Summary and Price Action Rundown
Global risk assets are mixed and muted this morning as market trends pause ahead of tomorrow’s highly anticipated speech by Fed Chair Powell, while more signs of easing US-China friction contribute to an upbeat tone this week. S&P 500 futures point to a flat open after the index climbed 0.4% yesterday, increasing its year-to-date gain to 6.6% and registering another all-time high. Equities in the EU are advancing, with a boost from German fiscal news, while Asian stocks were mixed overnight, though Chinese indexes lagged again. The dollar continues to fluctuate near two-year lows, while longer-dated Treasury yields having been rising in tandem with German bund yields, with the 10-year yield climbing to 0.71%. Brent crude is holding at multi-month highs near $46 as storms in the Gulf of Mexico hit US output.
Markets Pause Ahead of Fed Chair Powell’s Remarks Tomorrow
Amid placid late summer market conditions, the focus this week is squarely on tomorrow’s speech by Fed Chair Powell, which is expected to detail an incrementally accommodative pivot in monetary policy. Tomorrow morning, Fed Chair Powell will be delivering his “Monetary Policy Framework Review,” a yearlong retrospective and projection of how policy will evolve going forward. He is expected to outline what could be the central bank’s most proactive posture in recent history to spur inflation back to the Fed’s target level. Specifically, market participants are expecting Powell to clarify the Fed’s express tolerance for overshooting the 2% price growth goal with a novel formulation of average inflation targeting. Along with the reassessed posture toward inflation, the Fed also, as indicated by the minutes from its July meeting, appears likely to reinforce its commitment to full employment. Powell’s speech could more formally link the Fed’s interest rate policies and asset purchase programs to the inflation target and full employment mandate, a policy approach known as “enhanced guidance.” Some analysts are characterizing this shift as an inversion of the anti-inflation campaign of famed Fed Chair Paul Volcker. Where Chair Volcker prominently enacted inflation-busting measures, Chair Powell and his colleagues are committing to eliciting price-inflation after a decade of mostly falling short of their inflation target.
This speech comes after some market participants expressed disappointment at the lack of clarity on these expected policy shifts in the July FOMC meeting minutes, which were released last Wednesday. The minutes also suggested that the FOMC may not be as close as expected to consensus over enhanced guidance. Specifically, analysts seized on the characterization that a pivot to enhanced guidance would be appropriate “at some point” rather than the June minutes’ more specific timeframe “at upcoming meetings.” The minutes also related continued skepticism about the usefulness of using bond purchases for purposes of yield curve control.
Ahead of Powell’s speech, there is likely to be hesitancy across financial markets, particularly in fixed income and currency, but heightened expectations of an exceptionally dovish performance by Chair Powell are evident in overall price levels. The dollar is hovering near two-year lows, while longer-dated Treasury yields are in the middle of the current, exceptionally low, trading range, as US equities continue to register new all-time highs.
Easing US-China Tensions Contribute to Mellow Market Mood
Positive atmospherics this week around the Phase One US-China trade deal are contributing to a perception of easing tensions. With reports overnight noting accelerating Chinese purchases of US soybeans, White House policy advisor Navarro, a noted China hawk, affirmed yesterday that the Phase One trade deal is “alive and well,” and lauded Chinese purchases of US commodities under the agreement. National Economic Council Director Kudlow also noted that the focus is shifting toward the intellectual property, technology transfer, and other structural aspects of the deal, indicating acceptable progress. This comes after the US Trade Representative (USTR) struck an upbeat note on the Phase One deal earlier this week following a high-level call to review its status, indicating that “[b]oth sides see progress and are committed to taking the steps necessary to ensure the success of the agreement.” No mention has been made of a Phase Two negotiation. Hopes for a thaw in relations were raised late last week on news that the impending US ban against popular Chinese app WeChat is less impactful than feared. Still, at the Republican National Convention, President Trump has focused on continuing his tough stance toward China and characterizing Joe Biden as weak on Beijing.
Additional Themes
German Fiscal Support in Focus – German equities are moderately outperforming their regional peers this morning after Chancellor Merkel’s government extended employment support funding to the end of 2021, which is expected to total roughly €10 billion in additional spending. This adds to the €1.2 trillion in fiscal support already marshalled by Berlin to see the German economy through the economic impact of the pandemic after the “black zero” policy of no national budget deficits was suspended.
Hurricane Laura Intensifies in the Gulf – With traders citing the disruption to oil drilling and shipping in the Gulf of Mexico as helping contribute to this week’s rally in crude prices, Hurricane Laura is expected to be classified as a Category 4 as it bears down on Texas-Louisiana coast. Reports suggest that 12% of US oil refining capacity could be impacted for months following landfall.