Something Consequential

Fed decisions and post-meeting press conferences have a way of turning out anticlimactic. Or maybe it’s just that all the analyst and media coverage headed in sets the audience up for disappointment by implicitly suggesting that something consequential is bound to happen even if a given meeting is just a “placeholder”, so to speak.

Jerome Powell is bound to emphasize the same series of familiar talking points Wednesday. The Fed will use all of its tools to support the economy during this challenging time consistent with its congressional mandate — you know the refrain. Most of the emergency lending facilities were extended through year-end on Tuesday, so that’s one question he won’t have to answer. But it raises several more.

Fed officials have been consistent in their remarks about the fragility of the recovery and the desirability of additional fiscal support. They also know the entirely predictable second-order effects of their actions are exacerbating the Main Street-Wall Street divide. Look no further than the juxtaposition between the $33 billion set aside by banks in the second quarter for losses and the almost identical amount Wall Street’s bond traders and investment bankers raked in during the period thanks in no small part to the Fed’s backstop of the corporate credit market.

“The outlook would need to materially change for policy makers to alter how they view the domestic economy. They rely heavily on models of their own and it’s helpful to forecast their actions in that framework”, former trader Richard Breslow wrote Wednesday, adding that,

They are human. They see what is going on. They know the economy is only muddling along. They are well aware of the current disagreements over the next phase of fiscal relief. They may even love playing god. But, unfortunately, not enough has changed as they calculate the odds they use to plan.

In any case, there’s no room for anything other than a dovish overshoot — or at least an attempt at a dovish overshoot. That shouldn’t be too difficult from a communications standpoint, even as enhancements to forward guidance will likely wait until September.

It’s notable (to say the least) that 10-year real yields hit record lows this week, just ahead of the meeting.

This is, in many ways, a measure of success for the Fed. But it’s also stoking fears (unwarranted) about the dollar’s reserve status. In all likelihood, Powell will have the (dis)pleasure of addressing those inquiries.

He’ll also be compelled to weigh in on congressional bickering. He’ll try to stay neutral. And that’s fine. After all, Bernanke and Yellen already made it clear what “needs” to be done from the Fed’s perspective.

“With uncertainly around the US stimulus package, the reality may be setting in that the Fed is not likely to do much this meeting, opting to see what fiscal stimulus Congress will pass”, AxiCorp’s Stephen Innes said Wednesday. “The Fed is in a bind to trigger inflation, so where will the money velocity come from?”, he wondered. “This is one of the biggest questions for no other reason than the current MMT-style fiscal spending is merely plugging the gigantic hole left by the economic shutdown and little else”.

Elsewhere, Hong Kong’s recession continued apace. The city is one key theatre for “Cold War 2.0”, and its economy, besieged on all sides, contracted a worse-than-expected 9% in the second quarter, data out Wednesday showed. That comes after a downwardly revised 9.1% in Q1.

This means that Hong Kong has suffered through its two worst quarters since 1974 — consecutively.

The city is grappling with another virus outbreak and the worst jobless rate in 15 years. An additional 118 coronavirus cases were reported on Wednesday.

There’s no relief in sight. As fatalistic and unfortunate as it is, it may be just as well that the city becomes another Shanghai. If the alternative is to exist in a state of limbo where the local economy is perpetually beset by the vagaries of the Sino-US superpower struggle, it may be better off just abandoning its cherished status as a bastion of democracy on communism’s doorstep. It will retain some of its luster as a financial hub either way. For now, it’s becoming a failed statelet of sorts. And Beijing will never allow that to persist.

Meanwhile, on the mainland, Chinese equities surged Wednesday. It’s been a harrowing ride at times, but the CSI 300 is on track to post a ~13% gain in July, the best monthly advance since February of 2019. The S&P is up 4% by comparison.

Speaking of limbo and equities, the above-mentioned Richard Breslow underscores points made here on Monday and Tuesday. “Global equity markets are becoming a technically challenged set of trades”, he wrote, adding that,

The indexes refuse to meaningfully correct. Or do anything really wrong for long. They trade like they know there will be buyers below relying on the ‘put’, even if being outright bullish is hard. It’s difficult to argue with that logic.


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