Morning Bid: Dollar rockets as Powell trumps AI
Raindrops hang over a Wall Street sign outside the New York Stock Exchange in Manhattan on October 26, 2020 in New York City, New York, US. REUTERS/Mike Sager/File Photo Get Licensing Rights
A look at the day ahead for US and global markets from Mike Dolan
Hopes of a late-August rally in world markets fizzled out as investors looked forward to a deeper assessment of the long-term interest rate trajectory from the Federal Reserve boss on Friday – pushing the dollar higher again in the process.
Fed Chairman Jerome Powell will deliver the keynote address at the annual Central Banking Symposium in Jackson Hole at 1405 GMT. Nervousness about the speech largely explains why discussion about artificial intelligence again dampened Thursday after this week’s stellar Nvidia results.
And given the growing contrast in economies on both sides of the Atlantic, Powell’s words are expected to convey a different message from European Central Bank President Christine Lagarde, delivered later in the day at 1900 GMT.
Business surveys for August this week underscored that activity is shrinking in the euro area but still expanding in the States. The omission strengthened the picture in another poll by Germany’s Ifo on Friday.
As a result, the euro/dollar exchange rate fell to its lowest level in more than two months on Friday – 4.5% below July’s peak, as US long-term bond yields began their upward march through August again .
The dollar index rose to its highest since June 7 against most-traded currencies (.DXY), while sterling also retreated sharply to June levels as UK economic clouds gathered.
The dollar’s jump ahead of the Jackson Hole set-piece was a modest change in Fed futures pricing, which now indicates a more than 50% chance of a Fed rate hike to 5.5-5.75% next month.
While there hasn’t been a major change in pricing, the changing constraints put the onus on Powell to return to the market if he really wants to signal that the Fed is done with its rate hike campaign.
Some of his aides indicated on Thursday that the central bank has indeed done enough to tighten the policy rate – and may continue to drive inflation down by keeping rates high longer. This allows it to reduce the traditional lag in credit tightening while keeping the long-term bond markets under its control.
Philadelphia Fed President Patrick Harker and Boston Fed President Susan Collins tentatively welcomed the recent jump in bond market yields, which complement the Fed’s work to bring inflation back to the 2% target and prevent another hike Can do.
Collins said, “We may be close, we may even be at a place where we will stop.”
“The higher long rates are consistent with the understanding that this will take some time,” Harker said.
Certainly the latest US economic data is showing no signs of weakness, with jobless claims falling below forecast in the latest week and orders for core durables still resilient in July.
Meanwhile, market pricing for ECB and Bank of England policy rates has declined sharply in recent weeks. Money market and swap rates are now ending the ECB campaign at 3.75% with no further increases in this cycle. Implied BOE terminal rates have fallen sharply to 5.5% from 6% in July.
This helped European shares to improve the gloomy equity market mood of the past 24 hours, where Asian shares were in the red after Wall St’s sharp technical-led reversal on Thursday. US futures were mostly flat ahead of Friday’s open.
Treasury yields moved slightly higher overnight, while oil prices edged up again.
China’s stock markets were also in losses, sources told Reuters, but authorities are planning to cut stamp duty on stock trading by up to 50% – in another attempt to revive the country’s struggling stock market. The authorities have also increased the defense of Yuan.