What Can Powell Say that the Markets Do Not Already Know?

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Marc Chandler
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Overview: The US is consolidating with a softer profile against most G10 and emerging market currencies today, ahead of Fed Chair Powell's speech at Jackson Hole (10 AM ET). He is unlikely to go much beyond confirming what the market already thinks it knows: namely, that the first rate cut will be delivered next month. By acknowledging that the economy has evolved broadly along the lines the central bank expected, it would be a gently push against speculation of a 50 bp move. In the current context, a rate cut will not usher in easy policy, but simply make the current stance less restrictive. The Dollar Index fell to the low for the year in the middle of the week and remains in the trough. The BOJ's Ueda explained last month's rate hike and did not back off the forward guidance for additional rate hikes barring a new shock. The dollar remains within yesterday's range against the yen. 

Global stocks did not take fright from yesterday's sharp equity sell-off in the US. Most large markets in the Asia Pacific region rose but Australia, Hong Kong, and South Korea. The Stoxx 600 is up for the third consecutive session. It is the third weekly advance, the longest since March. US index futures are trading higher but look vulnerable technically. Benchmark 10-year yields are narrowly mixed today, and the 10-year Treasury yield is flat near 3.85%. Gold is consolidating in yesterday's range and remains near $2500. October WTI snapped a four-day down draft yesterday, rising 1.5% and is up another 1% to almost $74, partly in response to the attack in the Red Sea. 

Asia Pacific

BOJ Governor Ueda defended the last months decision to hike rates and kept the door open to additional rate adjustments, even if not immediately (next month). Like other central banks, the BOJ wants to avoid changing policy amid market turmoil but that is tactical decision. Strategically, Ueda's leading the central bank to gradually normalize monetary policy. The market recognizes this, and overnight swaps show that nearly 11 bp of tightening before the end of the year has been discounted and was little changed after the national CPI was reported earlier today. The CPI report contains little new information. It had been anticipated a few weeks ago when the Tokyo's August CPI was released. The headline pace was unchanged at 2.8% (rather than slip to 2.7% as many expected). The core rate ticked up to 2.7% (from 2.6%), as utility subsidies were cut. The measure that excludes fresh food and energy eased to 1.9% (from 2.2%). It is the first sub-2% reading since September 2022. 

Say what you want about the BOJ and interest rate differentials, the 30-day rolling correlation of changes in the US 10-year yield and the exchange rate is at the upper end of where it has been for five months (~0.60). The correlation of changes in the 10-year differential and exchange rate is a third lower. Rising US rates appeared to help lift the dollar to JPY146.50 as the European session wound down yesterday. Recall that Wednesday's high was set in the quick spike around the apparently partly delayed release of the job revision data near JPY146.75. We suspect that US interest rates have forged a near-term low. The dollar is trading inside yesterday's range (~JPY144.85-JPY146.55). The Australian dollar surged in recent days to approach the high set before the carnage with the carry-trade. The more than four-cent rally stretched momentum indicators and profit-taking kicked in yesterday. After trading above $0.6760 on Wednesday, the Aussie was pushed against $0.6700 yesterday. This area held today, and the Australian dollar reached near $0.6730-35 in consolidative activity. The (38.2%) retracement of the latest leg up from August 15 low near $0.6570 is found slightly below $0.6690. The halfway mark is $0.6665. The dollar's recovery against the yen signaled the gains against offshore yuan. The dollar rose to a three-day high near CNH7.15. It is also recording an inside day. The dollar is stronger once again against the offshore yuan rather than the onshore yuan, which also seem indicative of the buying pressure on the dollar. Simply to return to the upper end of last week's range, the greenback can rise toward CNH7.1850. The string of lower dollar fixings ended today. The PBOC set the dollar's reference rate at CNY7.1358 (CNY7.1228 yesterday and CNY7.1464 a week ago). It is the fifth consecutive week that the dollar has fallen against the onshore yuan for a cumulative loss of about 1.5%. 

Europe

Europe is overshadowed today by the BOJ Governor defending last month's step to remove a little more monetary accommodation and Federal Reserve's Powell's speech at Jackson Hole. The ECB's survey found saw the one-year inflation expectation steady at 2.8%, while the three-year expectations edged up to 2.4% from 2.3%. Next week's calendar features the preliminary August CPI and July unemployment. The ECB says it is data dependent, but market is confident that it will deliver at least another 50 bp of cuts this year and leans (~60%) toward 75 bp in the remaining three meetings of the year. The UK's economic calendar is light today and next week in terms of market-moving data points. Still, after leading the G7 in growth in H1 24, the July data and August flash PMI show the UK economy has momentum at the start of Q3. There are three BOE meetings left this year. The market is confident of one more cut but has shaved the odds of cut another until Q1 25. 

The sharp euro rally stalled yesterday. It posted its lowest settlement in three days. Given the stretched momentum indicators, there is a reasonable chance that the consolidative/corrective phase we have been anticipating has begun. It is trading quietly mostly between $1.1110 and $1.1130. The year's high was set on Wednesday near $1.1175. We suspect the $1.1140-50 area will cap it now. Sterling also appeared to have stalled, but it set a marginal new high near $1.3135 today within a tenth of a cent of the 2023 high. The intraday momentum indicator is stretched, warning that the upside may be limited in North America today. 

America

Fed Chair Powell's speech at Jackson Hole eclipses whatever interest there may have been for July new home sales (first increase in three months?) and the Kansas Fed's services activity survey (the services PMI slowed to 53.5 from 55.0). What can Powell say that we do not already know? There is little doubt that the Fed will cut rates in September. Ahead of the jobs report on September 6 and the CPI on September 11, Powell may avoid a direct reference to the magnitude. Still, the overall sense will be that the economy is evolving pretty much along the lines the Fed anticipated (including the downward revision to job growth), and the implication, would be a 25 bp move. The first cuts can and may be framed in terms of reducing the restrictiveness of policy. When everything is said and done, the economy is likely growing near what the Federal Reserve estimates is the non-inflationary pace. It does not share the urgency of many Wall Street economists. Canada report June retail sales. Economists expected another decline. Through May, retail sales rose only once this year (April). 

The US dollar bottomed against the Canadian dollar yesterday at its lowest level in four months (~CAD1.3570). It recovered to almost CAD1.3620 but is back near CAD1.3580 in the European morning. The intraday momentum indicators are stretched, suggesting yesterday's low may hold. The greenback has come a long way. It peaked on August 5 around CAD1.3945. A modest correction could see CAD1.3650 initially. The Mexican peso sold off hard for a third day yesterday. The weakness of the yen did not take pressure off the peso, and the US dollar traded above MXN19.50 for the first time in two weeks. The economic data conspired against the peso. The IGAE economic survey for June showed the economy had weak momentum and the first half of August CPI was softer than expected. The core rate fell below 4% for the first time in four years. But it is not like the market needed a new reason to sell the peso. It taken the peso down more than 3% in the first three days of the week. The dollar is consolidating in a narrow range so far today (~MXN19.4370-MXN19.5335). Note that the MXN19.60 is the (61.8%) retracement of the dollar's pullback after hitting MXN20.2180 on August 5.