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dollar fed fomc jerome powell Markets stocks

Seeking Redemption, Jerome Powell Blindsides Skeptics

Is this what you wanted?

Jerome Powell came into the January Fed meeting holding the all-time record for most consecutive Fed decision days with an S&P loss.

That amusing stat garnered quite a bit of attention last month after ol’ Jay fumbled what we now know (thanks to the December minutes) was an easy handoff in the post-meeting presser.

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Jerome Powell Is The Wilt Chamberlain Of Fed Decision-Day S&P Losses

Long story short, “plain English” struck again on December 19 and at the worst possible time (i.e., the day before Donald Trump decided to force what would end up being the longest government shutdown in history). And so, Powell’s increasingly dubious legend grew.

powell

(Bespoke)

He made amends on January 4 and with a little (read: a lot) of help from Clarida and friends, managed to engineer a rousing risk rally to start the new year.

The problem headed into Wednesday was that the bar was set pretty high when it came to over-delivering on the dovish side, especially for a Fed chair who was 0-7 in the only 7 “games” he’s played since taking the reins from his predecessor.

Well, suffice to say Powell brought a pole to Wednesday’s hurdle race and vaulted over what everyone thought was a high bar with about 10 feet to spare. As documented here in the minutes after the statements (plural) crossed, Jay stuck the landing on the notoriously difficult “aggressive dovish pause against already dovish expectations” floor routine (and now we’re just mixing Olympics metaphors at random).

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Fed Drops Reference To Further Gradual Hikes, Says Prepared To Adjust Balance Sheet Runoff Plan

In the course of removing the reference to further gradual rate increases, the Fed appeared to indicate that March was a non-starter for an additional hike under any circumstances – the “patient” characterization rules it out. Period. Additionally, you could very well make the argument that merely saying “future adjustments” opens the door to rate cuts. Throw in the acknowledgement of market-based measures of inflation compensation moving lower and you’ve checked all the dovish boxes.

“The statement removed all guidance implying that the next move in the policy rate will be higher”, BMO’s Jon Hill wrote, adding that “it’s not necessarily ‘pause then continue hiking’, it’s ‘maintain and see’, with the next move dependent on incoming data and economic developments.”

“On the balance sheet, the groundwork is now explicitly laid for a 2019 taper, and possibly cessation of runoff by the end of the year”, he added.

On the balance sheet, the Fed’s “special” statement was, well, something “special” for salivating markets. This, right here, is what everyone wanted to hear:

The Committee is prepared to adjust any of the details for completing balance sheet normalization in light of economic and financial developments. Moreover, the Committee would be prepared to use its full range of tools, including altering the size and composition of its balance sheet, if future economic conditions were to warrant a more accommodative monetary policy than can be achieved solely by reducing the federal funds rate.

“The market has latched onto the Fed’s statement that it is prepared to adjust any of the details for completing balance sheet normalization”, Nomura’s George Goncalves (whose name has come a lot lately in discussions about the future of the balance sheet) told Bloomberg in an e-mail exchange, adding that “the Fed is not only being patient, but is super-sensitive [to financial conditions].”

The knee-jerk reactions across markets were obviously dramatic. Stocks, which were already well on their way to a solid session, surged.

ESNQ

(Bloomberg) 

The dollar dove with 2-year yields.

DollarRates

(Bloomberg)

The curve aggressively bull steepened.

CurveSteep

(Bloomberg)

And gold surged on the overtly dovish outcome.

Gold

(Bloomberg)

Meanwhile, the EM ETF exploded to the upside. EM equities were already on track for their best month in a year and the ETF is now gunning for the 200-DMA.

EEM

(Bloomberg)

There was no “fumble” in the presser, either. Tone deaf Powell is now gone, replaced with a guy who has figured out how to turn “plain English” into “plain dovish”, which, in hindsight anyway, was predictable (if “plain English” is especially pernicious for risk assets when Powell is hawkish, you can expect it to be especially blunt on the bullish side when he’s dovish).

You really couldn’t ask for a much more market-friendly set of presser soundbites than those listed below, especially in light of what everyone had just read in the statements by the time he got started (i.e., there was no effort to talk the market back once things were off to the races).

PowellPresser

Ultimately, this was the best day for stocks since Powell’s January 4 remarks in Atlanta and the second best day since the December 26 rally.

Stocks

(Bloomberg)

The dollar is now sitting at a four-month low (which, again, is great for EM and only adds to the looser financial conditions impulse from soaring equities).

Dollar

(Bloomberg)

The high yield junk CDS index surged to what looks like the highest since early November.

CDXHY

(Bloomberg)

And it just goes on, and on, and on.

The bottom line is that Powell appeared determined to snap his 7-“game” losing streak when it comes to Fed decision days ending in tears for risk assets. Unfortunately for Jay, it’s highly unlikely that any subsequent Fed chair will ever come close to tripping up the S&P on 7 straight decision days, so it’s a record he’ll probably hold forever.

Now the only question is whether the trade talks and/or Trump’s ongoing threats to shutter the government (again) if he doesn’t procure $5 billion for his “slat fence” by February 15 will end up negating the good vibes.


 

 

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9 comments on “Seeking Redemption, Jerome Powell Blindsides Skeptics

  1. The (market’s) bitch is back!

  2. Harvey Darrow Cotton

    I love you, Mr Heisenberg, I really do, but nobody – man or machine alike – gave two goddamns about the vocabulary, grammar, syntax, or diction coming out of Powell’s word hole. It was always about policy. When the Fed skewed the slightest bit ‘oh gawd don’t hurt me Goldman and CNBC hawkish, the markets hated it. Now that Trump, Jim Cramer, and Government Sachs ‘put’ Powell back in his place, the markets love it. That is it. No need to overcomplicate. “Everything should be made as simple as possible, but no simpler.” Charts and squiggles and investment banker notes and forward guidance and two-way communications all be damned. ‘Hawkish bad. Dovish good. More dovish better. Japan a good starting point.’

    • “… gave two goddamns about the vocabulary, grammar, syntax, or diction coming out of Powell’s word hole.”

      I love you Harvey, but you are 100% incorrect. As in, you couldn’t be more wrong if you tried. where do you think the dovishness comes from, homie? if he doesn’t open his mouth (either literally or through the statement), there is no dovishness. dovishness has to be communicated. and when you say “investment banker notes”, what exactly do you think Goldman is?

      • and this: “it was always about policy” makes zero sense.

        there was no “policy” change today. none.

        markets were pricing a 1% (that’s “one”) chance of a rate hike. there was no policy change. not to rates and not to the pace of balance sheet rundown.

        it was literally all about the words. again: your comment is wrong in every possible sense of the word “wrong”

        soz.

        • Harvey Darrow Cotton

          Well, the Fed was increasing rates…and now they are not. That is a policy change. The markets didn’t price that in. They made a prop bet. If they had priced that in, then markets wouldn’t have soared 1.5% today. The Fed was rolling off Treasuries and MBSs on autopilot for the foreseeable future, and now they aren’t. That, too, is a policy change. Those are two dovish pivots.

          In terms of communication, Powell could have opened a box and released pigeons and left the stage and the markets would have soared. If he played Prince’s “When Doves Cry,” markets would have tanked. They only care about low interest rates and liquidity boosts. You can say that in Basque, Morse code, with hand puppets, or Legos. Nobody cares.

          Your love does make my day, though. 🤗

          • There was no policy change today. Period. Rates were unchanged. The pace of balance sheet runoff was unchanged.

            Again, you are wrong. All that changed was the language. Both in the statement and in the presser. That is the reality of this situation. What you are saying is fantasy.

            Also, your allusion to Goldman makes no sense. Goldman was persistently hawkish (predicting quarterly rate hikes in 2019 all the way up through December even when the market had completely priced them out).

            This is also wrong: “The markets didn’t price that in.”

            Do you have a bloomie? if so, look up the market pricing for today’s meeting. Markets did price it in.

            It was absolutely, 100%, for sure, no doubt about it, NOT the pause that caused the rally. it was the statement language and the presser. Period.

            Nobody expected a rate hike today. Nobody at all. Except maybe you. Again: LOOK AT THE MARKET PRICING AHEAD OF THE MEETING. There was no hike priced in. You are stone, cold wrong.

  3. Like kids snatching candy from the bowl when they are not supposed to…….the inevitable excuse when finally apprehended “well everybody does it” Then after a while somebody refills the bowl and it goes on and on.
    With Powell and the Institutions of Government , generally, the bar is set very low.. ….Like with the kids the complacent onlookers ignore the activity having been desensitized by the frequency and it’s brazen nature. Happens everywhere and all the time.. Inevitably volumes are written explaining and debating all this…soon to be forgotten by the very next event of any consequence, probably something contrived to distract the same onlookers…. Life goes on…!

    • He veers too hawkish, reverses tone, then too dovish.

      This is not what I expected from Powell. Realizing markets are turning and then changing Fed language? Sure, I think that was achieved already. But to lean so far dovish feels like a betrayal of what he’s supposed to stand for. Market is now dictating policy again.

      Like seriously, markets were already recovering this month. Wasn’t enough to just say “ok so in light of recent developments, we will halt hikes for the foreseeable future, and we could slow the pace of balance sheet normalization later this year”.

      As an experienced market participant, you would think he understood short term market volatility is perfectly normal. I would also have expected someone of Powell’s stature to understand the market turmoil of recent months was healthy. I know we like to kid ourselves, but most of us know deep down that valuations are stretched. Asset inflation as a policy objective was achieved. Financial engineering has expanded multiples beyond anything thought reasonable 3 years ago. The economy isn’t really feeling any pain (although shutdown may change that), unemployment is low, and inflation subdued. This was the perfect opportunity to shake out loose hands, remove excesses, and redirect capital to productive assets.

      Wtf is he trying to do? Engineer the bubble to continue growing in size? He is already limited in policy tools, and he’s removing the little ammunition that he has, so when things start to go bad, everything will topple. All he had to do was just continue the language from the last presser while leaving the door open for changes to balance sheet normalization.

      The market needed a forward looking Fed Chair who’s familiar with cycles in markets as well as the economy. What we got is someone who wants to act steadfast but can’t take the pressure and then shoots in the opposite direction. He’s literally causing bouts of volatility and uncertainty in the system.

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