Markets await Powell testimony and FOMC Minutes

Markets tread-water

Financial markets ambled overnight, as traders prepare for several days of central bank related event risk. Wall Street traded flat, with the S&P 500 closing slightly higher on another day of thin volumes. Though a bounce in tech shares did support a rally in the US tech 100 cash (NASDAQ). However, the ASX 200 ought to defy the torpor, with SPI Futures pointing to a roughly 30-point jump at the open today. The USD is up across the board, as traders prepare for a slew of Fed-speeches to end the week, pushing the Australian Dollar, in turn, to around the 0.6930 mark. While both oil and gold are marginally higher.

ASX200’s second day of declines

The ASX 200 continued to fade from last week’s 11-and-a-half year highs yesterday. But again, despite what was a day of reasonably broad-based losses, volumes were light, suggesting a market not too perturbed by the current state of things. Higher bond yields have drawn flow away income stocks, while the lower risk appetite has kept investors away from growth stocks. And at a slightly more “micro-level” for the market: financials sapped the ASX 200 the most during Tuesday’s trade, erasing 10 points from the index, on the back APRA’s announcement it requires the banks increase its reserve capital by 3% by 2024.

The Aussie consumer in focus

Australian markets will get a feel on the domestic economy today. Westpac’s Consumer Sentiment survey is released, and ought to provide some insight into the current state of the Australian consumer. Today’s print takes on slightly greater importance, too: the market has the opportunity to assess some of the impact that recent rate cuts, tax cuts, changes to lending standards, and a nascent reversal in Aussie property prices is having on consumer sentiment. As stated repeatedly by the RBA, consumption remains one of the main drags and risks to the economy. Investors will be hoping for signs in today’s data that this trend is turning-around.

Chinese inflation worth watching

It probably won’t move markets: but the release of Chinese inflation numbers is one to watch today. A key structural concerns for central bankers, especially the US Fed, is the absence of adequate price growth in the global economy. Though the causes for this are complex, one significant factor is China’s exporting of deflation to the rest of the world – especially to the United States. US CPI and Chinese PPI are tightly related, and have recently trended lower together. Today’s Chinese inflation data may provide a handy insight into the prospects for US price-growth, and therefore the willingness and ability for the US Fed to cut rates in the future.

Fed Chair Powell testifies tonight

The timing and extent of rate cuts from the US Federal Reserve will literally be at centre stage tonight. US Fed Chair Jerome Powell testifies before the US Congress, and will be fielding questions about the state of the US economy and the likely course for interest rates. Financial markets haven’t bowed on the notion that the Fed will be cutting rates by 25 basis points this month, despite limited data to suggest such action is necessary. Markets will be watching for what guidance Powell provides – and how congruent this message is with the FOMC Minutes to be released later that night.

What’s the case for a cut?

A curious point will be how Chairperson Powell justifies any dovish bias he happens to adopt. An “insurance cut” is what’s recently been flagged to the market by the Fed. But on what tangible basis has this bias emerged? Indeed, the global economy is weakening, and the trade-war is exacerbating this; while US inflation is a little sluggish. So, the rationale is simple to grasp. However, with the labour market solid, retail sales around its long-term average, the S&P500 at all-time highs, and economic growth above trend, would an “insurance cut” right now really be consistent with Fed’s supposed commitment to data dependence?

Can Powell release the doves?

The answer can’t be the categorical “yes” that interest rate market pricing currently implies. But nevertheless, as far as the market is concerned, a rate cut on July 31^st is a sure thing. And, of course, the market doesn’t care about sensible policy in the short-term; it will respond to promises of looser financial conditions, and tacit pledges to support risk assets. It’s here though, that the risk lies. The market believes this Powell-led-Fed will bend to the will of the market – arguably like it did in early January. If Powell doesn’t unleash the doves, then the consequent re-pricing in rates markets will surely dent risk-appetite.