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Markets Morning - Fed chair Powell reminds traders that the US economy is doing well and rates will keep rising

Market Analysis /
Greg McKenna / 18 Jul 2018

Welcome to my daily Markets Musings.

You’ll see things are different from now on. That’s because the full note was approaching 2,000 words some days and I’m breaking it up into a number of reports on the Axi Blog each day now.

That way traders can subscribe to the Axi Blog easily and then cherry pick the yarns and markets of interest 

Feedback always welcome


Market Summary (7.49 am Wednesday July 18)

Fed chair Jerome Powell gave exactly the address I thought he would to Congress last night and that buoyed both the US dollar and US stocks. That’s because he message was one of continued US economic strength and continue gradual increases in US front-end interest rates by the Fed.

The high level summary is that he focussed on the Fed’s base case but acknowledged the risk case associated with trade tensions. But he said for now the risks the down side are roughly balanced with the risks to the upside for growth. His focus was that the labour market continues to be strong, inflation is “close” to the 2% target and “recent data has been encouraging”. He noted there were solid tailwinds to growth and that as a result the “best way forward is to keep gradually raising” the Fed funds rate. There was a “for now’ in there though. So we know the Powell Fed is a data dependent, not dogmatic one.

Anyway stocks and forex bulls liked that, while futures pricing shows the chance of the 4th rate hike this year in December has now risen to 65%.  

So this morning the USD index is up half a percent at 94.97. USDJPY has mapped that move higher to 112.82 while the Euro lost 0.4% to be at 1.1663. That the Euro’s weakness didn’t get a nudge from dovish comments from Oli Rehn is interesting. GBPUSD has been caught up in the maelstrom of Brexit shenanigans (PM May even tried to send the Commons into recess and summer holidays early), Mark Carney saying a Hard Brexit would impact rates, good employment but no wages growth, and of course the USD’s move – it’s at 1.3112, down 0.9% giving up substantial early gains.

Indeed the USD had been under pressure before Powell’s speech. That saw the Aussie peak at 0.7438. But it’s back at 0.7388 – on ST support – for a loss of 0.4%. The Kiwi was also sharply higher at one point yesterday after the RBNZ’s preferred inflation gauge accelerated to the lofty height of 1.7%. A 7 year high which drove NZDUSD back to resistance with a high at 0.6840. It’s at 0.6781 now, up 0.1%. The CAD lost 0.4% and is at 1.3186 – still respecting that trendline.

To stocks then and a positive outlook for the economy and mostly solid earnings are helping sentiment in US stocks even as the BAML institutional survey shows global money managers are their least optimistic on equities in some time. This morning the S&P is up 11 points, 0.4% to 2,809. The Dow is 0.22% higher at 25,119 while the Nasdaq 100 rose 0.64% to 7,405.

Europe took the US rather than Chinese lead and closed in the black. The DAX was 0.8% higher, the CAC rose 0.24% and the FTSE100 was up 0.34%. Here at home after a bit of carnage yesterday on the local market SPI traders have added 19 points overnight. What’s interesting about that is despite the weakness we saw in industrial metals global miners were up. So it night be a good day here on the ASX.

Oil recovered from early lows on more concerns about supply out of Venezuela and Libya where, respectively, production facilities are being shuttered for maintenance and another force majeure at a port was declared. WTI is flat at $68.05 while Brent was up 0.1% to $72.00. That was the story till the API data anyway. Both Brent and WTI are lower now, down 0.4% and 0.7% respectively. Copper is lower this morning, losing around 0.6% to $2.74.

Gold is gone. Gone, gone, gone with a break of important support in the $1235/40 region signalling a test to, perhaps below, $1200. The bears will be out in force. A break of $1200 and I can see $1125 on my charts.

But anti-gold, Bitcoin, is higher, having leaped almost 10% as the recovery in it and other Crypto’s continues. There is talk of ETF’s again, of “institutional” interest, of IBM getting involved in Cryptos, and of course Blackrock sniffing around. And of course the techs – as I highlighted in my video yesterday – supported higher prices. BTCUSD is at $7,320 – NOT A TYPO!    

It’s a quiet day in Asia for data with the Westpac Leading index for Australia the only release of note. Tonight though UK inflation data – RPI, PPI, and CPI – are out along with Euro area CPI. They could move the needle on forex rates.  Tonight Powell is back on Capitol Hill giving his second round of testimony and we also get housing starts and building approvals along with the Beige Book. That might be interesting at 4am tomorrow morning.

Have a great day.


Macro Stuff that affects everyone and everything – either today or eventually


  • Jerome Powell was on message last night focussing on the Fed’s base case not the risk case. I make that point strongly because the press reports and markets take from the recent minutes focussed on the risk case. I wrote at the time that was the wrong interpretation and that the Fed was still on track to hike twice this year because it still believed in its base case of a strong economy and inflation back at target.
  • That was the message from J Powell last night. You can read the initial transcript of his speech here. You’ll see that he’s pretty upbeat. But he’s also clearly saying the Fed remains data-dependant. Here’s the penultimate paragraph which summarises everything you need to know about the outlook (my bold):
    • “With a strong job market, inflation close to our objective, and the risks to the outlook roughly balanced, the FOMC believes that--for now--the best way forward is to keep gradually raising the federal funds rate. We are aware that, on the one hand, raising interest rates too slowly may lead to high inflation or financial market excesses. On the other hand, if we raise rates too rapidly, the economy could weaken and inflation could run persistently below our objective. The Committee will continue to weigh a wide range of relevant information when deciding what monetary policy will be appropriate. As always, our actions will depend on the economic outlook, which may change as we receive new data”.
  • And while on the topic of the Fed’s outlook,  the SanFran Fed tweeted an inflation forecast with the accompanying copy which said, “#Inflation has moved up near the FOMC’s 2% target. With continued tightening in #labormarkets & economic #growth above its sustainable pace, we expect the upward trend in inflation to continue”. Here’s their chart.
Click on me, I'll expand
Click on me, I'll expand
  • On the curve what Powell said suggests that like Robert Kaplan he might be of the view the Fed will pause when it gets back to Neutral. Powell said about the curve flattening that, “If you raise short-term rates higher than long-term rates, then maybe your policy is tighter than you think. Or it’s tight, anyway”. So he’ll keep raising rates but seems reluctant to send the curve inverse.
  • Yesterday morning I wrote that the Trump/Putin summit could impact the president by increasing opposition to him. But unless that opposition rises to actually doing something – in the congress or at November’s midterms – then he’ll just keep on keeping on. But when writing and then when I was asked by Ingrid Willinge on Sky about the impact of the President dissing his own intelligence services I didn’t really understand the depth of feeling at home in the USA that President Trump had elicited by appearing to side with Putin. But, reading Thomas L Friedman’s piece in the NYT, via the Financial Review, yesterday I got a window into the level of disquiet.
  • With a graphic mental image Friedman got to the nub of why the Summit and the President's performance really peeved so many Americans. Friedman wrote, “Listening to Trump, it was as if Franklin Roosevelt had announced after Pearl Harbor: ‘Hey, both sides are to blame. Our battleships in Hawaii were a little provocative to Japan - and, by the way, I had nothing to do with the causes for their attack. So cool it’”. Equally Tom Nichols, a professor of national security at the Naval War College and fellow I have followed on Twitter for years disabused me of my sanguine outlook of what this means to Americans in  USA Today piece yesterday.  Both are Trump critics, but Nichols is a Republican.
  • Naturally, and as usual,  President Trump has tried to walk back what he said overnight and said he does know Russia meddled and that he misspoke. We’ll see how it plays out. From a markets perspective I agree with what Greg Valliere from Horizon Investments wrote in his daily note (my bolding, his capitals), “there's one scenario that could worry the markets: a tidal wave election for the Democrats, who have a decent chance of recapturing the House but only a fair chance of taking the Senate…WATCH THE POLLS CAREFULLY in the next couple of weeks – signs of a post-Helsinki bounce for the Democrats would have significant implications for November. This should be an easy issue for Chuck Schumer – all he has to do is ask: what do the Russians have on Trump” he wrote.
  • Oh and while I’m on President Trump…the EU and Japan have reached agreement on a free trade deal.

Have a great day's trading.

Greg McKenna

Chief Market Strategist


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