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Markets are now watering down the impacts of vaccines and fiscal stimulus.

US equities were a touch stronger Wednesday, S&P up 0.3%, while the rates rally has extended further, US10Y yields fell another 3bps to 1.32%. 2yr yields down a further 1bp as well to 0.21%

While the sizable move in rates is open to debate; however, one can make a good argument that the street has begun to water down the impacts of vaccines and fiscal stimulus.

US job openings missed in May, only rising slightly after a substantial downward revision to April. The private quits rate fell 0.3bps to 2.8%.

Fed minutes offered little that was new, other than reiterating that a September announcement on tapering appears unlikely: an assessment on substantial further progress will likely continue to be needed "in coming meetings." Also, staff projections for inflation in 2022 remain below 2%, with risks balanced versus a 2.1% median for officials.

While not explicitly ruling out a September announcement, the minutes noted that the Committee would "begin to discuss" plans for tapering "in coming meetings." The bulk of the street still pricing a December tapering announcement, with November now also a distinct possibility.

In addition, the minutes reveal a Committee split between patience and repining. The patient camp, led by Fed Chair Powell, controls the policy debate. However, unpredictable US monetary policy could drive higher US rates volatility that, in turn, causes a stronger USD. Still, hawkish noise could become louder at upcoming meetings with FX traders circling July 13 (US CPI) as a potential catalyst for increased urgency if inflation runs too hot. 

US stocks zigzagged ahead of yesterday's Fed minutes and then struggled to find a clear direction, with UST yields continuing their dramatic drop. The Delta variant remained a looming threat, with the highly transmissible strain accounting for 30% of positive samples sequenced in the US for the two weeks ending June 19. Virologists anticipate the number to increase to 52% in the two weeks ending July 3.

China rates also rallied yesterday afternoon in Asia, and the reason now seems to be more transparent. China's State Council meeting yesterday, chaired by Premier Li, mentioned using an RRR cut to support the real economy and smaller enterprises. This RRR cut should be more of a targeted one instead of a universal cut, given the intention of policymakers is not to boost TSF/M2 growth.

The recent downward pressure on the economy amid the spread of covid spread in China's Guangdong province, along with the enormous upcoming MLF expiry (CNY400 bn on Jul. 15 and CNY700 bn on Aug. 17), could be among the other reasons supporting an RRR cut. Onshore securities houses call for a targeted RRR cut at the end of Q3, should China's PPI peak in July.

Oil Prices 

After initially reacted positively to the OPEC+ failure. Still, as pointed out by numerous big oil traders, the bullish scenario of an orderly fall back to the existing production arrangement is not a given now. And over the near term, although it is impossible to factor in the probability that the UAE and other OPEC+ members come to a belated agreement, the negative impact on oil of ongoing tension within OPEC+ (and the perception that compliance will begin to slip) has now outweighed the positive effect of the expected 2mb/d increase not happening.