At altitude 8000 feet
A gaggle of bankers will meet
All eyes are on Jay
And what he might say
Regarding the Fed’s balance sheet

Now, pundits galore have opined
But something we need bear in mind
Is policy tweaks
Are still several weeks
Away, and will like be refined

Well, at 10:00 this morning, Chairman Powell will speak to the world regarding his latest views on “Structural Shifts in the Global Economy.”  At least that is the theme of the entire event where there will be numerous speeches by central bankers including Madame Lagarde later today, as well as papers presented by economists.  The reason this event is so widely discussed is in the past, Fed Chairs have used the forum to signal a shift in policy.  

Is that likely today?  This poet’s view is no, it is unlikely.  The message from the July meeting was that the Fed was still concerned about inflation running too hot and that the higher for longer mantra still applied.  Since then, the data has, arguably, been somewhat better than expected, although certainly not universally so.  At the same time, 10-yr yields are some 40bps higher and the S&P 500 is lower by about 4% since the last FOMC meeting, market moves that indicate investors are listening.  I do not believe Chairman Powell is keen to rock the boat.  As well, I don’t believe he feels the need to imply any major changes are necessary and I have a feeling that he is actually going to speak about the global economy, and not the US one specifically.

Summing up, I have a feeling this is going to be a complete non-event, with no useful information forthcoming, at least from Powell.  As it happens, Madame Lagarde speaks at 3:00 this afternoon NY time, and there is considerably more uncertainty as to the ECB’s path forward given the fact that the economic data in the Eurozone continues to be weak (today, German GDP in Q2 was confirmed as 0.0% Q/Q, -0.2% Y/Y, with Private Consumption also at 0.0% and the Ifo sentiment fell to 85.7, several points below expectations) while inflation remains far above their target.  While the ECB hawks are still claiming it is far too early to consider a pause in rate hikes, the ECB doves have been clear they are ready to stop.  Remember, too, Lagarde is a dove at heart.  It would not be difficult to believe that Lagarde discusses the slowing growth in China and the assumed knock-on effects for Europe as a rationale for expecting inflation to continue to fall without further ECB actions.

But as always, this is merely speculation ahead of the speeches, which is why we all listen.  Away from this meeting, though, investors are demonstrating some concerns about the overall situation, at least as evidenced by recent market activity.

Yesterday, in what was clearly something of a surprise to most pundits, equities sold off sharply in the US, led by the NASDAQ which was down -1.9%.  The surprise comes from the fact that the Nvidia earnings the night before were so strong and the stock rallied sharply on the news.  And this weakness was spread across all the major US indices.  Adding to the confusion was the fact that the US data yesterday generally pointed to more economic growth, with lower Claims data, and a strong Durable Goods -ex transport print with survey data looking up as well.  I guess this is a ‘good news is bad’ situation as continued economic strength informs the idea the Fed is not going to change their stance on higher for longer.

That weakness fed into Asia, where markets were lower across the board led by the Nikkei (-2.05%).  But in Asia, the interesting thing was that China announced, during the session, additional support for the property market by altering some mortgage and tax rules to encourage more home buying as Beijing tries to grapple with the increasing speed of the property implosion.  Alas for President Xi, the positive impact in the stock market lasted…10 minutes only!  After that, selling resumed and all the major indices in Asia finished lower on the day.  Now, European bourses have reversed that trend and are higher by roughly 0.6% across the board, perhaps anticipating a Lagarde ease, while US futures at this hour (7:30) are edging higher by 0.2% or so.

In the bond market, yields, which had fallen sharply earlier in the week, bottomed on Wednesday and are now higher in the US and throughout Europe.  While the move largely occurred in the US yesterday, with a 5bp bounce, and this morning we are little changed, Europe is seeing yields climb by 5bp-6bp across the board today.  The one place where yields remain dull is Japan, which has seen the 10yr JGB hover either side of 0.65% for the past week or two.

In the commodity space, oil (+1.5%) is rebounding again, arguably on the better than expected US data.  This is consistent with firmer prices in base metals, which are rising despite the rise in yields.  Ultimately, what this tells me is that there remains a great deal of uncertainty as to the near future regarding the economy.  The battle over whether a recession is coming soon or never coming continues apace.  The thing about commodities is that the supply piece of the puzzle continues to be undermined (pun intended) by ESG focused investors and governmental actions, and so the ultimate direction remains higher in my mind. 

Finally, the dollar is mixed to slightly stronger this morning, with most of the G10 a touch weaker vs. the greenback except for NOK (+0.4%) which is clearly benefitting from oil’s rally.  In the EMG sector, ZAR (+0.9%) is the outlier on the high side as allegedly traders are betting on increased investment flows to the country in the wake of the expansion of the BRICS nations.  (As an aside, can somebody please tell me why adding Argentina, a nation with a history of hyperinflation and serial debt defaulter, would inspire confidence in a BRICS currency?). But other than the rand, movement in this space has also been limited, arguably with everyone waiting for Powell.

On the data front, just ahead of Powell’s speech, we get the Michigan Sentiment Survey (exp 71.2), but that will clearly be overshadowed by Powell.  While I anticipate very little activity in the market ahead of 10:00, I also anticipate very little after the speech as I don’t believe he is going to change any perceptions at this point.  There is still a lot of data before the next meeting, another NFP, CPI and PCE reading, so it is too early to look for a change.  

Good luck and good weekend

Adf