Notes From Underground: Mr. Powell, the Spotlight Was On You

Dear Jerome, You handled Wednesday’s press conference with great alacrity as most of the media tossed ridiculous softball inquiries, following the road map of the dot plots. The summary of economic projections needs to be tossed on the trash heap of academic pabulum. You almost got to that point as the non-financial media kept questioning the decision about three or four rate hikes. You correctly stated that the only decision that the FOMC made today was to RAISE the fed funds range to 1.5%-1.75 % and that the DOT PLOTS were only forecasts and not decisions. Chairman Powell actually got miffed when a reporter began citing the 2020 projections.

Chairman Powell became curt in noting that forecasts three years out are just that: forecasts. In trying to interpret the dot plots I will continue to rely on Art Cashin. (By the way, Rick Santelli argued with Steve Liesman about Powell’s move away from an academic-oriented explanation of the dot plots. Huzzah for Rick’s analysis.) The media did ask a few good questions, especially the question from the last reporter who actually bothered to inquire about the FLATTENING YIELD CURVE. Powell said he was currently not overly concerned about the recent contraction of the 2/10 yields. Yes, he is aware that such action in the yield curve has rendered a high probability of a recession and noted that this view was much too dependent on so-called research data indicating such an outcome.

One thing Powell alluded to is the FOMC‘s continued acceptance of the Phillips Curve/Nairu model as credible as an inflation predictor as he bowed to the Fed’s research staff and the Bernanke/Yellen influence in the maintenance of the Fed bureaucracy. The most critical issue that the media failed to ask about was the RISING LIBOR and widening of the LIBOR-OIS SPREAD. This issue has been extensively covered by Bloomberg reporters Liz McCormick and Alexandra Harris. It is troubling that no financial reporter raised this question to Powell. Is the FOMC worried that the spread, which has more than doubled since January, is indicative of some problem in the global dollar funding markets? If so, shouldn’t the FED proceed with caution in its efforts to dance to the tune of its own forecasts?

The markets’ reaction to the FED‘s release and the press conference seemed DOVISH as the DOLLAR was sold after an initial rally. More importantly, GOLD and silver sustained a day-long rally. The EQUITY markets initially rallied but closed slightly lower as the news headlines turned to the Trump administration’s imposing $60 billion in tariffs on the Chinese in an announcement to be made Thursday. In the Powell press conference, the media did raise the issue of the possible negative impact on the global economy from a trade war. Chair Powell  asserted that the FOMC did discuss tariffs but did not entertain any solid opinion about the economic outcomes. The dollar weakness may have been a result of the tariff news but we will need to see more market action before accepting the price action with certainty. The yield curve did steepen a bit during the Powell press conference as the market interpreted the day’s Fed focus as somewhat dovish. This is something to watch as an indicator of market sentiment without as much influence from global politics.

***On Wednesday Rick Santelli had his traditional guest on FOMC day: former Fed Governor Mark Olson. The most interesting part of the Santelli early interview was that Olson revealed a point that has frequently been raised in Notes From Underground. The FED has a “tremendous amount of communication” with other central banks and there is a global harmonization of monetary policy. Olson further maintained that what other banks do in terms of monetary policy is built into the Fed models. While global monetary flows can be powerful the prominent idea is that the U.S. is dominant global economy and Olson went so far as to repeat an economic aphorism from the 1950s/60s: When America sneezes the world catches a cold.

I believe that this concept no longer holds as it appears that the Chinese have attained an equivalent role to the U.S. in impacting the global financial system. But what the Olson comments seem to reveal is that the Fed has a triple mandate: employment, inflation and the global financial system. For many readers who are unaware, I suggest going to research the G-30 and its impact on global central banks. The FED‘s triple mandate will not sit well with its detractors in Congress. This makes the unasked question about the LIBOR/OIS spread even more relevant. Now, about those tariffs.


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17 Responses to “Notes From Underground: Mr. Powell, the Spotlight Was On You”

  1. Chicken Says:

    If not equal, certainly the potential.

  2. asherz Says:

    Regarding Powell’s first press conference, it was a pleasure hearing clearly spoken testimony which did not require my wearing earphones to translate gobbledygook (Greenspan and to a lesser extent his successors).
    The burning question hanging over all- will there be three or four raises this year, or how many angels can dance on the head of a pin.
    As to dollar weakness, we’ve discussed this here before. This phenomenon has been going on for over a year, in the face of interest rate raises. A likely reason is the growing national debt with fiscally imprudent spending budgets agreed to on both sides of the aisle. Trillion dollar deficits loom right in front of us with nary a whimper from our elected officials. Not good for the reserve currency. Explaining yesterday’s weakness is like the daily explanation why the market was up 200 points or down by financial reporters. They have at the ready two sets of stories for the next morning. If the dollar had strengthened it would have been attributed to higher rates.
    Trees and not the forest.

    • yra harris Says:

      Asherz—the bogey of massive twin deficits coupled an administration trying to right past wrongs–their terms—-does not bode well for global capital.

  3. Stefan Jovanovich Says:

    We all are still struggling with the expectations revolution. Certainly, the economists are. Having “discovered” that current prices are always forecasts of what the buyers and sellers are thinking, they have done their best to reject their own Heisenberg moment. In a world of traded currencies, can any national or currency Bloc money be considered an international “reserve”? In a world of administered trade rules, can the small adjustments by the U.S. really be considered the opening salvoes in a trade war? These are themselves expectations that set prices, not “facts” that satisfy our Einstein need for absolute data and certain causes and effects.

  4. GreenAB Says:

    “The euro area’s private-sector economy grew at the slowest pace in 14 months in March, as service providers and factories struggled to keep up with demand.

    A composite purchasing managers’ index by IHS Markit slid to 55.3 from 57.1. That’s below the median estimate of 56.8 in a Bloomberg survey of economists, and marks a second successive decline from the 12-year high reached in January.

    “The loss of momentum since the buoyant start to the year has been quite dramatic,” said Chris Williamson, chief business economist at IHS Markit.


    -> Maybe it´s too early. But i still remember those “green shoots” (improving, yet still recessionary PMIs) during the Great Recession. So I´m watching for signs of the cycle to roll over.

    • yra harris Says:

      GreenAB–absolutely and much of it is due to politics .The Italian situation is far from resolved and the Macron/Merkel love affair is starting to come under pressure especially as Trump has disrupted the best laid plans and the protectionist inclinations of France will show up soon

    • David Richards (@djwrichards) Says:

      GreenAB, still watching and waiting for that potential May low in stocks. Fingers crossed.

      But to drop US stocks that low from here, one would expect a dollar rally too, something that looks unlikely that soon. However, the market has a tendency to fool everyone, and certainly a dollar spike higher would do that.

      • GreenAB Says:

        David: “GreenAB, still watching and waiting for that potential May low in stocks. Fingers crossed.”

        Don´t make too much of it. So far the Bradley Model worked pretty well in 2018.

        Major turn date 1/29 is still THE top. But also the last two minor turn dates 2/25 and 3/9 turned out to be at intermediate highs. But there´s no guarantee that the model will keep working (as it´s always the case with cycles). Though it suggests that we should decline from here into May, there´s also the posibility that 5/29 eventually turns about to be a high instead of a low. Remember – the date only suggests the turn, not the direction!

        Let´s see what happens. Many Technicians are still calling for new highs. But some of the analysts I follow identified major long term resistance recently hit by the Nasdaq. Without tech the market will have problems to rally.

        Please keep us updated on the Economic Surprise Index!

      • GreenAB Says:

        Offtopic: Just had a little fun, looking at a chart of 1987. The whole sequence from the top has some similarities to today. Especially when you compare what happens after the last swing high – beginning of October 1987 vs. the recent high in March 2018. Almost the same structure. Today could very well be Friday, October 16th. The good news is – the structure might be similar, but the the moves are not as big as back then. So if Monday happens something, i´d guess that a plunge would go to around 2.400 or so.

        No prediction, just having fun with charts. With Trump in the WH, anything is possible. 😉

      • David Richards (@djwrichards) Says:

        GreenAB. Thanks for all that. Yes, I see May and July are key targets in time. A high in May would constitute (another) cycle inversion. A series of cycle inversions can denote a major change in trend. Currently we consider the market to be in consolidation mode rather than in uptrend or downtrend.

    • David Richards (@djwrichards) Says:

      The Citi economic surprise index for EU gave an early warning as it has been collapsing since January, as I posted a few weeks ago. Meanwhile, the same index for the US rose sharply. Possibly an after-effect of the EURUSD rising from 1.03 to 1.26 between Jan.2017 and Jan.2018.

      USD is in a multi-year bear market, but it will have a strong rally sometime. When EUR falls in a major retracement, it’ll boost EU economically again and imagine how strongly those lagging EU stock indices could react. Waiting for an opportunity to long EU stocks while hedging EUR. Or one could buy long-dated call options for EU stock index. Food for thought.

  5. Arthur Says:

    2010-2017. EU countries with negative real wage growth

    Greece -19.1%
    Cyprus -10.2%
    Portugal -8.3%
    Croatia -7.9%
    Spain -4.4%
    Italy -4.3%
    UK -2.4%
    Belgium -1.1%
    Finland -1%

    European Trade Union Institute

  6. Arthur Says:

    Yra, what’s your view about the mass media statement:

    “Putin Won. But Russia Is Losing”

    • yra harris Says:

      Arthur—that is preposterous —which media outlet had that—what does it mean???

      • Arthur Says:

      • yra harris Says:

        Arthur–ok so now I know it is written by one of the greatest self-promoters I have read –Ian Bremmer.Another pundit i attach the label to of ,seldom right,never in doubt.Yes,Russia has its issues but Obama’s great mistake of letting Putin back in the the mid-east means that nothing can happen without Russian say so—this has made russia a significant player and allows him to be disruptive.Also,he has a strong hand to play in Europe as I have argued for ten years because of gernard Schroeder and the Nord Stream projects—Bremmer focuses on narrow things where Putin has a larger picture–under estimate him at your own risk–and because of his rise in Syria nothing with Iran and Turkey can take place without Putin–quite a bit of leverage in the Great Game if you ask me

      • Arthur Says:

        OK. Thanks!

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