Fed chairman’s prepared Senate testimony adds the caveat ‘for now’ in relation to the rate hike track. With less hawkish stance, equity markets rise

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By Nick Smyth

In the US, Fed Chair Powell delivered his semi-annual address to the Senate where he largely stuck to the script that the US economy was in good shape, the risks to growth were roughly balanced and added further gradual rate rises were warranted “for now”. 

The inclusion of the phrase “for now” suggests that the Fed will become more data dependent as the Fed funds rate approaches neutral and may speed up hikes, if inflation moves “persistently” above target, or stop them completely, say if downside growth risks materialise.

Market expectations of Fed tightening didn’t change much after Powell’s comments; the market prices a more than 90% chance of a September rate rise and prices the Fed funds rate to rise to around 2.7% next year (which is below Fed officials ‘dot’ forecasts but close to the central bank’s estimates of the neutral rate).  The US 10 year Treasury yield was unchanged on the day and there was a further modest flattening in the yield curve, with the 2s10s curve moving below 25bps – its flattest level since 2007.  Powell appears before the House tonight. 

While there wasn’t much reaction in the rates market to Powell’s comments, US equities moved higher, with the S&P500 up 0.5% on the day as I write (and up 0.8% from when Powell’s testimony was released).  It’s possible the equity market had attached some risk to Powell taking a hawkish stance, which might explain the rise that followed his testimony.  The NASDAQ is 0.7% higher, to a new record high, having shrugged off Netflix’s disappointing results after the bell yesterday, in which the company said it had added fewer subscribers than analyst expectations.  Netflix opened almost 14% lower today but has since pared that loss to be “only” 5% down from its pre-earnings level. 

Finally, the GBP has been the weakest currency overnight as politics continues to overshadow economic data.  The UK Government managed to narrowly avoid defeat on an amendment to the Trade bill that would have sought to keep the UK in the Customs Union if the Government couldn’t agree on frictionless trade with the EU by January 2019.  If the amendment were accepted (and the Government defeated), there was speculation there would be a leadership challenge on Theresa May and possibly a vote of no confidence from Labour.  GBP fell to as low as 1.3070 ahead of the vote, but has since recovered slightly to 1.3120 after the amendment was defeated (leaving the GBP still the worst performing currency on the day).  So Theresa May hangs on by the skin of her teeth but the political outlook remains highly uncertain.  The UK labour market report met expectations and market pricing of an August BoE rate rise remained around 85%.  UK CPI is released tomorrow.


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