For those who expected a hawk
When Powell completed his talk
T’was somewhat depressing
That Jay was professing
They’d not walk the tapering walk
Then last night, from China, we learned
A falling stock market concerned
The powers that be
Thus, they did agree
To pander to those who’d been burned
Apparently, the Fed is not yet ready to alter its policy in any way. That is the message Chairman Powell delivered yesterday through the FOMC statement and following press conference. Though it seems clear there was a decent amount of discussion regarding the tapering of asset purchases, in the end, not only was there no commitment on the timing of such tapering, there was no commitment on the timing of any potential decision. Instead, Chairman Powell explained that while progress had been made toward their goals, “substantial further progress” was still a ways away, especially regarding the employment situation.
When asked specifically about the fact that inflation was currently much higher than the FOMC’s target and whether or not that met the criteria for averaging 2%, he once again assured us that recent price rises would be transitory. Remember, the dictionary definition of transitory is simply, ‘not permanent’. Of course, the question is exactly what does the Fed mean is not going to be permanent? It was here that Powell enlightened us most. He explained that while price rises that have already occurred would likely not be reversed, he was concerned only with the ongoing pace of those price rises. The Fed’s contention is that the pace of rising prices will slow down and fall back to levels seen prior to the onset of the Covid pandemic.
Of course, no Powell Q&A would be complete without a mention of the “tools” the Fed possesses in the event their inflation views turn out to be wrong. Jay did not disappoint here, once again holding that on the off chance inflation seems not to be transitory, they will address it appropriately. This, however, remains very questionable. As the tools of which they speak, higher interest rates, will have a decisively negative impact on asset markets worldwide, it is difficult to believe the Fed will raise rates aggressively enough to combat rising inflation and allow asset markets to fall sharply. In order to combat inflation effectively, history has shown real interest rates need to be significantly positive, which means if inflation is running at 5%, nominal rates above 6% will be required. Ask yourself how the global economy, with more than $280 Trillion of debt outstanding, will respond to interest rates rising 600 basis points. Depression anyone?
At any rate, the upshot of the FOMC meeting was that the overall impression was one of a more dovish hue than expected going in, and the market response was exactly as one might expect. Equity markets rebounded in the US and have continued that path overnight. Bond markets rallied a bit in the US, although with risk appetite back in vogue, have ceded some ground this morning. Commodity prices are rising and the dollar is under pressure.
Speaking of risk appetite, the other key story this week had been China and the apparent crackdown on specific industries like payments and education. While Tuesday night’s comments by the Chinese helped to stabilize markets there, that was clearly not enough. So, last night we understand that the China Securities Regulatory Commission gathered a group of bankers to explain that China was not seeking to disengage from the world nor prevent its companies from accessing capital markets elsewhere. They went on to explain that recent crackdowns on tech and educational companies were designed to help those companies “grow in the proper manner”, a statement that could only be made by a communist apparatchik. But in the end, the assurances given were effective as equity markets in Hong Kong and China were sharply higher and those specific companies that had come under significant pressure rebounded on the order of 7%-10%. So, clearly there is no reason to worry.
Now, I’m sure you all feel better that things are just peachy everywhere. The combination of Chairman Powell removing any concerns over inflation getting out of hand and the Chinese looking out for our best interests regarding the method of growth in its economy has led to a strongly positive risk sentiment. As such, it should be no surprise that equity prices are higher around the world. Asia started things (Nikkei +0.75%, Hang Seng +3.3%, Shanghai +1.5%) and Europe has followed suit (DAX +0.45%, CAC +0.7%, FTSE 100 +0.9%). US futures have not quite caught the fever with the NASDAQ (-0.2%) lagging, although the other two main indices are slightly higher.
In the bond market, investors are selling as they no longer feel the need of the relative safety there, with Treasury yields higher by 3bps, while Bunds (+2bps), AOTs (+1bp) and Gilts (+2.7bps) are all under pressure. But remember, yields remain at extremely low levels and real yields remain deeply negative, so a few bps here is hardly a concern.
Commodity prices have waived off concerns over the delta variant slowing the economy down and are higher across the board. Oil (+0.25%), gold (+0.85%), copper (+1.1%) and the entire agricultural space are embracing the renewed growth narrative.
Finally, the dollar, as would be expected during a clear risk-on session and in the wake of the Fed explaining that tapering is not coming to a screen near you anytime soon, is lower across the board. In the G10 space, NZD (+0.6%) and NOK (+0.55%) are leading the way higher, which is to be expected given the movement in commodity prices. CAD (+0.45%) is next in line. But even the yen (+0.1%) has edged higher despite the positive risk attitude. One could easily describe this as a pure dollar sell-off.
In the emerging markets, HUF (+0.85%) is the leader as traders are back focused on the hawkishness of the central bank and an imminent rate hike, now ignoring the lack of EU funding that remains an open issue. ZAR (+0.8%) is next on the commodity story with KRW (+0.7%) in the bronze medal position as exporters took advantage of the weakest won in nearly a year to sell dollars and then Samsung’s earnings blew away expectations on the huge demand for semiconductors, and funds flowed into the equity market.
We get our first look at Q2 GDP this morning (exp 8.5%) with the Consumption component expected to rise 10.5% on a SAAR basis. We also see Initial Claims (385K) and Continuing Claims (3183K). Recall, last week Initial Claims were a much higher than expected 419K, so weakness here could easily start to cause some additional concern at the Fed and delay the tapering discussion even further. With the FOMC behind us, we can look forward to a great deal more Fedspeak, although it appears many of the committee members are on vacation, as we only have two scheduled in the next week, and they come tomorrow. I imagine that calendar will fill in as time passes.
Putting it all together shows that any Fed hawks remain in the distinct minority, and that the party will continue for the foreseeable future. Overall, the dollar has been trading in a range and had been weakly testing the top of that range. It appears that move is over, and we seem likely to drift lower for the next several sessions at least, but there is no breakout on the horizon.
Good luck and stay safe