The Fed: Reverse Jawbone

Market Snapshot

The Fed: Reverse Jawbone

The Fed redoubled its campaign to undo the impressions left by its previous statements; China helped pick up the pace of its trade negotiations with the U.S.; Brexit brinkmanship saw no breakthrough.

"With the muted inflation readings we've seen coming in, we will be patient as we watch to see how the economy evolves"
Fed Chair Jerome Powell

After an onslaught of objections from financial markets and the Executive Branch to the projected path of rate hikes announced in December, voting members of the Fed’s Open Markets Committee unleashed their own high-profile publicity campaign, culminating in live interviews of Boston Fed president Eric Rosengren and  Fed Chair Powell on Thursday, January 10.

The overall message was that the Fed is far from oblivious about the possibility of a slowdown, despite the impression left by its previous speeches and forecasts. In particular, there was emphasis that its “data-dependent” forecasts and actions will take that possibility into account while making rate decisions over the coming months.

Financial markets seem to have embraced the more conciliatory messaging. The campaign,  beginning on January 4, saw the S&P 500 move up by as much as 3.8% during the day,  in response to Fed Chair Powell's statement that the current level of inflation would give the Fed room to be "patient" in deciding whether to continue raising interest rates. Since the beginning of trading on that day, the index has risen about 6.3% by the end of January 10. That’s brought the S&P 500 up 3.5% for the year to date.

Going forward, the Fed will have additional opportunities to speak more formally about its views than in previous years, having promised to hold press conferences after each of its eight meetings as opposed to once per quarter.  Whether that will add or detract from its current perceptions of its level of clarity is yet to be seen.

China: Incentives

A close reading of the statement issued at the end of the three-day negotiating session on U.S.-China trade reveals that both sides now see clear benefits to making a deal, and appear to believe that an agreement could be possible within the foreseeable future -- a solid improvement in the tone of  negotiations.

Further evidence comes from the January 11th announcement by U.S. Treasury secretary Mnuchin that Vice Premier Liu He, China’s top economic official, is expected to travel to Washington in the coming weeks for a new round of trade talks. That’s after Mr. Liu made a surprise appearance at the negotiation sessions in China, suggesting that the government views the possible next round as worth the trip.

Separately, factory-gate inflation (China’s equivalent measure of producer price inflation) rose 0.9% year on year, a two-year low, while consumer prices rose 1.9%, lowest in 6 months. These figures are consistent with the People’s Bank of China latest reduction in banks’ required reserve ratio, intended to free up funds for lending and investment.

Brexit: Brinkmanship

Tuesday will see a much-anticipated vote in the House of Commons on the Agreement currently scheduled to come into force at the end of March. To sharpen the matter, an amendment, added 308-297, to the Brexit motion currently up for a vote on Tuesday could force Prime Minister May to propose a “Plan B”, within three days if her current plan fails to pass.  It might be a sign of desperation that Friday January 11 saw a single-source story about a possible delay in the implementation of the Brexit agreement generated a brief 1.1% upward move in the British pound vs. the U.S. dollar, as well as a 52-point surge in the FTSE 100 Index before both retreated in the face of denials.


Unless otherwise indicated, all prices Source: Bloomberg as of close of trading on January 10, 2019.


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