The FOMC minutes had a distinctly stale flavour to them as the logical expectation were for a more hawkish tone after the Fed massively underwhelmed on the July rate cut, maintained a positive outlook, and had two dissenters. Beyond that, there wasn't a great deal in these minutes that was new.
However, what stood out is how optimistic the board's review was, not something the market will trade on but continues to highlight how hard it would be to generate a consensus on the board for the more aggressive easing option.
However, the minutes painted a convincing enough picture that the Feds will continue to go along with the market's expectations for more cuts, as they will not want to tighten financial conditions, but at the same time not feel pressured to get ahead of the curve.
Now that we've cleared the minutes' risk with no real surprises and after an "I'm not sure what the minutes mean risk wobble " the release is being viewed dovish leaning enough to keep equity investors coming back for more.
Indeed, if the Fed officials view their interest rate cut last month as insurance against the uncertainty over the US-China trade war, that insurance has gotten two folds more expensive since then, suggesting policy should adjust two folds as well.
In any case, we are entering the business part of the week. Jackson Hole is right around the corner with Chair Powell speaking on Friday, so the markets have been quick to shift focus given they have bigger trout to fry.
Trump Put Strike
It appears the latest market meltdown has caused President Trump to turn increasingly anxious about an economic slowdown that is manifesting on the cusp of the US elections run.
Trump will not capitulate on the trade war front as he's winning over voters for his hawkish approach; instead, he will likely toggle other dials. However, as far as a Payroll tax cut, it's improbable as it pays for social security and no way this passes in the House of Representatives, but we should expect more fiscal trial balloons to float in the weeks ahead. Ultimately, signals are increasing that the Trump put strike is little more than a hop skip and a jump away from at-the-money position.
Crude stockpile reports are unpredictable at the best of times and given the nature of there short-term influence; traders were looking for a significant buffer in a robust product's demand.
However, with two weeks left in the critical driving season, the surprising build in US fuel inventories is being viewed as a counter-seasonal Grim Reaper of sorts suggesting that gasoline demand has peaked, and the worst is yet to come.
This a very sobering negative growth reminder even more so with the market perched on a recessionary razor-edged heading into what many are now viewing as a make or break US-China trade discussions next month. If trade uncertainties persist it will be difficult for oil to shrug off concerns about the threat to global demand
Fortunately for oil markets, not only has macro sentiment improved in recent days, but prices could springboard off a dovish Fed policy backstop. What last week looked like a dangerous doom-and-gloom spiral appears to have been averted for now buttressed by the thought of dovish central bank policy pivots.
The gold market slipped small after the release of the Fed minutes which suggest the July rate cut was a recalibration for most as the minutes stuck to Chair Powell description of the 25 bp rate cut a mid-cycle adjustment. However, a lot has happened since then, and Gold continues to consolidate above the pivotal $ 1500 level.
However, it comes down the Jackson Hole as the markets will focus on whether Chair Powell affirms that the current easing is a 'mid-cycle adjustment' as per the FOMC minutes or not. As such, gold markets remain very vulnerable to current market rates pricing that may have raced ahead of the Fed medium-term expectations. Gold will trade very sensitive to Powell’s comments, so if he walks down the market’s dovish expectation; the dollar gets stronger and gold will likely test the bottom of the near-term range.
However, gold demand has been lukewarm this week, suggesting that overbought conditions are factoring into the equation this week.
Jackson Hole and policy implications
The Jackson Hole Symposium is meant to be an academic exercise in policy to go well beyond any short-term policy signalling, that's if there is any signalling at all.
However, On the cusp of the Jackson Hole conference, investors are pinning hopes on the coordinated melding of fiscal and monetary policy, but at a minimum, the event needs to produce the Fed's next stimulus plan. Now and again, something significant does come out of the central bank soiree but are we setting ourselves up for disappointment?
I think not
The global economy is slowing again, the US is only just holding above the potential growth line, and US/China tariffs are likely to drop US growth below that break even. Bond curves are inverting, the market either thinks central banks are behind the curve or lack the necessary firepower to stabilise growth against the negative knock effect of tariffs.
Jackson Hole won't be about loosening policy but rather how to stimulate the global economy when monetary policy is on max loose settings.
The Feds waxing dovish is a given, but the Jackson hole presents the perfect stage to lay down a blueprint for what comes next. Moreover, that's to detail an all-encompassing risk management plan as to how fiscal and monetary policy can be combined to tame not only the bond market beast but also to bolster global equity market sentiment.
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