Wednesday, July 10, 2019

All eyes on Powell today: will he confirm a July cut or spread more doubt?

Tags
  • Dollar
  • Gold
  • Yen
  • Euro
  • Pound
  • Stocks
  • Oil

MORNING BRIEFING

Jerome Powell’s testimony to Congress will be the key point of focus for the day ahead with investors eager to find out whether a July rate cut is set in stone. At the same time, the release of the FOMC minutes from the last monetary policy meeting will be the other important event but we already know that they will convey a bearish message and given that Powell’s testimony will take place before this, his remarks will be the driver for the Dollar and US equities. The greenback extended its gains yesterday while 10-year yields also moved to the upside, keeping the rest of the majors under pressure. Gold edged below $1,390 but Oil ticked higher after a bullish API inventory report.

Just three weeks ahead of the July FOMC meeting, Jerome Powell’s outlook on the domestic economy and his comments on whether a rate cut is needed at this stage is all investors care about. And with good reason as there’s quite a debate on whether the evident slowdown in the US economy requires an easier policy to keep growth on a positive trajectory. His comments and the subsequent decision could be a major inflection point for the Dollar or it could just kick the can down the road since the range of available options include: a) doing nothing for now, b) cutting rates once as a precautionary measure or c) embark on a series of rate cuts to prevent a recession from potentially developing next year.

For a number of reasons that we explained in our recent notes, we’re of the opinion that the Fed intends to cut rates at the end of the month but signal an “one and done” approach for the time being. Despite the robust NFPs last week, there are simply too many signs of slowdown in several sectors of the economy for the Fed to do nothing and risk falling behind the curve. At the same time though, going full bearish and opening the door for aggressive easing would not be prudent for two reasons: one, there are no signs of a looming recession at this stage and two, the Fed has little room to maneuver given that interest rates are already below their historic highs - meaning that any reductions need to be timed appropriately.

Meanwhile, market participants seem to agree with this assessment according to the Fed fund futures as the odds for a move in July sit around 100% while the likelihood of a more aggressive move has dropped. The Dollar has gained from this change in sentiment - remember that recently there were some calls for an immediate 50bps reduction - while the improved bias surrounding the US-China trade dispute has also helped Treasury yields move higher, further fueling the Dollar recovery. If Powell confirms our central scenario today and hints on an “one and done” rate cut then the Dollar would weaken but we wouldn’t expect an extended selloff: investors already expect some kind of response from the Fed and we don’t think that too many of them were swayed by the strong NFPs to put their money behind a material delay in easing.

Gold tread water yesterday consolidating below the $1,400 mark in expectation of Powell’s remarks today and tomorrow. The yellow metal is currently trading near the bottom end of its recent range as the surprisingly robust NFPs pushed prices to the downside. However, given that the Fed will cut rates sooner or later, the upside is still there for Gold and if Powell confirms that a move in July is pretty much decided, a rally higher seems likely. The first area of interest sits around the $1,405 mark while an further extension could bring the $1,420-5 zone into focus.

Equities had a mixed day yesterday with traders hesitant to take action before they hear from Jerome Powell. Europe was down around 0.4% while some US indices were able to score a small advance. This morning, equity futures are pointing slightly lower as the reduced odds of an aggressive round of easing from the Fed are removing a potential bullish catalyst. Of course, this could all change depending on what Powell has to say so patience is key right now.

MARKET EVENTS TO WATCH

  • UK Industrial/Manufacturing Production - 12.30pm
  • Fed Chairman Powell Testifies Before House Financial Services Panel - 6pm
  • FOMC Meeting Minutes - 10pm

All times are GMT +4.

Written by Konstantinos Anthis, Head of Research