Goldman wasn’t surprised by the hawkish procession of Fed officials the market was confronted with ahead of Jerome Powell’s make-or-break remarks at Jackson Hole.
“Going into this week, we thought the combination of decent US data and resistance from a number of Federal Reserve Bank presidents to providing a much more accommodative policy stance would lead to a somewhat constrained message from Chair Powell, providing near-term support for the Dollar”, the bank wrote Friday morning, in a quick note.
Needless to say, the tone from regional Fed presidents when it comes to policy easing has been tepid, although one might have expected that from Eric Rosengren and Esther George, the two dissents at the July FOMC who both spoke to the media this week. “We have not changed that baseline view, but the market has already moved to largely price that outcome on the back of a number of media interviews with Fed officials, and the minutes of the July FOMC meeting”, Goldman says.
Of course, it wasn’t just Rosengren and George. Patrick Harker was overtly skeptical about the need for more policy accommodation and, as discussed at length in the linked post, all of the soundbites appear to suggest that the August volatility and incessant tweets from the president might not have been enough to sway policymakers from abandoning the “mid-cycle adjustment” characterization of the July rate cut.
The meeting minutes indicated broad-based support for that assessment of preemptive easing and as Goldman goes on to say, that support does not appear to have waned.
“Overall, the comments we have already heard from US policymakers in Jackson Hole and just beforehand suggest that many on the Committee have not significantly changed their view from the ‘mid-cycle adjustment’ framework outlined in Chair Powell’s July FOMC press conference”, the bank says, adding that “markets have moved to now expect a similar message from Chair Powell”.
What does this mean for markets? Well, assuming Powell does strike a similar tone to that adopted by his colleagues this week, it means “the divergence in monetary policy expectations [will] present near-term upside risks for the Dollar”, Goldman says. As noted on Thursday, that isn’t the best news in the world for emerging markets or for risk assets in general, but the bank thinks “a better growth outlook should provide some relief for HY EM currencies”.
Goldman says that in their view, “the majority of the boost to risk appetite from ‘monetary policy’ is behind us”, which means that going forward, “global growth optimism needs to take over as a driver”.
That might be challenging considering how dour the outlook is on that front, although if you wanted to (and Goldman seemingly does) you could point to the better-than-expected flash PMIs out of Europe on Thursday as “evidence” that things are improving at the margins.
That said, the threat of retaliation from Beijing to the forthcoming new US tariffs is a stark reminder that trade remains the biggest stumbling block, something Goldman underscores.
“While the US/China trade war is likely to linger and might have a larger impact on US growth, our economists expect the growth drag from the US inventory cycle to fade”, the bank writes.
So, what are we to hang our hats on? Well, hopes for fiscal stimulus, naturally.
“Less-negative expectations for fiscal policy in the US and globally present some near-term upside risk”, Goldman says. The rumor mill is of course alive with speculation that Germany might loosen up the purse strings, although Bundesbank sources seemingly threw more cold water on that Thursday. In the US, the Trump administration is pondering more tax cuts despite the demonstrable lack of fiscal breathing room.
Ultimately, Goldman stays neutral from an asset allocation perspective on a 3-month horizon “due to lingering uncertainty on growth and monetary policy”. They’re slightly more upbeat looking out over the next 12 months.