You know, it’s funny. Back on January 4, when Jerome Powell finally “figured it out” (no doubt with some coaching from Yellen and Bernanke who were sitting right across from him as he spoke in Atlanta), we suggested that his allusion to 2016 might well be the most important takeaway. Here’s an excerpt from our coverage:
[Powell] also deftly referred everyone to the 2016 experience when Yellen took a pause, an implicit/tacit suggestion that we could see a repeat of that in 2019. That was a good move.
In fact, we even made sure to cram that into the title of our recap, despite the fact that doing so made it unacceptably long.
Fast forward to the January Fed statements (plural) and post-meeting presser and it was pretty clear that Powell was using 2016 as a kind of blueprint, if only in his head, where that just means justifying the dovish relent by drawing a historical parallel with an episode where dovishness was clearly the “right” move in light of the deteriorating outlook.
Given that, it might be instructive to look at what happened to the dollar back then for guidance going forward. Barclays makes this link (the 2016 analog) explicit. “In many ways, the Fed’s capitulation to markets can be compared with early 2016, when the S&P had sold off 11% following the Fed lift-off from the zero lower bound and external risks from China dragged down global growth”, the bank wrote Sunday.
Barclays continues, noting that if you “use 2016 as a guide, in H1 USD underperformed significantly against the JPY and NZD” while in USD-EM, as the Fed revised its hike path lower, volatility declined and USD-EM normalized to its pre-hike levels.” Here’s a chart from the bank that shows dollar performance, where dark blue is from December 2015-February 2016, light blue is February 2016-June 2016, and green is October 2018 through January of this year.
Meanwhile, SocGen’s Kit Juckes notes on Monday that if you’re looking to divine something about the future from Friday’s jobs report, AHE does a decent job of correlating with Treasury yields. Given that, he thinks “you need to take the brief turn in wage growth as a sign of something bigger if you’re going to jump into the Treasury market with both feet [on Monday].”
That, Kit goes on to say, “is another way of saying the dollar’s unlikely to get sold off ahead of new news” in light of its recent correlation with yields.
Speaking of “new news” we’ll get factory orders, non-manufacturing ISM, the State of the Union and a procession of Fed speakers including Powell this week. On the Fedpseak, Juckes notes the obvious, which is that “markets will be sensitive to tone and any small hint of hawkishness would send the dollar up – but might undermine global risk sentiment in the process.”
And when it comes to “global risk”, it’s worth noting that US and global manufacturing PMIs are starting to diverge pretty notably after Friday’s better-than-expected ISM print stateside.
Finally, if you’re looking for drivers when it comes to predicting where risk assets are going to go, you could do worse than the yuan, which the above-mentioned Kit Juckes reminds you “has been a huge market factor of late.”
As for this week’s most important event, SocGen thinks it might well be the Chinese holiday.
“The press is full of pictures of traffic jams, and crowded airports and stations [but] what markets will feel, is a lack of new hard news”, the bank says.