Morning Commentary: Fed Chairman Powell – In the Hot Seat

Foreign Exchange - Morning Commentary

Fed Chairman Powell – In the Hot Seat

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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
As we arrive this morning, the post-analysis of the stellar U.S. jobs report from Friday continues to reverberate through the markets. Global equity markets are correcting lower, G7 interest rates and commodity prices are mixed, and the U.S. dollar is fractionally higher. The strong U.S. jobs report from Friday has dampened hopes for additional rate cuts over the next nine months, but expectations remain very high for a Fed rate cut on July 31. While Friday’s report was above expectations, job growth in 2019 has slowed to 172,000 average monthly job gains versus last year’s 223,000 per month.
While markets are unsure of the next steps to take regarding the future path of U.S. interest rates, what is 100% certain with little doubt or confusion is the fact that Fed Chairman Powell is increasingly finding himself between a rock and hard place. He is under tremendous pressure from the White House to lower interest rates and is a constant target of President Trump’s tweets; this brings into question the Fed’s ability to remain independent, not knuckle under to political pressure, and to continue to take the appropriate steps with regards to the economy and inflation (see story about Turkey below).
Fed Chairman Powell will be going before Congress for his semi-annual testimony with regards to the state of the economy on Wednesday and Thursday. While this can be a three-ring circus at times, it will provide the Fed Chairman the opportunity to clarify and stake out the Fed’s thinking regarding the state of the U.S. economy and monetary policy. In addition to Chairman Powell’s testimony, markets will be focused on the Fed minutes from June on Wednesday and CPI and PPI data later this week. Expect another volatile week ahead but with investors keying off Chairman’s Powell’s testimony on Wednesday and Thursday.
  • Central bankers are increasingly coming under political pressure, but the worst example has been Turkey. President Erdogan, like many political leaders, believes that his central bank is undermining his efforts to govern and boost the Turkish economy. He took the extraordinary step over the weekend to fire his head of the Turkish central bank, whose four year term was set to run until 2020. Markets have reacted strongly with Turkish 10-year yields up 69 bps to 16.19%; the Turkish lira has lost 1.62% of its value against the U.S. dollar. The notion of an independent central bank still carries a lot of weight with investors.
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