Who Does Powell Want To Be? | Morning Express 08/25/2022

Posted: Aug. 25, 2022, 8:34 a.m.

E-mini S&P (September) / NQ (September)

S&P, yesterday’s close: Settled at 4142.75, up 12.25

NQ, yesterday’s close: Settled at 12,929.75, up 33.25

Fundamentals:

U.S. equity benchmarks, along with many other assets, are enjoying a risk-on bounce this Thursday morning, one day ahead of Fed Chair Powell’s critical Jackson Hole speech. Overnight, China announced 1 trillion yuan in stimulus measures, or about $146 billion. Price action across global stocks, bonds, and commodities enjoyed a knee jerk spike and remain buoyant after settling in ahead of U.S. hours. The move, not a complete surprise, comes after the Chinese economy has continued to deteriorate despite exiting lockdowns. Ahead of this stimulus injection, the PBoC trimmed four rate benchmarks over the last week and a half, but little interest in borrowing or lending has watered-down the already marginal impact.

Whether feared or championed, expectations are mounting for a more hawkish rhetoric from Chair Powell in tomorrow’s planned remarks, which will be released ahead of his speech at 9:00 am CT. The CME’s FedWatch Tool is currently signaling a 75 basis point hike in September with a 60.5% probability.

We spent Tuesday reinvigorating our call from this spring, ‘The Inflation Showdown at Jackson Hole’, and highlighting the monumental policy announcements made by Powell at Jackson Hole over the last two years. In 2020, the bank announced ‘symmetrical inflation targeting’. This plan allowed inflation to run as hot as it did cold. Last year, Chair Powell did not blink to an overheating economy, deciding to maintain easy money policy. Of course, the former led to the latter and the Fed is now battling unprecedented and historic waves of inflation. Yesterday, we highlighted our long-standing ‘Jekyll and Hyde’ narrative, where official policy statements exude one attitude, but committee members in between take a balancing approach. We now believe official bank communique is in a less hawkish and more pleasant state of Jekyll, whereas individual interviews are steadfastly hawkish, calling for relentless rate hikes in the unhinged manner of Hyde.

Do not miss our daily Midday Market Minute, from yesterday.

Who does Chair Powell want to be? On June 22nd, he said, “I would never want to compare myself to Paul Volcker, in any way.” Paul Volcker, the Fed Chair from 1979-1987, is known for slaying inflation but also creating the worst recession in U.S history. It’s important to understand the Federal Reserve, as a whole, cannot let up their hawkish rhetoric, only balance it. If they provided a road map to end rate hikes and called a victory against inflation, asset prices would again surge and reinvigorate the underlying inflation, doing more damage than good. Right here, right now, it is too early. Fed Chair Powell understands this, and the mistake of being too far behind the curve through last year. Although he and the bank were wrong in calling inflation transitory, they quickly made a drastic shift in policy at the end of 2021 and early this year, admitting their error. This was the first step in not being Arthur Burns, the Fed Chair from 1970 to 1978 who spent the better part of his first five years denying inflation existed and massaging data to fit his narrative. Understanding last year’s error and emphasizing the dependence on data going forward allows Fed Chair Powell to be unlike the others. All things considered, not much has changed over the last 30 days and expectations for inflation in August are tame, with headline month to month being +0.09%. For this reason, we see tomorrow’s keynote speech being more in line with what we heard at the July 27th policy announcement and appearing less hawkish in nature.

Today’s slate of economic data was broadly better than expected. Q2 GDP improved from -0.9% to -0.6%, analysts were expecting -0.8%. The GDP Prices Index rose from +8.9% to +9.0%, analysts were expecting +8.7%. Nothing like looking at prices from 2-4 months ago, talk about backward looking. Initial Jobless Claims rounded out the 7:30 am CT slate and came in better than expected for the third straight week, after nine weeks of misses. At noon CT, the U.S. Treasury will auction $37 billion 7-year Notes. Last night, NVDIA and Salesforce both released disappointing earnings and are down 2.5% and 8% just ahead of the bell.

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