The punditry’s now all atwitter
That joblessness is a transmitter
Of lower inflation
Thus, Powell’s flirtation
With turning into a rate slitter

But so far, the confidence that
Inflation is falling toward flat
Has not yet arrived
And could be short-lived
So, rate cuts are not yet diktat

As expected, Chairman Powell’s testimony to the Senate Banking Committee was THE story of the day yesterday.  However, it was not that interesting a story despite scads of digital ink spilled on the subject.  What was everybody so excited about?  Well, here are some key quotes and you can be the judge.  In his opening remarks, he explained, “Elevated inflation is not the only risk we face,” and “The latest data show that labor-market conditions have now cooled considerably from where they were two years ago—and I wouldn’t have said that until the last couple of readings.”  Scintillating, I know!

What does it mean?  The quick and dirty is that the Fed has become a bit more evenhanded in their views that the employment side of their mandate may soon force decisions that conflict with the inflation side of their mandate.  So, if the Unemployment Rate continues to rise going forward, even if inflation does not continue its recent downward trajectory, the Fed may decide employment is now more important and respond.

Doves everywhere are clamoring for the Fed to cut before it’s too late and the labor market collapses.  Meanwhile, hawks will explain that at 4.1%, while that is higher than the recent past, the Unemployment Rate remains quite well behaved, especially in the context of NFP results that have averaged 222K over the past six months.

But we really know that this was a nothingburger because a look at markets showed that nothing happened.  The major equity indices all closed +/- 0.15% while 10-year Treasury yields were unchanged from the morning and higher by 2bps from Monday.  Neither did the dollar or commodities move in any substantial way from their early morning levels.   So, now Powell will speak to the House Financial Services Committee today, give identical testimony and fend off whatever inane questions they ask there.  But he was clear that there would be no indications of the timing of any policy changes and that is certain to be true today as well.

And truly, that was the entire session yesterday.  There was no data released and aside from Powell, nobody cared about what other speakers said.  And as you can see above, Powell didn’t really say that much.  So, let’s take a look at the overnight session to see if there was anything interesting at all.

In equity markets, the one place that is trying to hang with the US tech sector is Japan, where the Nikkei rallied another 0.6% overnight and is now higher by 30% this year, second only to the NASDAQ’s 34% rise.  While some of this is excitement about tech, I believe a larger proportion of the gains is due to the yen’s ongoing weakness as many of the companies in the index have their JPY earnings benefit greatly from their export sales.  Elsewhere in the time zone, though, equities were under modest pressure with Chinese, Hong Kong and Australian shares all sliding a bit.  The news of note here was Chinese inflation data, which showed limited price pressures as consumption on the mainland remains lackluster, at best.

Europe, however, is in a much better mood as all the major indices around the continent are higher this morning led by Spain’s 1.0% rise but followed closely by France (+0.9%) and Germany (+0.75%).  Here, too, there has been a lack of data, so I guess the narrative has become that despite the electoral outcomes, investors have overcome their concerns that the new governments will destroy their respective economies.  I guess the one truth is that the new governments will try to spend as much money as possible as quickly as possible, and so support economic activity.  Meanwhile, the recent pattern in the US, higher NASDAQ, lower DJIA and limited movement in the S&P is playing out in the futures this morning as well.

In the bond market, Treasury yields have slipped back 2bps overnight, trading at the same levels as Monday, but there has been a much more aggressive bond rally in Europe with sovereign yields falling between 6bps and 9bps this morning.  It appears that investors are counting on the Fed to maintain its inflation fight, thus helping reduce global inflation pressures, and are responding to declining inflation from China as a rationale to add duration to their portfolios.  While the direction of travel is no surprise given the Treasury yield decline, it is a bit surprising the movement is this large.

In the commodity markets, oil (-0.2%) continues under pressure as the combination of relief that Hurricane Beryl had limited impacts and the potential for a cease-fire in Gaza have oil traders questioning the recent price action.  Arguably, a bigger concern is that slowing economic activity may begin to reduce demand, but that is not the main story today.  In the metals markets, both gold and silver are edging higher this morning while copper is essentially unchanged.  I continue to believe that the Fed is going to be the key driver in this space as if they do cut rates sooner than currently forecast, it seems likely that commodity prices will rise while the dollar declines.

But the dollar is not yet declining in any meaningful way with the DXY still trading above 105.00.  The big outlier today is NOK (-0.95%) which is not only suffering on oil’s recent declines but is also responding to this morning’s inflation data which showed more significant progress on returning it to target.  Core inflation printed at 3.4%, down from 4.1% last month and below the 3.6% estimates.  This has encouraged traders to believe the Norgesbank is going to cut rates sooner than previously expected, hence the krone’s decline.  As to the rest of the G10, NZD (-0.9%) is also under pressure as the RBNZ was less hawkish than anticipated last night, although they did leave rates unchanged.  After those two, though, the G10 is dead.  One thing to note is that USDJPY is back at 161.50, just a few pips below the most recent dollar highs seen last week, although, given the very calm nature of the move, we have not heard much from the MOF on the subject.

As to the EMG bloc, MXN (+0.45%) is continuing its rally after yesterday’s higher than expected CPI data from south of the border has traders looking for continuing policy tightness, pushing back any thoughts of an early ease.  Elsewhere, ZAR (-0.4%) continues its wild back and forth, so much so that it is difficult to pin any fundamentals to the movement.

There is no data of note today so all eyes will be on Chairman Powell when he testifies at 10:00 to the House.  In addition to Powell, we will hear from Governors Bowman and Cook as well as Chicago Fed president Goolsbee.  But really, can anything they say overshadow Powell?  I think not.

It is shaping up as another dull day as it seems unlikely Powell will tell us anything new.  As such, I would look for a quiet session as we all await tomorrow’s CPI data.

Good luck
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