Rates as of 0500 GMT

Market Recap

Ive been pretty optimistic about the soft landing hypothesis, thanks to the many signs of strength in the US economy. But yesterday something happened to shake my confidence. The Empire State manufacturing survey plunged 42.4 points the secondbiggest drop ever in the 21 years of the survey. The only bigger decline was in April 2020, when the pandemic hit. The survey fell 56.7 points then. The fact that we would get a fall on that scale with no pandemic, no stock market crash, no hurricanes or volcanoes or tsunamisits a shock.

Note too the much largerthanexpected fall in the National Association of Home Builders NAHB index. That was the eighth consecutive decline in the index, which is sometimes seen as a leading index for the US economy as housing is so important.

Against this background, the odds of the Fed hiking 75 bps in September fell further.

There were also signs of weakness in China. Following Monday mornings disappointing data on retail sales and industrial production, the Peoples Bank of China PBoC surprised the market by cutting its 1year mediumterm lending facility rate by 10 bps to 2.75. By doing so, they are resuming their easing cycle and trying to improve its transmission to the credit markets, as the PBoCs easy monetary policy hasnt been able to permeate the real economy due to the difficulties in the housing market and the COVID19 disruptions to economic activity.

Economists expect that the next move will…