Was Mr. Powell hawkish or dovish yesterday?

Analysts haven’t made up their mind about whether Mr. Powell was hawkish or dovish yesterday. We see both terms applied in various reports.

In FX, the consensus seems to fall on the side of dovish and “sell the dollar.” Never mind that rates fell only a little and are higher than anyone else’s. The nail in the coffin was his repeated rejection of the idea of a hike, despite persistent questioning by reporters, right down to saying the committee didn’t talk about it. He also denied the Fed ever, EVER, considers elections.

Powell dismissed stagflation altogether, saying he can “see neither stag nor flation.” Along that line, the Atlanta Fed’s GDPNow yesterday came in at 3.3%, down from 3.9% last week. This is still darn hot.

One idea to explain the dollar drop: we already had the idea that the Fed would likely cut only once this year. Mr. Powell didn’t change that. So a return to the status quo in yields or near it makes sense. What doesn’t fit is the exaggerated sell off in the dollar as the US day was closing.

We wonder if it’s a dead cat bounce. It could also be spillover from the assumed intervention in the dollar/yen by the Bank of Japan in the late afternoon. 

The second big question is whether our little list is right detailing why the Fed really does want to cut but data is holding it back—for the moment. Powell wouldn’t define how much good data has to come to get the Fed back on track, but if he took one quarter of lousy inflation data for the hold, maybe we can assume he would take a quarter of improving data—which leads to the July meeting. 

The other announcement was the cutback in tapering from $60 billion per month to $25. This is as much to fend off another taper tantrum as anything else—Powell said.

Bottom line, the CME FedWatch tool delivers no rate cut this year with a probability over 50%. Sept has 43.7%, Nov has 44.1% and Dec has 38.8%. We don’t know where forecasters get their numbers from, although it’s true and inconvenient that the CME numbers change so much, so often. Reuters reports “Futures markets nudged up the full-year Fed easing expectations to 35 basis points, though a first cut is still not fully priced until after November's election.”

Fresh info today includes Q1 productivity and unit labor costs, the usual Thursday jobless claims, the trade balance and factory goods orders. Unit labor costs may get some attention but on the whole, traders will mostly be preparing for tomorrow’s payrolls.

We dislike payrolls day because it’s just one more opportunity for knee-jerks and silly deductions and general hysteria. One forecast is for April to deliver 233,000 new jobs, from 303,000. Lower, but still hot. Is job growth automatically a harbinger of GDP? Well, yes, but remember that payrolls, like the ADP private sector version, gets revised and by a lot.

On the whole, if payrolls are high, and by high we mean over the forecast, the expectation will be better growth, higher yields, stronger dollar. A low print would be dollar-negative.

Given the wide difference among currencies so far, this could go either way tomorrow.

Intervention saga

Some folks are trying to keep the BoJ intervention story alive by claiming that the big gain in the yen against the dollar late in the NY day yesterday on the Fed story was a second round. An analysis on Bloomberg TV said it would be consistent with the MoF waiting until after the Fed story was out and in addition, high volumes accompanied the move. How does he know about volumes, which are not reported in spot FX because they are literally private?

The FT is on the same train, writing “The magnitude of Wednesday’s move was not replicated in other parts of the foreign exchange market, suggesting the driver was idiosyncratic. The move follows another suspected intervention into the yen on Monday. ‘This looks like evidence of an intervention,’ said Mark McCormick, global head of FX and EM strategy at TD Securities.”

The FT says the move started around 4 pm NY time. No, it actually started at 1:30 and peaked at 2:30, just as Powell was starting to speak. That throws courtesy to Powell out the window. One report has it that the move came after the US stock exchange closed. But we clearly see the yen moving big-time earlier than that.

The euro/yen moved (high to low) by 4.59 points (168.66 to 164.07). The dollar/yen moved 4.85 points (158.01 to 153.16) during the NY day. Idiosyncratic? Well, no. Both moves are roughly 3%. Is the BoJ thought to be intervening against both currencies, or is that just the natural inclination of the market to keep the crosses in sync?

The intervention theory is not confirmed on those grounds. It doesn’t mean Japan did not intervene on Monday or Wednesday. We must admit, though, the preponderance of the evidence is piling up in favor of a stealth intervention. Bloomberg raises the interesting question of whether intervention would work. “In more evidence of those concerns, the currency’s top forecaster is predicting the yen may weaken to 165 per dollar for the first time since 1986.” Unfortunately, the link to that story is broken.

See the chart from Reuters.

One nay-sayer who has switched sides is the savvy and thoughtful Marc Chandler, who writes “Although Japanese officials retain the strategic ambiguity and refused to confirm or deny intervention, changes in the BOJ's current account balances relative to expectations suggest that the intervention Wednesday afternoon/Thursday morning may have been for about JPY3.5 trillion (JPY5.5 trillion Monday), or around $22 bln. The macro considerations have not changed, but some market segments, like momentum traders and trend followers, may be hesitant to challenge Japanese officials without fundamental cover.”

Forecast: We didn’t get a hawkish hold but rather a dovish one and the dollar crashed in a classic overshoot, likely a dead cat bounce. 

Tidbit: One of the many FX paradoxes: high inflation, or rising inflation, or inflation high relative to other countries’ inflation, “should” result in devaluation over time. See the Turkish lira. A more refined way of expressing it is to compare the inflation rate of traded goods, since it’s the primary way any country knows about inflation in another country.

So, by this classical measure, the US has stubbornly high inflation that is higher than the inflation in major trading partners and thus higher prices for its exports, and so “should” devalue.

But that’s not happening. Several reasons account for it. First, the dollar is the reserve currency so demand for it is somewhat independent of inflation. They gotta have it. Besides, dollar assets are the most varied and occupy the biggest markets in the world, whether equities or bonds or their thousands of variations. Aside from the esoteric asset types that keep getting invented, this means liquidity, the most desirable quality after stability.

Second, the US is the largest producer of oil in the world, and everyone knows oil traders are flibbity-gibbets who hardly ever have a clue about supply and demand, taking their cue from US inventory reports and geopolitical developments that nobody else understands, either.

Third, sentiment, a pulsating mix of macroeconomic data, institutional expectations, Big Player positioning, attitude toward risk, and a dozen other factors both obvious and murky. The upcoming US election is one of the murky ones. The last time Trump was president, some of his stupid and outrageous actions caused the dollar to rise on the idea that risk just went up and the dollar is the safe haven from risk, so let’s buy some. Yes, perverse.

Next, sentiment is influenced by the health of the economy overall in comparison to others. The US got back to pre-pandemic growth and beyond remarkably fast while everybody else lagged (and they are all still lagging). This is in part the “business cycle,” but there are so many business cycles that you can make current conditions fit one of them, and that’s not worth much. Underlying economic health is social conditions and demographics. The current bout of consumer spending arises from the lower and lower middle population segments, mostly because there is a labor shortage and anyone who can read and is not an addict can find a job, then go out and buy lunch at McDonalds. 

Bottom line: On-going sticky inflation is a problem, to be sure, but it’s not what is driving the dollar, at least not directly. The direct driver is yields and the yield differential. And behind the yields are the attitudes deduced from the institutional side, chiefly the Fed.

Reasons for the Fed to cut rates:

Avoid embarrassment from getting inflation wrong twice.

Normalize the yield curve.

Head off any recessionary tendencies.

Help housing via mortgage rates.

Help banks rollover commercial property loans.

Help the stock market.

(Help the current White House).

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This is an excerpt from “The Rockefeller Morning Briefing,” which is far larger (about 10 pages). The Briefing has been published every day for over 25 years and represents experienced analysis and insight. The report offers deep background and is not intended to guide FX trading. Rockefeller produces other reports (in spot and futures) for trading purposes.

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