing trade imbalances. Recent data shows the U.S. goods trade deficit with Japan was $5.8 billion in March 2024. This situation reminds us of the U.S.-China trade war, where critical deadlines in 2019 led to the VIX volatility index spiking above 20 due to negative news. We can expect similar turbulence and should consider long positions on volatility as a cost-effective form of portfolio insurance.Implications for the Auto Sector
For a more focused strategy, we are paying attention to the auto sector, which is a major area of concern. If talks fail, tariffs could severely impact Japanese car manufacturers. We see a chance to buy put options on major Japanese automakers while also keeping an eye on the strength of their American counterparts. However, we must not ignore the possibility of a surprise agreement, as it’s often said, “the tenth time’s the charm.” If a deal happens, it could lead to a relief rally in Japanese stocks and a stronger yen, hurting those who are only positioned for a decline. Therefore, we are also considering low-cost, out-of-the-money call options on the Nikkei as a budget-friendly way to take advantage of significant upside if a last-minute deal is reached. Create your live VT Markets account and start trading now.Sefcovic said finalizing trade negotiations is always challenging as the deadline for discussions approaches.
EU’s chief trade negotiator, Maros Sefcovic, discussed the ongoing trade talks and noted that the final phase is proving to be tough. He plans to brief EU ambassadors on the latest updates, with a deadline for a deal set for August 1st.
Analysts predict that the U.S. might impose tariffs of around 10%. Meanwhile, the EU is working to secure concessions in important areas. If a deal isn’t reached by the deadline, an extension is likely, allowing the EU to continue paying the current 10% tariff, which has been in effect since April 9th.
Market Uncertainty and Volatility
With the chief negotiator’s comments in mind, we anticipate that the next few weeks will bring increased uncertainty. This market climate is favorable for strategies that thrive on price fluctuations, known as volatility. We expect significant movements in European stock and currency markets as we approach the August 1st deadline. There’s potential to profit in the options market, as current prices may not fully account for the risk of talks breaking down. The Euro Stoxx 50 Volatility Index (VSTOXX), a key measure of fear in European markets, is currently low at around 15, making it cheaper to buy options. We are considering purchasing straddles on major indices, which would benefit from substantial price swings, regardless of whether a deal is reached or not. History offers insight into how markets respond to political deadlines. During the peak of the U.S.-China trade war in May 2019, the VIX index, which tracks U.S. market volatility, jumped over 45% in just a few weeks due to rising tariff threats. We anticipate a similar, but smaller, reaction in European markets if the current negotiations falter.Sector and Currency Impact
Some sectors are more vulnerable than others, especially the European auto industry, which exported over €40 billion worth of vehicles to the U.S. last year. A 10% tariff would directly affect the profits of leading German and Italian car manufacturers. We are considering buying put options on these companies to hedge against or profit from a negative outcome. The currency market also offers clear opportunities, as the trade negotiations will significantly impact the EUR/USD exchange rate. If a deal falls through, the Euro is likely to weaken. We can prepare for this by acquiring EUR/USD put options, which will gain value if the Euro depreciates. If an extension is announced, as initially suggested, implied volatility would likely decrease since the immediate risk is delayed. In that case, we would consider selling the volatility we’ve accumulated to take profits. This strategy allows us to reassess and adjust our positions ahead of the next important deadline. Create your live VT Markets account and start trading now.The BoJ may cautiously express optimism about US tariffs while keeping interest rates steady and revising inflation forecasts.
The Bank of Japan (BoJ) might have a more positive view on the effects of US tariffs in its upcoming report, even though some uncertainty remains. Interest rates are expected to stay the same during the meeting on July 30-31.
The BoJ is likely to believe that inflation will hit its 2% target in the latter half of its three-year forecast. They might also raise the inflation estimate for this fiscal year, hinting at a more aggressive approach.
US-Japan Trade Negotiations
US-Japan trade talks have played a role in the BoJ’s decision-making, delaying possible interest rate increases. Winning the upper-house election could strengthen the Japanese yen if the ruling party keeps its majority. As inflation remains high and economic data looks strong, there could be rising expectations for a trade agreement and an earlier rate hike. According to Dellamotta’s report, the central bank seems to be changing its tone. A more upbeat outlook on US tariffs indicates a possible hawkish trend ahead. Derivative traders should prepare for the yen to gain value. There’s a significant chance of raising the inflation forecast, especially since Japan’s core inflation reached 2.5% in June, staying above the 2% target for over a year. Recognizing this ongoing inflation would signal future rate hikes and strengthen the argument for yen appreciation.Market’s Potential Reaction
The upcoming upper-house election could be a major political factor in this change. If polls are correct and the ruling party retains its majority, it could speed up trade discussions and give policymakers the assurance they need to take action. We expect the market to start factoring in a rate hike more actively after the election. Looking at history helps us understand the market’s possible response. In the past, even minor hawkish surprises from the central bank have caused the yen to soar, as seen with adjustments to yield curve control in late 2022. The current situation might lead to a similar quick movement in the currency. Given this outlook, buying yen call options against the U.S. dollar seems appealing. The implied volatility for these options is relatively low leading up to the events. This creates a chance to benefit with defined risk before the BoJ’s July meeting. Create your live VT Markets account and start trading now.Chancellor Merz of Germany suggests an unequal deal, hinting at higher US tariffs and concessions from the EU
Germany’s Chancellor has talked about a possible unequal agreement, but didn’t share any details. This agreement might lead to the US raising tariffs.
In exchange, the European Union could receive some advantages in important areas, although specific topics were not mentioned. The terms are still unclear.
