Thursday, November 29, 2018

Capital Markets: Powell and the Fed

From Marc to Market:

Reluctant to Extend Dollar Losses
Overview: The biggest US equity advance since Q1 has helped lift global markets today. The MSCI Asia Pacific Index rose for the fourth session, and nearly all the bourses in the region rallied with the notable exception of China and Hong Kong. Almost all the sectors in Europe are rallying but energy and real estate. US oil inventories rose three times more than expected and Putin expressed little support for fresh output cuts. February Brent is slipping below $58 a barrel, and January WTI is making new lows below $50 a barrel. Bond yields are falling, and the US 10-year yield is dipping below 3% for the first time since decisively moving above in mid-September. The dollar is mixed after yesterday's reversal, but among the majors, only the yen and the Australian dollar have extended yesterday's gains. Emerging market currencies are mostly higher, led by the Turkish lira and the South African rand.

North America
The S&P 500 gapped higher yesterday and was near opening levels when Powell took the stage in NY. Contrary to some accounts, Powell did not say rates were just below neutral. He said that the fed funds rate was just below the broad range of estimates of the neutral level. Those estimates as of the September forecasts were 2.5%-3.5%.

Powell's comment then should not be considered forward guidance, but a simple observation, which we suspect was meant to correct his remark from early October that seemed to emphasize that policy was still very accommodative as the target rate was still well below neutral. Rather than being contradictory, both statements are correct if you grant that Powell first referred to the median forecast of the neutral rate and in NY specifically referred to the range.

The December hike will put the upper end of the target range at 2.50%, the lower end of the range of views of neutrality. That does not mean policy is neutral. It means that the most pessimistic Fed officials see it as neutral. The median is 3.0%. At the December meeting, the newly sworn-in Governor Michelle Bowman will also provide forecasts, and she is thought to add to centrist views, which is to follow the Fed's leadership....MORE