Markets have largely spent the past week in consolidation as traders have looked to keep their powder dry ahead of Fed chair Jerome Powell’s speech at the Jackson Hole Economic Symposium. The minutes of the FOMC meeting for July focused on the term “mid-cycle adjustment” which disappointed the doves. It suggested that Powell’s use of the term “mid-cycle adjustment” in last months press conference was a calculated move. But given that President Trump recently cranked up the trade dispute with further tariffs on China and with the global economic slowdown taking hold (especially in manufacturing) Powell seems to have paid due care with this in mind. We look at the implications of what Powell has said and the market impact.
Key takeaways from Powell’s speech
Powell’s speech seems to have been all rather boring in honest. There has been little real sign of intent. Perhaps given the array of speeches by various Fed members in recent days, Powell sits between a rock and a hard place. It is a speech which seems to have changed little, and is as much about what he did not say as what he did.
- The Fed will “react as appropriate to sustain the expansion” (this is fairly standard in rhetoric)
- The US economy has remained favourable, but the global outlook has deteriorated since the middle of the year.
- Trade policy uncertainty has played a role in the global slowdown, weak manufacturing and capital spending.
There was also a part of the speech dedicated to the global risks and the need for the Fed to react.
However it was also interesting in what he also did NOT say:
- The key point is that there was no mention of the term “mid-cycle adjustment” (lean dovish)
- However, there was also no discussion of the yield curve inversion (not as dovish as could have been)
What does it mean for monetary policy?
Before today’s speech, FOMC members Esther George and Patrick Harker made comments to show their opposition to further rate cuts at this stage. Certainly this helped to pull yields higher but also flatten the yield curve, but even before Powell’s speech we got a sense of what a bind the Fed is now in. Fed speakers giving contrasting signals all over the place. This time it was James Bullard (who is admittedly very dovish) suggesting a “robust debate” regarding a -50 basis point cut. Bullard also referred to the 1998 insurances cuts where there were three 25 basis point cuts which would be a good model. Treasury yields subsequently dropped sharply.
Fed Funds Futures have been gradually pricing out the prospect of a -50bps rate cut in September. However, a -25bps cut for September still is still largely priced in. This has not changed,overly but has swung back in favour of further rate cuts.
Prior to the speech Fed Funds futures were saying 95% probability of a September cut with a 5% chance of no move. This has now swung to pricing for a guaranteed -25bps cut but also a 5% chance of a -50bps cut.
The markets are taking this speech as a mild dovish lean, especially given that Powell focused on the risks of the global slowdown impacting on the US economy. If Powell wanted to guide the market away from the current pricing of two further cuts by the end of the year, then he passed up the opportunity. More rate cuts appear to be on the way.
How have markets responded?
US Treasury yields have fallen back by a couple of basis points on the dovish lean (with little change to the yield curve shape). In forex, the dollar has slipped back slightly. However, the big mover though is gold. Mild dollar weakness but coupled with big focus on the concerns of the global risks has hit sentiment and proved bullish for gold. Equities have been supported by the mild dovish lean.
- US 2 year Treasury yield – around 2 basis points lower
- US 10 year Treasury yield – around 2 basis points lower
- EUR/USD – has picked up around 10 pips, but is still under the $1.1100 resistance
- GBPUSD – has heled above $1.2200 breakout support and is looking to test for a close above $1.2250 which would be a bullish move.
- USD/JPY – Once more the 106.75 resistance holds.
- Gold – the market picked up around $8 from Bullard’s speech and then since Powell another $10 higher. This has pulled it back above the near term pivot at $1510 in the range $1481/$1534 and suggests that a close above renews a bullish bias again.
- S&P 500 – around 5 ticks higher. There is no real change to the mini range 2900/2940 but increases the potential for an upside break which would be a key near to medium term move.