Markets Waiting for the Proverbial Godot, I.E. Fed Easing – Currency Thoughts
Markets Waiting for the Proverbial Godot, I.E. Fed Easing
May 28, 2024
I found the market’s initially upbeat reaction to Fed Chairman Powell’s May 1st press conference puzzling and dismaying and in my opening post the following day wrote
Investors had a somewhat more comforting reaction to Fed Chairman Powell’s press conference than I, fixating on the fact that he generally doubted there were be a need to raise interest rates further. My main takeaway was to conclude that the first cut would occur very late this year and possibly not until 2025.
What had I missed? The only hope he’d thrown investors was that he personally doubted that a rate hike would be needed. Otherwise, everything he said and the body English of Powell’s presentation to the press corps screamed “stop the presses” to the prior script of an initial rate cut as early as June and two more to follow by December. Choose your metaphor: waiting for Godot or Lucy removing the football just before Charlie Brown can kick it.
It’s becoming increasingly apparent that investors will be lucky to get one cut of the 5.25-5.50% federal funds target before New Year’s Eve, and that prioritization of price stability over employment maximization is no longer lifting the dollar, which slid overnight by 0.4% against the Swissy, 0.3% relative to the euro, 0.2% against the Australian dollar, and 0.1% versus the yen, sterling, and loonie. It had seemed miraculous that inflation had slowed so far and so fast without much effect on the real U.S. economy from heights of 9.1% measured by the CPI and 6.8% according to the PCE price deflator. That fast and front-loaded progress largely reflected the unwinding of supply-side bottlenecks, but the remaining progress needed to complete the restoration of sustained price stability is going to require a bigger contribution from the demand side.
Minneapolis Federal Reserve District President Kashkari conceded overnight night that “many more months” of positive inflation news will be now needed for the go-ahead on interest rate cuts, and Cleveland Fed District President admitted that perhaps officials need to do a better job of communicating the Fed’s reaction function between incoming data and policy decisions.
It could be argued that Fed officials are perhaps showing the right degree of due diligence in waiting several months before authorizing an initial rate and in the meantime letting unfolding economic data and other information dictate the timetable of future policy actions. In strictly sticking to the narrowly defined responsibilities embodied in their mandate, however, the Fed is turning a blind eye to the political implications of the current policy that favors the the return of Trumpism to the White House and an agenda that includes several proposals such as steeper and broader tariff hikes, mass deportations and, yes, an end to central bank independence in conducting monetary policy that will fuel higher inflation in the long run.
U.S. stock futures are little changed. In foreign equity markets, share prices today closed down 0.5% in Australia and China, and the Paris Cac is 0.6% softer. Bitcoin’s price dropped 1.3%, but oil and gold have so far firmed 1.6% and 0.5%. The 10-year Japanese JGB yield closed above 1% at 1.02%, and comparable sovereign debt yields are up by 4 basis points in Italy, 2 bps in France and Spain, and a basis point in Germany.
Among today’s assortment of reported data, Japanese corporate service prices rose 0.7% on month and 2.8% on year, their biggest 12-month advance in 109 months.
A 0.4% monthly increase of German wholesale prices in April was the largest rise since September 2022. This trimmed their 12-month rate of decline to 8-month low of 1.8% from 2.6% recorded in the prior month.
Malaysian producer price inflation of 1.9% in April was the most in 16 months.
The British CBI distributive trades index swung from a 37-month low of -44 in April to a 17-month high of +8 this month. Separately, however, British shop prices were reported at just 0.6% higher than a year earlier in March, their smallest 12-month rate of rise in two and a half years. Following a 3-day weekend, the 10-year British gilt yield is 3 basis points softer today.
The National Bank of Kyrgyzstan cut its policy rate by two full percentage points to a 27-month low of 9.0% at today’s scheduled review. The reduction matched a similar reduction at the prior review in April and brought the total decline of the rate since an initial cut November 2022 to 500 basis points. From a pandemic low of 4.25%, the rate had chased inflation higher all the way to to 14.0% by March 2022. CPI inflation in Kyrgyzstan has receded from a peak of 16.2% in February 2023 to a 4.4% this month, which is the lowest reading since February 2020
The policy interest rate of the Central Bank of Sri Lanka was left steady at 8.5% at today’s policy review. A 50-basis point cut at the prior review in March was the fifth reduction since last June and brought the cumulative decline to 700 basis points. After peaking at 67.4% in July 2022, Sri Lankan consumer price inflation had receded all the way to 0.9% by this past March but rose to 1.5% in April. A released statement from officials implies a further reduction of the central bank interest rate in the future and identifies further scope for banks to pass through cuts in the central bank already made.
Monthly U.S. house price inflation in March ticked up 0.1 percentage point to 7.4% according to the Case-Shiller index but slowed 0.4 percentage points to 6.7% according to the FHFA measure. The Case-Shiller index leaped 1.6% month-on-month. The resilience of housing prices in the face of sustained interest rate elevation by the Fed has been unexpected.
Canadian producer price inflation swung from -0.4% in March to +1.4% in April, exceeding market expectations, and Brazilian PPI deflation was trimmed to -3.1% last month from -4.2% in March.
Australian retail sales ticked up 0.1% last month and were 1.3% above year-earlier levels.
Copyright 2024, Larry Greenberg. All rights reserved. No secondary distribution without expres permission.
Tags: Canadian PPI, Central Bank of Sri Lanka, German WPI, Japanese corporate service prices, National Bank of Kyrgyzstan, U.S. house prices
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