Not a Clue

The thing that we learned from the Fed
Was they’ve not a clue what’s ahead
A few wanted fifty
But others more thrifty
Suggested a quarter instead

The thing that has Powell perplexed
Is what to do when they meet next
That’s why when he speaks
Near Jackson Hole’s peaks
Investors all fear some subtext

Once again the market has wandered aimlessly ahead of tomorrow’s Jackson Hole speech by Chairman Powell. Equity markets have generally edged lower (Hang Seng -0.85%, DAX -0.1%, FTSE -0.6%) although a few managed to scrape out a gain (Nikkei +0.05%, Shanghai +0.1%). Bond markets have also been mixed with most Asian markets rallying while Europe has seen small losses. I guess it’s only fitting that 10-year Treasuries are essentially unchanged on the day. Meanwhile, the dollar continues its broad winning ways with mostly modest gains against both G10 and EMG currencies.

At this point, all eyes are on tomorrow’s Powell speech to discern the Fed’s next move. Yesterday afternoon’s FOMC Minutes painted a picture of a group with significant differences in views. We know of the two dissenters, who didn’t want to cut rates at all, and it turns out that a “couple of participants” were looking for a fifty basis point cut. In the end, it is no surprise that twenty-five was the result, although the rationale, given their stated views that downside risks to the economy had diminished, seem shaky. The market response to the Minutes was, therefore, largely nonexistent, with almost no movement subsequent to their release in any market, which, given the proximity of the new information coming from Powell ought not be that surprising. In fact, it seems unlikely that today will bring too much activity either given that the important data has already been released (European PMI’s) and Initial Claims (exp 216K) and Leading Indicators (0.3%) are unlikely to change any opinions.

A quick look at those Eurozone PMI’s shows that they were marginally better than expected although continue to paint a picture of a weakening economy with no inflationary impulse. The biggest concern was that the new orders survey in Germany fell even further, a sign that there is no recovery in sight. At their release, the euro managed to rally about 0.35%, however it has given all of those gains back in the past four hours and seems more likely to wander aimlessly than take on a direction. The release of the ECB’s Minutes did nothing to change any views, merely confirming that they are preparing further easing for next month, with a growing chance of both an interest rate cut and the restarting of Large Scale Asset Purchases, better known as QE.

Other news of note comes from Djakarta, where Bank Indonesia (BI) surprised one and all and cut 25bps last night. However, the rupiah managed to eke out a small gain on the session as investors and traders seem more focused on the positive growth story, a true rarity these days, than on the interest rate situation. Most analysts are convinced that BI is done cutting unless the global economy really tanks, rather than merely continues its recent slowdown. In China we saw the renminbi soften some 0.3% and fall to levels not seen since 2008 in the onshore market. However, there has been no obvious further deterioration of the trade situation so I don’t anticipate a significant extension unless the PBOC acts more aggressively to ease policy. And arguing in favor of less movement is the fact that the 70th anniversary of the founding of the People’s Republic is coming up on October 1st. Historically, the PBOC will go out of their way to insure financial markets are stable during that celebration and frequently they start the process several months beforehand.

Brexit is the final story that seems to be having an impact as PM Johnson is visiting Paris today after meetings in Berlin yesterday. At this point the EU continues to talk tough, but nothing has changed regarding the desperate need for the EU to prevent a shock to a weakening economy. In fact, the pound is bucking today’s dollar trend, currently trading higher by 0.15%, as traders are beginning to read between the lines and realize that a deal is more likely than currently priced. I maintain that we will see something in October that will avoid a no-deal outcome and the pound will rally sharply as that becomes a reality.

And that’s really all for today. Bloomberg will be interviewing several FOMC members in Jackson Hole, so that should offer some background color, but at this point, it is all about Chairman Powell tomorrow. Until then, tight ranges are the most likely outcome.

Good luck
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Wanton Cries

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.

 

Good luck
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