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
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
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.”