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Week Ahead: Doves to dominate at Jackson Hole
Welcome to your guide to the week ahead in the markets.
As global bond yields fall and investors worry about a recession, all eyes will be on the central banker meeting this week in Jackson Hole. Whilst it’s rare for major policy announcements to emerge from the symposium, markets will be fixated on any signals from the Fed and others about the path of interest rates.
Minutes from the Fed’s last meeting will be parsed for clues about future rate cuts. With markets pricing in more cuts this year, these minutes will help show exactly where members stand on the issue.
A few earnings to watch for – Anglo-Australian miner BHP Billiton and some US retail sector stocks including GAP and Target bring up the rear as US second quarter earnings season winds down.
There are still a lot of earnings releases in the current week, including big name brands Target, Salesforce and Gap.
|Approx 22.30 GMT||19th Aug||BHP Billiton Ltd – Q4|
|Pre-Market||20th Aug||Home Depot – Q2 2020|
|Pre-Market||20th Aug||Medtronic Plc – Q1 2020|
|Pre-Market||21st Aug||Lowe’s Companies Inc – Q2|
|Pre-Market||21st Aug||Target – Q2|
|After-Market||22nd Aug||Gap – Q2|
Join our XRay sessions live, or watch them on catch-up at a convenient time. This week, we’ll be covering the following topics in our live video streams.
|07.15 GMT||19th Aug||European Morning Call|
|17.00 GMT||19th Aug||Blonde Markets|
|15.30 GMT||20th Aug||Asset of the Day: Bullion Billions|
|15.45 GMT||20th Aug||Asset of the Day: Oil Outlook|
|13.00 GMT||21st Aug||Asset of the Day: Indices Insights|
There’s a lot going on this week, with special notice paid to the Red meeting in Jackson Hole.
|08.30 GMT||21st Aug||UK Public Sector Net Borrowing|
|12.30 GMT||21st Aug||Canadian CPI|
|18.00 GMT||21st Aug||FOMC Meeting Minutes|
|07.15 – 08.00 GMT||22nd Aug||Eurozone Member PMIs (Services, Manufacturing)|
|11.30 GMT||22nd Aug||ECB Monetary Policy Meeting Accounts|
|Day 1||22nd Aug||Federal Reserve Jackson Hole Symposium|
|22.45 GMT||22nd Aug||New Zealand Retail Sales|
|12.30 GMT||23rd Aug||Canada Retail Sales|
|Day 2||23rd Aug||Federal Reserve Jackson Hole Symposium|
Could this be the biggest monetary policy meeting in years?
Could the upcoming Federal Open Market Committee (FOMC) be the most watched monetary policy meeting in a long time?
It certainly has a lot weighing on it.
Stocks are at record highs, pushed higher by a certainty that the FOMC will cut short-term interest rates for the first time in a decade this week. The two-day policy meeting kicks off on Tuesday, with a policy decision announced on Wednesday.
While Chairman Jerome Powell signalled a cut in July, its unclear what the policy could be for the rest of the year. And is a cut even necessary? While the consensus is that a cut is coming – the only quibble is 25bps or 50bps – the recent economic data looks strong. As our Chief Markets Analyst, Neil Wilson, explains:
“Is a cut justified? I would point to underlying core CPI at 2.1%, retail sales +3.4% in June and a 50-year low in unemployment as perhaps arguments to the contrary. Increasingly there is a sense that the Fed is no longer data dependent, but being held to ransom by the White House and the market.”
But what can we expect from the meeting?
The answer is, it depends…
Confirmation of a cut from the FOMC, if paired with signals of a more dovish policy in the long term could send greenback diving.
On the flip side, if the markets are surprised and a cut doesn’t happen, expect stocks and commodities to tumble and the dollar to surge.
At this stage, despite stronger-than-expected data, growth momentum is weaker. While a recession has been avoided, a cut is still the safe bet. This policy meeting could define the direction of global monetary policy for years to come and provides a lot of opportunities for traders. One thing’s for sure, the announcement on Wednesday is not one to miss.
NFP beat dampens rate cut bets, but not by enough
This afternoon’s US non-farm payrolls report was even more closely watched than usual. It is common for traders to get twitchy ahead of arguably the most important monthly data release on the economic calendar, but this was different.
Markets are betting that the US Federal Reserve will cut interest rates when it meets again at the end of this month. Pricing suggests multiple 25 basis point cuts over the coming 12 months.
The Federal Open Market Committee hasn’t exactly been on the same page as the markets for some time, and the latest jobs numbers given strong ammunition with which to defend their hawkishness. Economists expected to see a 165,000 increase from today’s payrolls, after May’s dire reading of 75,000, but in fact the US economy added 224,000 jobs during June.
A slight tick higher in the participation rate saw the unemployment rate inch up to 3.7%, against expectations of no change at 3.6%.
Wage growth, key inflation predictor, slowed to 0.2% month-on-month, and 3.1% year-on-year. In both cases the readings were 10 basis points lower than analysts had expected.
Market reaction to non-farm payrolls
Stock futures tumbled, with the Dow quickly shedding 180 points and the S&P 500 dropping 0.8% following the announcement as markets cut bets on easier Fed policy. US ten-year treasury yields gained six basis points in the space of 10 minutes to trade back above 2%. EUR/USD fell 0.6%, breaking through three levels of support to hit 1.1222, while GBP/USD dropped 0.7% to test 1.2500.
The latest non-farm payrolls have highlighted the disconnect between market expectations for monetary policy and what the economy is signalling is needed. It’s true that growth is beginning to slow, and some data has revealed weakness in areas such as manufacturing, but so far the market is expecting a disproportionate response from US policymakers.
Markets expect three rate cuts between now and April 2020, although bets of four are not far behind. There are no expectations of interest rates remaining in the current 2.25-2.50% range – wise, considering the data and global macroeconomic conditions – while a handful of uber doves have gone as far as pricing in seven cuts by April 2020.
Those expectations are likely to cool in the wake of the latest NFP data, but the market is still convinced that the Fed is about to embark on a rapid cycle of loosening policy. It will take a lot more than one better-than-expected data print before we reach a realistic middleground.
Fed holds, pound breaks $1.27 ahead of BoE
Stocks firmed and the dollar fell, whilst gold rallied to a 5-year high as the Fed opened the door to cutting rates.
It’s like 2010 all over: the race to the bottom is on. Only this time the global economy is coming off a period of remarkable synchronised expansion, not a terrible recession and the worst financial crisis in a generation or more. So what gives!? Must Powell acquiesce to the whims of his president? Must Draghi end his tenure not normalising, but actually cutting rates even deeper?
Draghi to be fair has little option. In the absence of structural and fiscal reform – blame Germany – he can but tinker around the edges of the zero lower bound, hoping to weaken the currency to get some competitiveness back. Powell is in a different position, although really it looks like central banks are spitting in the wind in trying to shift inflation expectations. They should try to focus on boosting oil prices instead.
So yesterday the FOMC nudged towards a cut. Nearly half the 17 members of the FOMC think cuts will be warranted this year. The median dot plot suggests 50bps in cuts through 2020. The dots evinced a shift from a tightening bias to an easing bias. The patient mantra was dropped, whilst the economy is now only expanding at a ‘moderate’, not ‘solid’, rate. The market took this as a sign the Fed’s listening to their demands – a cut in July is now fully priced in.
But there’s yet optionality for Powell and co. The Fed refrained from explicit references to cuts. The median dot plot shows no cuts this year still. The market is ahead of itself again. If we believe the dots, rate cuts will come slower than the market wants them to.
In some ways the Fed thread the needle here – keeping the market and the president happy without actually committing to cuts. The dots suggest the Fed is saying: “Of course we will cut, just not yet-good enough?”. For now it is. But the tail seems to be wagging the dog, forcing the Fed to follow sooner or later.
Certainly revising inflation expectations lower points to concerns that tame price growth cannot simply be attributed to transient factors. Yet at the same time the Fed thinks unemployment will be lower and growth stronger than it thought in March.
The problem we have is that Fed looks like it is flip-flopping; changes its mind based not on economic data but on the caprice of financial markets; appears in thrall to the White House; and is therefore at a very serious risk of losing its credibility.
Yields hit the deck. US 10yr bond yields slipped beneath 2% again for the first time since 2016. Bunds heading deeper into negative territory.
Gold rallied on the outcome as yields sank, breaking north of $1385. It’s now cleared a tonne of important multi-year resistance, paving the way for a return to $1400 and beyond. This is a big move, but if the Fed doesn’t deliver the cuts the bulls could be caught out.
Stocks liked it – the S&P 500 notched gains of about 0.3%, Limited upside as the Fed was not as dovish as the market wanted and because a lot of this was already priced in. Asian markets rallied across the board.
Futures show European stocks are on the front foot, catching a tailwind from Wall Street and the Fed. The FTSE 100 may underperform though as the pound is finding bid.
Oil has climbed as US inventories feel three times more than expected. Brent was up at $63.50, threatening to break free from its recent range – look for $63.80. WTI at $55.50 also close to breaking out of its trough.
The dollar kicked lower after the Fed decision – but with the ECB looking super easy the gains versus the euro are limited. Likewise the yen with the Bank of Japan also ready to step up stimulus. Likewise the Australian dollar, with RBA governor Lowe talking up a further, imminent, cut. The race to the bottom is on. Is it too soon to talk about currency wars?
The exception here is the Bank of England, which is heading towards raising rates. We get to learn more about the BoE’s position later today. The difference here is the inflation expectations, which are moving up, not down like they are elsewhere. Britain’s also enjoying strong wage growth and a super-tight labour market. All of this is dependent on a smooth Brexit – this is not a given by any means.
Indeed, Brexit is keeping the lid on sterling’s gains – the prospect of Boris Johnson taking Britain out of the EU come October 31st is a risk. There’s now talk of a possible general election if he gets in – risky, we know what happened to May. The prospect of a general election would not do anything to remove uncertainty around UK assets. Zero clarity still.
EURUSD moved through 1.12 and was last at 1.1280, but failing to gain enough momentum to rally above 1.13 and scrub out the Draghi-inspired losses.
GBPUSD has reclaimed 1.27. Quite a chunky move here, blasting through a couple of big figures in under a day. Maybe the prospect of a more hawkish BoE is helping the pound, albeit the market is actually pricing in cuts, not hikes. At least Mark Carney doesn’t have to deal with a political leader on his case…
USDJPY lost the 108 handle to trade at 107.50, now breaking free into new 2019 lows (ex the Jan flash crash).”
Commodities: Gold hits five-year high as Fed strikes dovish tone, crude oil up after attack on US drone
Gold is trading at its highest level in more than five years after the US Federal Open Market Committee yesterday indicated that monetary policy may become more accommodative.
Gold has gained 1.7% after the FOMC held rates in the 2.25-2.5% range but signalled a cut was coming. It’s trading around $1,383 after rising to test resistance at $1,394 – prices haven’t been this high since March 2014.
Bulls may now be targeting the $1,400 handle, but there is plenty of room for a pullback before support comes into play at $1,362.
Fed Chair Jerome Powell stated in the post-meeting press conference that “Many participants now see the case for somewhat more accommodative policy has strengthened.”
Markets had been pricing in a rate cut in July. A weakening US dollar has helped push commodity prices higher in the wake of the meeting. Cable is up 0.6%, EUR/USD up 0.5%, and USD/JPY down 0.4%.
Crude oil rises as US and Iran clash over missile attack on drone
Oil prices have extended gains of up to 3% today after tensions in the Middle East cranked higher. Washington claims that a US military drone was shot down by an Iranian surface-to-air missile in international airspace. Iran’s Islamic Revolutionary Guard asserted this morning that the drone had entered Iranian airspace.
Tensions between Washington and Tehran have been building of late, after the US accused Iran of carrying out the recent attacks against oil tankers in the Gulf of Oman. Iran’s oil exports are the subject of sanctions by the US which came into force last year.
The news pushed Brent up to a ten-day high of $63.85, while crude oil rose to a 20-day high above $55.50.
Closing on all-time highs, FOMC preview
Equity markets buoyant after Tuesday’s rally ahead of the key Federal Reserve meeting.
You can just about smell the all-time highs. The S&P 500 rallied 28 points to 2,917.75, just a shade under 1% below its April record high. The Dow added 350+ points to 26,465.54.
And yet the latest BAML data shows fund managers are at their most bearish since the global financial crisis a decade ago. Equity allocations have experienced their second worst drop on record – we’ve seen a huge move into cash. And yet and yet, we’re close to all-time highs again for US equity markets at least. This is what you may call an unloved rally.
Asian shares were encouraged by Wall Street’s gains. Japan closed 1.72% higher. Futures indicate European shares are treading water ahead of the FOMC decision later today. A touch of caution after an exuberant session yesterday.
Oil rallied again – demand outlook matters a lot more than supply constraints. The world is awash with oil whatever OPEC does. Brent was close to its $62.50 comfort, the 50% Fib level that continues to anchor prices. WTI has regained $54. On both charts signs of either double-bottom reversal or bearish flag continuation patterns.
The prospect of president Trump meeting his counterpart Xi Jinping at the G20 assembly later this month, combined with signs of renewed stimulus efforts by the ECB, has investors eyeing short-term gains. We need to wait and see what the Federal Reserve does. So hold on tight, let the flight begin.
You got to know when to hold ‘em, know when to fold ‘em. Markets expect the Fed to cut 3 times this year, but the Fed needs to be careful about reacting too easily to markets. There is not the need to be as pessimistic about growth and inflation as bond markets suggest, despite some softness in recent labour market data. The Fed will seek to avoid sounding overly hawkish, but one feels there is a need to steer markets away from expecting the Fed to ride to the rescue of financial markets.
It’s hard to recall a time we headed into an FOMC meeting with so much at stake and with so much uncertainty about what might be agreed and what the guidance for the rest of the year will look like. This means the potential volatility around the event is likely to be substantially higher than at most recent FOMC meetings.
Macroeconomic indicators suggest slowing growth whilst there have been no positive developments on trade. Inflation is tame but there is arguably enough to keep the Fed on the side lines for the rest of the year. And quite how much the data has softened since the last meeting to suddenly warrant a cut is beyond me.
Moreover, last week’s retail sales data has gone against the downbeat, pro-cut grain. The Atlanta Fed GDPNow model predicts 2.1% GDP growth in Q2, up from the previous 1.4%. The model now anticipates second-quarter real personal consumption expenditures growth of 3.2% to 3.9%.
Talk of demoting Jay Powell further clouds the picture as Trump heaps pressure on the Fed chair to cut. Know when to walk away, know when to run.
Markets do not currently anticipate the Fed will cut rates this week, but they are pricing in a cut in July and a subsequent 1-2 25bps cuts.
Pricing for a rate cut this week dropped sharply – from nearly 30% to around 21% – after the strong retail sales print on Friday. It’s since crept back up to 26%. For July, though, market pricing indicates an 87% chance of a cut, whilst there is a 95% chance for September.
The blackout period ahead of the meeting has tied tongues that were in overdrive in the preceding days.
Powell’s comments in Chicago at the start of June were the trigger for a relief rally in equities. He noted ‘recent developments involving trade negotiations and other matters’, adding that: ‘We do not know how or when these issues will be resolved’.
This was the key remark: ‘We are closely monitoring the implications of these developments for the U.S. economic outlook and, as always, we will act as appropriate to sustain the expansion’.
Critically he did not signal a cut, but only stuck to the Fed’s oft-stated stance. Markets have read much more into this, and could be left disappointed. The problem for Powell now is to gently steer markets back to the right course.
Coming Up Today (GMT)
GBP- CPI y/y (08:30)
CAD- CPI m/m (12:30)
EUR- ECB President Draghi Speaks (14:00)
USD- FOMC Economic Projections (18:00)
USD- FOMC Statement (18:00)
USD- Federal Fund Rate (18:00)
USD- FOMC Press Conference (18:30)
BRL -Interest Rate Decision (21:00)
NZD- GDP q/q (22:45)
Equities flat ahead of big week for central banks
Shares open flat as markets look ahead to the FOMC meeting later in the week, whilst Lufthansa shares tumble on a profits warning.
European equities look pretty flat on the open after a decent run last week for global equity markets. The S&P 500 closed a shade lower on Friday. Asian shares a bit wobbly overnight. Gains may be hard to sustain with the Fed in focus and no clear signs of progress on trade. Investors may take a bit of risk off the table in the next couple of days.
US commerce secretary Wilbur Ross has poured cold water on any hopes that we might get a trade deal from the G20 meeting and said the US is ready to increase tariffs on China if necessary.
All eyes are of course on the Fed meeting this week. It’s hard to recall a time we headed into an FOMC meeting with so much at stake and with so much uncertainty about what might be agreed. This means the potential volatility around the event is likely to be substantially higher than at most recent FOMC meetings. Traders may start to show some nervousness ahead of the Fed meeting if they think it won’t be accommodative as hoped.
We’ve also got the BoE and BoJ expected to stand pat. We could though see some hawks on the MPC vote for a rate hike to signal their intent, as it appears waiting for Brexit clarity could take a while longer than policymakers had anticipated. Three members of the rate-setting Monetary Policy Committee have in the last week or so said that rates will likely need to rise at a faster clip over the next two years than the market is currently pricing. This week could be when they signal their intent.
EURUSD is looking softer ahead of the Fed meeting with the apparent failure of the double-bottom breakout from the descending wedge. Last trading on 1.12, a breach on the downside of this handle opens up a return to the 1.110 level immediately. Sterling remains softer too ahead of the Bank of England meeting with the dollar broadly firmer. GBPUSD has last holding support at 1.2580 where we long-term rising trend support coming in.
A fair old whipsaw last week as geopolitical tensions in the Middle East temporarily lifted prices. But on the whole the bleak demand outlook is weighing on prices and we have seen Brent retreat to the comfort of $62-$62.50. WTI is a shade below the $53 level. Yet to see a sustained downside break again but it may be coming, albeit rising geopolitical tensions may offer support.
Speculative long positions have been heavily reduced – CFTC data showing a trimming in net long positions of around 50k contracts from 400k reported in the COT on Jun 7th to 351k reported on Friday. That’s down from a high of around 547k at the end of April. The reduction in net long positions reflects worries about a supply glut as demand weakens and US production ramps.
Effectively the market has decided that OPEC will choose to extend its production curbs when it meets later this month/early July. To do anything else would be to risk a collapse in prices. Saudi oil minister Al-Falih is optimistic about extending cuts. His confidence is now being discounted by the market however.
Deutsche Bank – If no one wants to marry you because you’ve got too much baggage, the answer is to get rid of the baggage. Deutsche plans to set up a bad bank (that’ll make two then) to offload some of the least profitable elements of business. This is Sewing’s big play – we await to see whether it’s enough to really convince shareholders that we’ve hit the bottom. Profitability targets still look rather distant.
Airlines – Lufthansa’s profits warning has taken the wind out of the airlines today. The margin on its preferred metric is seen between 5.5% and 6.5%, down from the previous guidance for adjusted EBIT margin of 6.5 to 8%.
At the end of April we noted that Lufthansa’s Q1 loss wasa red flag for the airline sector. Over-capacity in the European short haul market, intense competition and the resulting pressure on fares can be blamed for the decline in profitability, whilst rising fuel costs are an added headache. The sector always does a good job at competing away margins in the good times. No signs that anyone is prepared to reduce capacity therefore we would anticipate the wave of consolidation in European short haul is not over.
Babcock/Serco – Babcock confirms speculation it’s been approached by Serco. Not an immediately obvious move but the two are a pretty good fit and we had anticipated some consolidation in the sector given the problems for outsourcers. Serco has been doing well against a tough backdrop for outsourcers, meeting new higher performance targets, whilst Babcock has been suffering. Babcock has been downgrading its forecasts for a while and has been on a persistently downward spiral. Last month Babcock reported profits down 47% last year and warned of a tough outlook for the coming one.
Morning Note: China’s long march, Britain’s interminable May
Wall St was higher yesterday as markets look on the bright side of the US-China dispute, focusing on the 3-month reprieve for Huawei. But news that the White House may also blacklist Chinese surveillance company Hikvision has weighed on risk appetite again.
It’s not looking too great overall, and we continue to witness Washington push hard in one direction and then beat a tactical retreat to test its opponents.
The situation we’re in now is a marked deterioration from the start of May. Beijing is now talking about a ‘new long march’, and trade talks have completely broken down. From this point we need to start to consider escalation looks like – tariffs on the $300bn of remaining Chinese exports being discussed would lead to a material impact on the US economy, corporate earnings and inflation. There is a risk that the market is complacent to what may be a very long, drawn out affair, albeit having clearly taken on some of the warnings – SPX closed at 2,864, down 3-4% from the all-time highs. However, this may not yet reflect the downside risks from a full-blown trade conflict.
Sterling is on the backfoot again this morning after going through the ringer yesterday. GBPUSD is below 1.27 again, having whipsawed on the prospect of a second referendum. The government plans to bring the Brexit withdrawal bill again to parliament but it’s clear it lacks the votes to get through. Pressure on the PM is excruciating.
At send time the pair held on 1.2690, having fallen to 1.26844. Support seen around a series of Dec lows at 1.2610, which coincides with the 78% retracement of the top-to-bottom move up from the Jan YTD low to the Mar YTD high. This area could well be a strong line of support. If it goes then we are looking at a potential retreat to 1.24. The pound was also weaker against the euro, with EURGBP continuing its march to 0.88, having notched up its worst losing streak on record versus the single currency.
But are we set for a pullback? The short sterling trade seems pretty crowded and the 14-day RSI calls for the pound to bounce on both EURGBP and GBPUSD. Sense from the momentum indicators that this decline for sterling against both the euro and dollar is running out of steam – of course that could just mean a temporary pause. We are also quite heavily extended at the respective lower (GBPUSD) and upper (EURGBP) extremes of the Bollinger Bands. Nevertheless, risks still appear skewed to the downside given the complete lack of certainty on the political front. Expect heightened volatility in sterling crosses.
Mrs May needs to realise her deal is never going to get through Parliament, whatever amount of convoluted bargaining she attempts. Her gamble on offering a confirmatory referendum on her deal has clearly failed at the first hurdle.
Broad-based dollar strength is also weighing on the pound as the greenback is finding safe haven bid in the current trade climate. The dollar index has just pulled back from the 98 handle but is looking firm. EURUSD has pulled back further to 1.1150 but seems to be building some support around this region. With the massive descending wedge nearing completion – are we set for an upside breakout? We’ve talked before about it being too early to call the top of the dollar rally, but as we look into the second half of the year, that is when many think the dollar will see a retracement.
Japanese macro data overnight was soft – exports declined for a fifth straight month. We note the big drop in exports to China – down 6.3%, outpacing the overall decline of 2.4%. Core machine orders were down 0.7%, although this was weak, it was better than the 5.5% decline registered a month before.
On tap later we have the UK CPI figures – 2.2% is the consensus. However, we expect the number to be skewed by the hike in the energy price cap. Core inflation is seen at 1.9%. Whether this is the peak in inflation will depend a lot on Brexit, and whether we see wage growth pick up. The Bank of England will look through any above-target print for a while, at least until Brexit is clearer.
FOMC minutes on tap too – watch for the markets to find these a little more hawkish than they would like. One gets the sense that the Fed is not quite ready to end its hiking cycle. Again one feels the market is not correctly pricing the chance the Fed will raise rates later in the year – albeit the base case is for it to stand pat until 2020.
Payrolls day: eyes on wage inflation
Data this week from the US has offered some mixed signals. Employment via the ADP private payrolls number was strong, coming at 275k, well ahead of expectations. One cannot always see a direct correlation between the ADP print and the NFP number, but nonetheless it suggests another print at least in line with the 3-month average. Census hiring might skew the numbers to the upside – prepare for a 250k+ print this time as a result, which could cause a little volatility.
Meanwhile the Chicago and ISM PMIs were soft, coming in around their weakest in two years and suggesting some drag in some employment sectors.
Within the ISM numbers the Employment Index fell to 52.4%, a decrease of 5.1 percentage points from the March reading of 57.5%. The Chicago PMI also highlighted weaker employment, with the decline in demand and production matched by reduced demand for labour. The Employment Indicator fell to its lowest level since October 2017, and below the three- and 12-month averages.
PCE figures meanwhile, shows spending accelerated at the fastest pace in almost ten years, rising to 0.9% in March after a 0.1% gain in February. Personal incomes, rose 0.1% in March. Inflation fell to 1.6% from 2%. All told there is perhaps a sense that wages are not squeezing higher as much as expected.
Unemployment shows tightness
On unemployment, initial jobless claims were steady at a seasonally adjusted 230,000 for the week ended April 27th, after jumping 37k the week before, the biggest rise in two years. The four-month moving average of claims has inched up 6,500 to 212,500.
Last month marked a recovery in the headline number as the March figure climbed to 196k from the wobble in February. Wage growth however was much softer than expected, rising 0.1% MoM versus the 0.3% expected. This left annual average wage growth at 3.2%, short of the 3.4% expected which was printed the prior month.
Post-FOMC, the USD is firmer with a push off the 96 handle back towards the 98 handle. For a drive higher for USD we would like require a beat on wage growth more than anything else as big headline jobs number is easy to disregard month to month. In fact it’s hard to get quite as excited about the main NFP print these days, particularly as the numbers can be quite volatile month to month. Focus on the three-month average and the wage data. Also unemployment, should it fall further and highlight further tightening in the labour market will get the Fed’s attention.
GBPUSD is holding the 1.30 handle but a big number on wages may pressure the pair lower and a retreat to the 200-day line around 1.2960.
190k jobs created
Morning Note: Powell pulls rate cut rug from equities, Europe to open lower
Is the US economy running hot or not? The economy is growing at +3%, but inflation isn’t there. PMIs are softening, but the labour market is as tight as it can be. The yield curve has started to steepen again – the big recession indicator has dimmed.
For the Fed, the glass is half full, still. That means it sees no need to cut rates this year – markets have been pricing in a 65% chance of a cut before 2019 is out. Now they need to rethink this. As I’ve been saying for some time, the market was mis-pricing where the Fed sits on the economy and inflation and was overly dovish.
Jay Powell last night made it clear the Fed thinks that the low inflation is down to ‘transitory’ factors. This word was key, and has given risk assets a bit of a fright. The Fed’s preferred gauge of core inflation has slipped from around 2% to 1.6% in recent months, but policymakers remain relaxed. If weaker inflation persists, however, the Fed may need to consider a cut.
The S&P 500 beat a hasty retreat on Powell’s comments – slipping 0.75% on the day to close at 2,923.73. Bonds were sold and yields climbed. Powell is not listening to Donald Trump and his 1% cut + QE idiocy.
Why the market is surprised by the commentary from Powell is not really clear. The minutes from the last meeting showed sill that the bias remains mildly towards tightening – I.e. the way policymakers read the economy progressing suggests still another hike before a cut. The market is still not pricing in the chances of a rate hike this year.
The word ‘transitory’ has done the damage – once again Powell has found a way to make what should have been a fairly innocuous presser quite interesting.
European markets are seen lower on the open – taking their cue from Wall Street and its risk-off moves. The FTSE 100 is seen opening around 7357, while the DAX – coming back from the May Day holiday – is seen at 12,347 on the open.
The dollar managed to pare losses as Powell’s comments were digested. EURUSD gave up the 1.12 handle and remains below this in early morning trade.
Having rallied as high as 1.31 at one brief moment ahead of the Fed statement, GBPUSD has retreated to 1.3050. Lots of strong horizontal support now around 1.3030/40.”