Powell Speech Cheat Sheet: Five things to watch, stocks, dollar implications

• Fed chief Powell is set to speak about the economy in an online conference.
• Speculation about negative rates is one of the top items eyed by markets.
• Fiscal and monetary stimulus, inflation, and reopening comments are also eyed.

Powering up markets and plummeting the dollar? That may be the case if Jerome Powell, Chairman of the Federal Reserve, opens the door to negative rates. The world's most powerful central banker will speak at a webinar organized by the Peterson Institute at 13:00 GMT, just before US markets open. 

Here are five things to watch:

1) Going negative?

Last week, bond markets reflected expectations for the Federal Reserve to set negative interest rates, That sent the dollar down and stocks up before investors' attention moved elsewhere. Fed officials rejected the idea – which had limited results in the eurozone and Japan. Banks' profits suffered and the real economy did not see substantial benefits. 

Powell is expected to categorically deny this option and that may marginally weigh on stocks and support the dollar. However, if he surprises by refusing to rule out going below zero, the dollar will likely dive and stocks could surge.

2) More QE? 

In the recent post-rate decision press conference, the Fed Chair committed to doing whatever is needed, potentially launching new lending schemes and buying more bonds. He will likely repeat his general pledge to act whenever needed and that is priced in.

If he goes into specifics and about fresh ideas to stimulate the economy and mentions numbers, the dollar could drop and stocks to rise.

3) Does inflation matter?

The US reported considerable falls in consumer prices – both headline figures impacted by oil and also core inflation. The Fed's mandates are price stability and full employment. While the devastating employment figures for April – 20.5 million jobs lost – were expected, the fall in prices was somewhat overlooked by markets.

If Powell sees it as another reason to be worried and act, it would be adverse for the greenback and positive for stocks, especially if he expresses concerns of deflation. When prices decline, consumers postpone purchases in anticipation of further drops, thus contributing to a downfall of the economy.

If he views weak inflation as part of the economic downturn, markets will move onto the next topics.

4) Urging fiscal stimulus?

In that late April rate decision, Powell called on the Federal government to do more and disregard deficits at these times of trouble. Will he repeat this call? The speech comes one day after Nancy Pelosi, the Democratic House Speaker, began detailing another plan in the trillions of dollars while Republicans seem to have "bailout fatigue."

If Powell indirectly backs Pelosi – he will refrain from getting into the details, staying away from politics – that could boost stocks and weigh on the dollar. It would help push politicians into that direction. Powell used to be extremely cautious about telling the government what to do, but the times have changed.

5) Warning about reopening? 

Another political hot potato is the speed of reopening the economy as coronavirus is not under control – according to Dr. Anthony Fauci, the senior White House medic dealing with the disease. Powell is unlikely to weigh into epidemiology but he could warn of the economic impact of a second wave – especially on business and consumer confidence. 

How will markets react to a grim outlook? On the one hand, dire forecasts could send stocks down the safe-haven dollar up. On the other hand, an economic deterioration opens the door to more Fed stimulus. 

Conclusion

Powell has proven his power to shake markets and he will likely do it again – through the things he says and those he does not. The five factors above re critical to that response.