Summary and Price Action Rundown
Global risk assets are mixed this morning after yesterday’s price action extended market trends associated with Fed accommodation ahead of this morning’s highly anticipated speech by Chair Powell, while last week’s US initial jobless claims data will also be in focus. S&P 500 futures indicate a 0.2% lower open after the index advanced 1.0% yesterday, increasing its year-to-date gain to 7.6% and registering its fourth straight all-time high. Equities in the EU are retracing some recent gains, while Asian stocks were mixed overnight. The dollar continues to fluctuate near two-year lows, while longer-dated Treasury yields are steady, with the 10-year yield in the middle of its recent range at 0.68%. Brent crude is holding near multi-month highs of $46 as Hurricane Laura lashes the Gulf of Mexico.
Investors Lean into Heightened Expectations for Fed Dovishness
Yesterday’s price action reflected doubling down on bets that this morning’s speech by Fed Chair Powell will deliver another historically accommodative pivot in monetary policy. Later this 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 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 using bond purchases for purposes of yield curve control.
Ahead of Powell’s speech, initial hesitancy across financial markets yesterday morning gave way to rising bets on another exceptionally dovish performance by Chair Powell. The dollar sank back toward two-year lows, helping propel precious metals prices higher, while longer-dated Treasury yields hovered in the middle of the current, exceptionally low, trading range, as US equities continue to register new all-time highs. This morning’s price action is more subdued.
Investors Alert for Signs of Slippage in US August Data
Last week’s tally of initial jobless claims will be in focus today after the prior reading showed a degree of backsliding. New filings for unemployment benefits are forecast to settle slightly lower to 1.0 million in the week ending August 22nd. For context, initial jobless claims for the week of August 15th rose by 1.1 million, above market expectations of 925,000 as the persistent impact of the Covid-19 pandemic weighed on the labor market recovery. The 4-week moving average eased to 1.18 million, the lowest since March, while continuing claims decreased to 14.84 million for the week of August 8th, marking the lowest claims reading since April. While the averages across the pandemic period are still in an improving trend, the unexpected jump back up to over one million new claims raised concerns about the state of the economy amidst a bitter partisan divide over stimulus support for unemployed workers. Reports indicate that President Trump’s executive order offering $300 per week in augmented unemployment benefits, down from $600 under the CARES Act, is being taken up in a broad number of states but that implementation may take three to six more weeks, depending on the state.
Oil Prices Steady as Hurricane Laura Lashes the Gulf – Though US production and refining in the Gulf region has been disrupted, crude prices have halted their pre-landfall rally as traders pause to assess the impact of the powerful storm as it moves inland.
US-China Tensions Percolate – Analysts noted China’s firing of test missiles in the South China Sea yesterday, characterizing this show of force as a warning to US carrier groups and bases in the region. Though financial markets have been broadly sensitive to US-China trade friction, and have reacted selectively to some other facets of the ongoing confrontation like the Huawei and TikTok/WeChat controversies, geostrategic posturing of this variety is generally discounted by market participants.