Today’s market analysis on behalf of Michael Brown Senior Research Strategist at Pepperstone
DIGEST – Fresh moves against the Fed’s policy independence made for a volatile start to the week yesterday, as a ‘sell America’ vibe briefly took hold. Today, US CPI highlights the docket.
WHERE WE STAND – Where the hell do you start with a day like yesterday!?
Unless you’ve been living under a rock, you’ll know by this point that, on Sunday evening, news broke that the Fed had been served with subpoenas, by the Department of Justice, requesting documents associated with, and threatening a criminal indictment over, the ongoing renovations of the Eccles Building.
That was, ostensibly, what the subpoenas were about. In reality, we all know that this has nothing to do with building work, and is simply the latest episode in the ongoing Trump-Powell feud, with the Trump Admin throwing around lawsuits in an attempt to pressure the Fed into giving them what they want – namely, lower interest rates. To reiterate, this isn’t a construction case, but one that strikes at the very heart of Fed policy independence, in seeking to intimidate policymakers into doing the Administration’s bidding.
Now, attacks on the Fed are not new. What is new, however, is Chair Powell facing down these attacks, having issued a forthright video statement, outlining the true rationale behind the subpoenas, while stressing that he will continue to carry out the job that he has been confirmed, by the Senate, to do, in an independent manner.
Why, you may well ask, is Powell now choosing to rebut these threats to independence, having previously tried to stay above the fray. I don’t know, definitively, the answer to that, however would imagine that the escalation in matters to the threat of criminal charges has changed Powell’s calculus, and change in stance.
As for the implications of this, I’d imagine they look something like this:
– There now being a higher chance that Powell stays on as a Governor after his term as Chair expires, in an effort to guard against the erosion of policy independence
– A higher chance of Governor Cook winning her Supreme Court case, amid the blatant sham nature of the accusations that both she and Powell face
– Significant complications over the nomination of Powell’s successor as Chair, with Congress seeking to block nominations until legal matters are resolved;
– A higher bar, in the short-term, for rate cuts, which were already a ‘long shot’ after Friday’s jobs report, with the Fed now not wanting to be seen as acquiescing to political pressure
– Huge questions over who on earth would take the Chair job, under these circumstances, and whoever that individual is starting the job with somewhere close to zero credibility in the mind of market participants
As market participants digested all of the above, the reaction was a relatively predictable one. Not the ‘traditional’ risk on/off dynamics, but a shift back to the ‘sell America’ vibe that we’ve seen on almost every occasion that the Fed’s policy independence has come under threat. We all know the playbook by now – sell the dollar, sell Treasuries, trim exposure to US equities, and buy precious metals. That’s exactly the playbook that was in effect yesterday.
Stocks, mind, only seemed to care about the potential loss of Fed policy independence for about half a day, before dip buyers emerged en masse, and saw losses erased. I’d stress, here, that the fundamental bull case remains a robust one to my mind, with the key question now being whether noise on the Fed front dies down enough to allow market participants to re-focus on it. In any case, financials underperformed notably on the day, on the back of a different Trump policy, namely a desire to cap credit card interest rates at 10% for a year. If such a policy is enacted, all it’ll do is limit credit availability to those on lower incomes, and with lower credit scores, deepening inequalities and the ‘affordability crisis’ that Trump is attempting to solve. The obvious trade is short credit card names/long BNPL firms as a pair, though the shit might’ve already sailed on that front.
Anyway, what we saw elsewhere was all pretty self-explanatory. The greenback trading softer against all major peers, Treasuries softer across a steeper curve as Fed credibility is called into question, and chunky gains across the precious metals space, with gold clearing $4,600/oz, and silver popping above $85/oz – so much for the BCOM rebalancing being the ‘end of the world’ for those two!
I remain inclined to continue riding the momentum higher with those two, as well as betting on a continued steepening of the Treasury curve, but must admit to having lost some degree of conviction in my dollar longs, at least until the dust settles on the Fed/DoJ front, given the higher risk premium that must now be priced into the buck.
LOOK AHEAD – Last month’s US CPI figures highlight today’s docket, though I can’t say that they’ll mean much for the near-term policy outlook.
There’s a few reasons for this, though chiefly it boils down to the FOMC’s reaction function leaning heavily into the ‘maximum employment’ side of the dual mandate, coupled with a hangover from October’s government shutdown continuing to skew the CPI metrics lower than they otherwise would be. In any case, both headline and core CPI are seen having risen 2.7% YoY, though unless the print deviates materially from those consensus figures, we should see the USD OIS continuing to discount about a 5% chance of a Jan cut, and little more, come the end of the day.
Besides that, we have October US new home sales (too stale to worry about), as well as a 30-year Treasury auction, coming after well-received 3- and 10-year supply yesterday. BoE Governor Bailey is also due to speak though, weirdly, his remarks won’t be made public until Friday.
Finally, Q4 earnings season kicks off on Wall St before the opening bell, with JPMorgan (JPM) and Delta Airlines (DAL) set to report.