The Minutes served to reinforce
The Fed is remaining on course
Next month rates will rise
Amid wanton cries
By doves, though the hawks will endorse
One of the reasons that I have become a fan of Jerome Powell is that he is willing to speak truth to power. And even though he sits in one of the most powerful chairs in the world, I would contend that he faces a much greater power every day; a legacy of Fed Chairs who carefully cultivated the impression that they alone could turn the dials and knobs of policy properly and with precision. Reality has shown that despite excellent PR work on behalf of Fed Chairs, they were no better at forecasting the economy’s future than anyone else, and in fact, were considerably worse than numerous Wall Street analysts. This difference in approach by Powell vs. his predecessors is made crystal clear in this quote from the Minutes released yesterday afternoon: “A number of participants emphasized the considerable uncertainty in estimates of the neutral rate of interest, stemming from sources such as fiscal policy and large-scale asset purchase programs. Against this background, continuing to provide an explicit assessment of the federal funds rate relative to its neutral level could convey a false sense of precision.” [My emphasis.] It is little things like this that give me hope Chairman Powell will maintain the humility necessary to be effective in his role.
At any rate, the upshot of the Minutes was that growth was continuing apace, the trade situation, while not yet causing significant problems, has the potential to do so in the future and impact policy decisions, but raising rates in September is baked in the cake. There was some discussion of weakness in emerging markets, but this was also seen as insufficient to change the trajectory of US growth, and therefore the current policy settings. In other words, the Minutes simply reiterated what we already knew, until potential problems become real ones, Fed Funds are going higher.
It can be no surprise that the dollar gained in the wake of the release, but also no surprise that the movement has been muted. Although peak to trough, the euro fell some 0.5%, it rebounded and is now only modestly softer than yesterday’s post-Minutes closing level. As I have maintained all along, all eyes are on tomorrow’s speech by Chairman Powell, as it will give us a chance to learn something new, rather than rehash what we gleaned three weeks ago.
Surveying markets this morning, the broad dollar index is a touch higher, +0.1%, but that is a mixture of a wide array of movements by individual currencies. For example, the euro has fallen back below 1.16 this morning, also down 0.1%, despite (because of?) seemingly positive Flash PMI data, which showed the Eurozone Composite PMI rising to a less than expected 54.4. Growth estimates for Q3 remain at 0.4%, but of course annualized that number becomes just 1.6%, unimpressive when compared to the US current growth trajectory. The pound is tracking the euro as a lack of supportive news and ongoing concerns over Brexit continue to weigh on the currency. The largest G10 mover was AUD, falling 0.7% despite a lack of obvious catalysts. No data was released and no comments of substance made, although local politics has put PM Turnbull on the defensive despite continued strong performance in the Australian economy. Perhaps, Aussie’s decline is related to that.
Turning to the emerging markets, the picture is one of mostly weaker currencies with the notable exception of the Russian ruble, which gained 0.4% on the back of modest strength in oil prices. Otherwise, we have seen broad-based dollar strength here with CNY having fallen 0.4% as tariffs on an additional $16 billion of goods went into effect at midnight last night. Other EMG decliners include KRW (-0.9%); ZAR (-0.6%) and INR (-0.4%). In fact, the odd thing is that the dollar index isn’t higher than it is given the uniformity of movement.
As to this morning’s data releases, Initial Claims (exp 215K) and New Home Sales (645K) are on the docket. Yesterday’s Existing Home Sales disappointed slightly, printing at 5.34M, a 0.7% decline from last month and softer than the 5.4M expected. Not only did the number of homes sold disappoint, but also the median price fell, perhaps indicating that the housing market may well have peaked. Another data point to monitor on the economy, and more importantly as to future Fed actions.
It appears that excess long dollar positions may have finally been wrung from the market after six consecutive days of a falling dollar. With all eyes turning toward Jackson Hole tomorrow and Chairman Powell’s speech, I expect that today will continue to see consolidation, likely with modest further USD strength. But until Powell speaks, it is hard to know just how hawkish or dovish he is feeling right now. My advice is to use a day like today, when markets are quiet, to manage risks ahead of tomorrow, where the opportunity for larger movement is clear.