U.S. Treasuries rallied Friday while equities weakened after various economic reports released during the day painted a mixed picture. While ISM’s July Manufacturing Index jumped to a 3-year high and June Construction Spending had its biggest one-month decline in 3 ½ years, markets generally focused most attention on disappointing wage data contained in July’s Employment Report.

Argentina defaults, Fed continues to taper QE but promises low rates for longer as before, US 2Q GDP up 4% - beating all expectations. ADP employment 218,000 – less than expected. That was the day of heavy news and the reaction – S&P500 0% but 10Y bond yields are up 10bps to 2.56%. USD is up 0.25% with EUR below 1.34 and EM markets are in turmoil with BRL off 0.65%, MXN off 0.65%. Oil trades below $100 off 1.35%. What sentiments have changed today? 1) Inflation. The PCE index from GDP moved from 1.2% to 2% - and the FOMC statement: "Inflation has moved somewhat closer to the Committee's longer-run objectives," this removes the “deflation” contagion risk in US markets. 2) Labor markets. The ADP missed expectations and the FOMC statement: "However, a range of labor market indicators suggests that there remains significant under utilization of labor resources." Hence, the Fed is still worried about unemployment levels. 3) Forward Guidance. While some expected more dissent, the one dissenter Philadelphia Fed Plosser highlights the fragility of “low for longer” being credible. He objected to the guidance indicating that it likely will be appropriate to maintain the current range of the federal funds rate for "a considerable time after the asset purchase program ends," because the language is time dependent and does not reflect the considerable economic progress that has been made toward the Committee's goals.

The CNY and the reform of the capital market are essential to rebalancing global markets and sustaining growth and stability. The Chinese ability to withstand the Asian crisis in 1998-1999 and the 2008 crisis have come with costs. The Trilemma for China gets more complicated. The best case for China with a new build up of Non-Performing Loans linked to the excess credit in 2009 is a sale to the private market including foreigners. This will force a more open capital account and risk other things - with CNY and inflation being the two most vulnerable. The ability to make at least 2 of the 3 objectives work continues to be the focus of the Central Committee as it pushes forward with reform.

Last week, Track hosted its July Idea Dinner, which brought together an assortment of analysts, economists, traders, and fund managers. The mood in the room ranged from contentious to philosophical, and the specter of a global exit from easy money policies weighed heavily on participants, as those present weren’t sure what to believe (or whom). Other topics included the continued shift in dynamic between emerging and developed markets, the nature of reserve currencies (and the state of foreign exchange in general), and overall geopolitical fears. This report summarizes the major themes, trades, and market fears discussed at the dinner.