Being the Fed Chief ain’t easy. There are so many competing voices divining the economic outlook, second-guessing policy decisions, and purporting secret knowledge of your thinking. Jerome Powell has had a particularly hard time of it because Donald Trump has entered the fray where most previous Commanders-in-Chief have avoided that temptation. The markets too have tried to drag the Fed along by the nose towards proverbial quantitative easing waters, but it isn’t clear whether this technocratic beast is thirsty. Even though our weekly commentary has suggested the US employment outlook is deteriorating, the very positive Non-Farm Payrolls print on Friday has caused the market to recognise the gulf between the Fed and market positions. Jerome Powell is speaking over each of the next three days, which will provide ample opportunity to redress this disparity, but it is unclear whether he will take it.
Bottom line: The efficacy of further policy easing has been under debate for some time. The recently observed asset hotspots also make policymakers reticent to add more punch to the bowl. Fiscal policy is the way out, but the Fed does not comment on fiscal policy matters, but perhaps it should. Donald Trump shouldn’t be the only one breaking convention when it’s this important.
The People's Bank of China’s (PBoC) policy of increasing liquidity is failing to translate to lower borrowing costs for companies, providing a lesson to other central banks considering similar action. The PBoC has been gradually lowering the reserve requirement—the amount of money banks must hold against their loan book—since April 18th to boost liquidity to the corporate sector. China's interbank repo rate, a key gauge of borrowing costs within the financial system, is at the bottom of its range since the PBoC began monetary easing in 2011. Earlier this year, the Chinese government seized Baoshang bank, the first bank seizure since 1998, which has increased perceptions of credit risk and blocked liquidity to those whom the policy has targeted.
Other central banks that are poised to provide monetary stimulus are already wary of their policies' effectiveness, and China's current situation will only reinforce their doubt. Earlier this year, the European Central Bank (ECB) announced a similar package of cheap lending to banks. When the toppy asset prices in the EU are set against a deteriorating economic backdrop, a similar veil of credit risk should be readily perceptible. The implications of this realisation would be a similar reduction in what the central bankers' term the 'transmission mechanism of monetary policy'. Perhaps this isn't a Chinese problem after all…
Bottom line: Christine Lagarde, the incoming ECB President, appears to be of a similar mindset to her predecessor, but lacking his technical expertise. It will be all the more crucial for her to think independently and challenge the status quo when these underlying dynamics shift. Perhaps more importantly, it will be a test of her political mettle when a change is required, fighting an uphill battle against entrenched bureaucracies.
The Dollar trended higher during yesterday’s trading as markets predicted a slower path of interest-rate easing in the US. This morning, Sterling continued its slide lower, depressing the pair to levels not seen sustained since April 2017.
Yesterday, the pair traded relatively flat and in a tight range as no fundamental economic data was released. Markets were also preoccupied with the fallout from Deutsche Bank’s announcement. Fresh selling pressure on Sterling has driven the pair lower this morning as markets predict a poor figure in tomorrow’s UK Gross Domestic Product (GDP) release.
Federal Reserve Chair Jerome Powell’s testimony later today is likely to be a key driver for the pair, currently trading in a tight range. The trade-weighted Dollar Index has again moved past the 100 and 200-day moving averages after finding resistance at those levels yesterday. There’s little positivity for the Euro as markets expect fresh quantitative easing in the near to mid-term.