The knee-jerk reaction to Friday’s US jobs report suggested market participants believe a cooler-than-expected read on wages will reinforce Fed “patience”.
That, in turn, appears to have taken some of the edge off Jerome Powell’s “hawkish” lean from Wednesday’s post-FOMC press conference.
But just as it was probably a mistake to read too much into Powell’s “transitory” messaging, it might be dangerous to read too much into another below-consensus AHE print.
The headline number from the April jobs report was obviously a blockbuster and with unemployment now at 3.6%, one has to wonder whether we’re whistling past the proverbial graveyard when it comes to inflation. Of course people have been saying that for a year (or more) and disinflation (and “Japanification”) are the front-burner topics – it’s one thing to do as Powell did and roll out the obligatory “transitory” descriptors in the interest of keeping everyone’s spirits up, but to talk of a “rogue” upside inflation surprise changing the game is almost seen as a faux pas these days.
In any event, a bevy of Fed speakers are on deck and markets will be listening closely for signs that they’re either trying to reinforce Powell’s “transitory” message, or else walk it back on the way to rekindling hopes for an “insurance cut”.
“It’s quite simple: if speakers (especially Clarida and Williams) come out and continue the prior ‘pro-flationary’ policy messaging on the ‘long-term inflation strategy review,’ with added potential kicker of ‘insurance cuts,’ then the dovish-Fed driven ‘QE trade’ (and the Steepener) can keep working”, Nomura’s Charlie McElligott wrote Friday morning. “If, however, they too begin to moderate their tone along with Powell, I’d then expect more air to come out of the trade—meaning likely bear flattening on the ‘unwind.”
The real kicker from Charlie’s Friday note, though, comes when he puts Powell’s efforts to moderate expectations for a rate cut in the context of apparent client discussions with a “former high-profile central bank head”. Here’s the quote from McElligott’s note (and this is in the context of a discussion about what could jeopardize the steepener from here):
As Jerome Powell moderated the market’s sizable “rate cut” bet which was built on account of 1) Fed speakers’ own guidance on said inflation re-think and 2) their introduction of “insurance cuts” to the market in order to keep the good times rolling (in light of weakening inflation trend) word around the macro universe the past day and a half since the FOMC meeting has been that a high-profile former central bank head has been consulting clients this week stating that he sees a greater chance of the Fed’s next move as a HIKE in 1Q20 over a cut”
You can take that chatter for whatever it’s worth, but it certainly raises questions considering that next year is an election year in the US and also considering expectations in many corners that 2020 could see a mild/shallow recession stateside.
Write your own conspiracy theories (or actually, no, please don’t do that).