The latest Fed communication nightmare rattles markets
Summary: As widely expected, the Federal reserve moved to cut policy rates by 25BP last night, but it wasn’t enough for the market, high on the fumes of central bank stimulus, and desperate to hear that rates are going one way only (DOWN!). Fresh off the back of a communication blunder from New York Federal Reserve President John Williams, whose comments had to be clarified by the Fed as academic in nature, the Fed delivered not just on a rate cuts, but another communication mishap.
Powell had one job heading into the presser; to deliver a dovish communique to accompany the dovish statement, but he made a complete mess of this. Instead he stumbled through the press conference delivering a message so clumsy and convoluted he sounded confused himself. To be fair, Powell is drinking from a poisoned chalice, walking a tightrope of expectations but none the less he failed to deliver the clarity the market was searching for. Instead pouring cold water on hopes of a fresh easing cycle, saying the move is a “mid-cycle adjustment to policy”, “not the beginning of a long series of rate cuts” and even flirted with the possibility of raising rates again, “we’ll cut and then we’ll go back to hiking”. And then offset those comments with "I didn't say it's just one" [cut]. Confusing?
These comments just weren’t dovish enough to soothe markets with almost 3 25BP cuts priced by year end. US equities fell across the board, Gold sank, and the USD rallied squeezing shorts. US rates were volatile, with 2yr rates jumping higher flattening the Treasury curve. The yield curve has been telling us that monetary policy is too restrictive, and now with forward guidance not dovish enough the market is interpreting this as a potential policy error, with short end rates too high, therefore raising the risk of recession and pressuring inflation expectations. The bond market does not have faith in Powell's “mid-cycle adjustment”, and nor should they. For one mid-cycle is optimistic (and that’s being polite), and two, US growth is slowing and will continue to do so. It is by no means the Fed’s job to placate markets, but US growth will not hold up whilst Europe and Asia ail, and the manufacturing sector continues to wilt. So, the Fed will be cutting again (25BP in September). This wobble in risk markets will only add to forcing the Feds hand to move again in September, unless the data really rebounds significantly, but the Fed would likely need to see strong evidence of inflation pressure building, and more stable global growth. It is likely only a matter of time until the Fed walk back Powell’s hawkish tone and clarify the messaging that further easing is on the cards. Given that the Fed is responding to uncertainty, an ongoing trade war and a deteriorating global outlook, the yield curve remains inverted and they have no appetite for a persistent disinflationary environment, the case for further easing can still be made.
World trade volumes are declining as exports are falling, industrial production is falling, business investment is being stymied and manufacturing is decelerating, and the problem is not just trade wars, it is weaker global demand driving that story too and a cyclical downturn that pre-dates the trade war. Services and consumption are propping up the expansion so far. The fear is, this permeates through to the services sector and the consumer and you can already see signs of that infiltration in trade sensitive areas like freight and shipping, which are signalling that world trade volumes are set to decline further.
Latest Market Insights
Quarterly Outlook Q3 2022: The Runaway Train
- Central banks' attempts to kill inflation is a paradigm shift, which could end in a deep recession.
Tangible assets and profitable growth are the winnersWith US equities officially in a bear market, the big question is where and when is the bottom in the current drawdown?
Understanding the lack of investment appetite among oil majorsThe everything rally seen in recent quarters has become more uneven, as its strength is driven by commodities in short supply.
The pressure is on as the wind leaves the sailsWith cryptocurrencies in sharp decline, are we entering a crypto winter or is the bear market a healthy clean-up of the crypto space?
Why the Fed can never catch up and what turns the US dollar lower?Many other central banks are set to eventually outpace the Fed in hiking rates, taking their real interest rates to levels higher than the Fed will achieve.
Bank of Japan: Swimming against the tideThe Japanese economy has gone from the age of deflation to rapidly rising prices in no time, leaving the Bank of Japan in a pickle.
Green transformation detour and bear market hibernationWith the impending risk of global econonomic derailment, we share the five things investors need to consider in this new half year.
Crisis redux for the eurozone?Whether there's going to be a recession in Europe or not, the path towards a stable economy will be agonizing.
Technical Outlook: Gold, Oil and a remarkable multi-decade perspective on EquitiesThe Nasdaq bubble pattern, USDJPY resistance, crude oil uptrend losing steam and the technical outlook for USD.
China: the train of new development paradigm left the station two years agoChina is transiting to a new development paradigm, as they are hit by deteriorating terms of trade, a slower global economy and an uncertain future while continuing attempts to contain the pandemic.