Morning Brief – Thursday 11th

Fed Up

Powell’s on board – we think – following his testimony to the House Finance Committee yesterday afternoon. The chairman of the Federal Reserve, the United States’ monetary policy and interest rate setting authority, spoke to politicians yesterday offering a dovish testimony that saw the value of the US Dollar fall sharply. The chairman cited international risks as a primary justification for a potential downward adjustment of interest rates from their present 2.25-2.5% band by (an unconfirmed) 25 basis points. Given that the chairman didn’t rule out a cut later this month confirms investors’ expectations that the yield or reward on US money will de facto fall later this month. The effort of pricing in this lower incentive to hold the greenback saw it fall by 0.35%.

The other risks that Powell cited as a possible justification to loosen monetary conditions to compensate for falling private investment was uncertainty surrounding the trade war and the impending debt ceiling. The first risk is self explanatory and can partially be read as a message back to Trump, someone that has been immensely critical if not damn-right rude about Powell’s chairmanship, that his ridiculous and ill-thought-through foreign policies create an unmanageable economic climate. The latter, the debt ceiling, is important because the higher US rates are, the more expensive interest repayments on borrowed money becomes, bringing the US closer to the brink regardless of marginal borrowing levels. A central banker, trade minister and treasury secretary all rolled into one?! Even Picasso would struggle to depict that one, but Jay Powell’s giving it a good go.

The message overall from yesterday’s testimony was amusing. If you missed yesterday’s testimony catch it online and watch a central banker looking at an economy with record low unemployment, record high equity prices, on-target inflation and one that added 224,000 jobs last month explain why he’s thinking about cutting rates. Whilst the chairman does have heavy influence over the Fed, it is by its very nature, Federal! And there’s still limited evidence that Powell’s voting peers believe that the economy is in a position whereby interest rates should be cut, reversing their own hikes in 2018. Beware therefore of markets over pricing monetary loosening via a weaker Dollar because it could well fall through.

The yield on the highly sensitive 2 year treasury note fell by up to 10 basis points yesterday. Yielding 1.92% ahead of the release of Powell’s written testimony, the reward for holding the note fell to 1.82% unwinding Dollar support along the way. The 10 year note dropped to 2.03% which is important not because of its drop yesterday but because of its survival of the 2% level. Only last Thursday, the yield on that very note sat comfortably below 2% showing that investors’ expectations for the Fed are still firming up versus where they were earlier in the month. 2% is an aggressive valuation for one of the world’s best performing currencies and there remains a serious risk that moving into the July meeting later this month that investors get cold feet, unwind loosening expectations and in doing so buy back their Dollars, raising USD across the board.

Discussion and Analysis by Charles Porter

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