Jerome Powell's Speech Leaves Traders Puzzled Over Dollar's Direction

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Central Bank

Summary:

Federal Reserve Chair Jerome Powell's speech sent mixed signals to the markets, initially causing the U.S. Dollar to weaken, but the currency later recovered. Powell acknowledged that tightening financial conditions and surging bond yields could impact future interest rate decisions.

The foreign exchange market experienced notable turbulence following a high-impact speech by Federal Reserve Chair Jerome Powell, leaving traders and investors puzzled about the future direction of the U.S. Dollar.

Initially, Powell's comments seemed to weaken the Dollar, causing both Pound Sterling and the Euro to rally. Powell stated that U.S. financial conditions had tightened considerably in recent months, highlighting the significant role played by surging long-term bond yields. He emphasized that these conditions could have implications for monetary policy, introducing an element of uncertainty into the market.

Before Powell's speech, financial markets were uncertain about whether the Federal Reserve would tighten financial conditions with another interest rate hike, possibly in November or December. The expectations of further rate hikes and the belief that the Fed would maintain high interest rates over an extended period had been key drivers of the Dollar's rally from August to October.

Jerome Powell's Speech Leaves Traders Puzzled Over Dollar's Direction_1

Powell's remarks appeared to trigger a Dollar selloff, pushing bond yields lower and suggesting that the market perceived a decreased likelihood of further rate hikes. The Pound to Dollar exchange rate rose by a third of a percent to 1.2174, while the Euro to Dollar exchange rate climbed two-thirds of a percent to 1.06. Notably, the Dollar lost ground against all major G10 currencies, reflecting the speech's high-impact status.

However, the market's reaction was not one-sided. Currency markets soon witnessed a reversal in price action, with the Dollar regaining some of its earlier losses. Powell's speech conveyed a sense of cautiousness on the Fed's part, highlighting the importance of economic growth and labor market resilience.

"We are attentive to recent data showing the resilience of economic growth and demand for labor. Additional evidence of persistently above-trend growth or indications that the labor market is no longer easing could put further progress on inflation at risk and might necessitate further tightening of monetary policy," Powell noted.

In his discussion on bond yields, Powell expressed a more relaxed stance, suggesting that they were a reflection of the robust U.S. economy. These comments indicated a level of comfort with recent developments that contrasted with the initial observations that had moved the Dollar.

The overall market response remained uncertain. While Powell's speech raised questions about the Fed's approach to tightening and its potential impact on the Dollar, the fact that the Pound-Dollar exchange rate remained unchanged at the time of writing suggests that Powell's speech might not have delivered a definitive shift in the currency landscape. The foreign exchange market continues to grapple with the implications of the Fed's statements, waiting for further clarity.

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Daily News

[Quick Facts]

1. Biden requests $100 billion in aid for Israel and Ukraine.

2. WSJ's Timiraos expects the Fed to pause rate hikes in November.

3. Fed's Bostic says lowering inflation remains the main mission.

4. Fed Chair Powell hints at November pause in rate hikes.

5. The U.S. seeks to buy 6 million barrels of oil for reserve at a higher price than before.

[News Details]

Biden requests $100 billion in aid for Israel and Ukraine

U.S. President Joe Biden launched a new mission on Thursday to convince Americans they should spend billions more on supporting Israel and Ukraine in their wars. He said in an Oval Office address that U.S. support is critical for the two key allies who are locked in conflict. A U.S. official said Biden's request for emergency appropriations included a total of about $100 billion that would be spent on Israel and Ukraine over the next year, as well as securing the U.S.-Mexico border. Any appropriations measure would have to pass both the House and Senate. However, Republican lawmakers oppose spending on Ukraine, and the Republican-led House has been without a speaker for 17 days.

WSJ's Timiraos expects the Fed to pause rate hikes in November

Powell's speech suggests that rising long-term U.S. bond yields could cause the central bank to pause its historic rate hikes as long as recent efforts to lower inflation continue to make progress, wrote Nick Timiraos, a correspondent for The Wall Street Journal, yesterday.

That's because the rapid rise in long-term interest rates over the past month could slow economic growth and the continued rise in borrowing costs could be deemed as another Fed rate hike.

Timiraos also noted in the article that strong economic activity makes it difficult for the Fed to announce an end to rate hikes, and Powell did not do so on Thursday, but his comments pointed to a recent decline in inflation and a marked cooling of the labor market. This suggests a comfortable policy stance from the Fed, raising the bar for another rate hike in December or beyond.

Fed's Bostic says lowering inflation remains the main mission

Getting inflation back to the central bank's 2% target is a top priority, Atlanta Fed President Raphael Bostic said in a speech on Thursday. If policymakers see signs of further economic growth, it is possible to raise interest rates again. Considering uncertainties and risk factors, as well as the progress we have made, the Fed is proceeding cautiously.

Bostic had expressed support for a pause in rate hikes, but he did not comment on the current economy or the current policy outlook this time. His attitude has clearly changed to a hawkish one in the speech.

Officials are now leaning toward keeping policy unchanged next month after the recent rise in bond yields led to a tighter financial environment.

Fed Chair Powell hints at November pause in rate hikes

Federal Reserve Chairman Jerome Powell delivered a speech on October 19 (local time), saying that the strong performance of the U.S. economy and continued tightness in the labor market may require further tightening of borrowing conditions to keep inflation in check. But the recent rise in U.S. bond yields has caused a significant tightening of the financial environment, which may make the Fed's action less necessary. We must wait and see what happens, as rising bond yields may mean the Fed doesn't need to raise rates more.

However, Powell also cited uncertainties and risks to monetary policy, including recently elevated geopolitical risks.

After Powell's speech, markets were inclined to bet that the Fed had completed its current round of rate hikes. Futures tied to the Fed's policy rate are now digesting expectations of less than a one-third chance of another rate hike this year, down from about 40% before Powell's speech.

Overall, Powell's speech clearly signaled that there would be no rate hike at the November policy meeting, but it was also open to a further rate hike. Looking at Powell's recent speeches, he never signals a clear halt to rate hikes but is always open to another rate hike which requires a big change in data.

The U.S. seeks to buy 6 million barrels of oil for reserve at a higher price than before

The U.S. Department of Energy (DOE) said on Thursday it wants to buy 6 million barrels of crude oil to replenish the Strategic Petroleum Reserve (SPR), with 3 million barrels for December receipt and 3 million barrels for January receipt next year, as it continues its plan to replenish the emergency stockpile. It will continue to replenish the reserve through monthly tenders until at least May 2024, with the exact amount yet to be determined, the Energy Department added. The DOE wants to contract at $79/bbl or less, a price higher than the earlier range of around $70/bbl, but below the current $90/bbl for WTI crude oil. The Biden administration has said it hopes its repurchase strategy will provide good taxpayer returns.

[Focus of the Day]

UTC+8 14:00 U.K. Retail Sales (Sept)

UTC+8 20:30 Canada Retail Sales (Aug)

UTC+8 21:00 Philadelphia Fed President Harker speaks

UTC+8 00:15 Next Day: Cleveland Fed Chairman Mester speaks

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Alex

Economic

Wall Street went on a mini rollercoaster ride during Fed Chair Powell's speech. Powell's comments were mostly in-line with other officials and support the belief that policy might not be "too tight" and future rate hikes may be needed. Powell's comments support their higher for longer mantra, but fell short of signaling a rate hike was likely in December. Until inflation is much lower, the Fed will try to jawbone the market into thinking more hikes are possible.

Fed Chair Powell Key Quotes from prepared remarks:

Additional evidence of a strong economy may merit hiking
Geopolitical tensions are highly elevated and pose key risks
FOMC proceeding carefully given risks, hikes so far
Financial conditions moves can affect policy if persistent

The dollar extended declines after the release of Fed Chair Powell's speech. Fed Chair Powell said, "Additional evidence of persistently above-trend growth, or that tightness in the labor market is no longer easing, could put further progress on inflation at risk and could warrant further tightening of monetary policy." The initial market reaction was somewhat dovish as Powell acknowledged that persistent changes in in financial conditions could change the path of monetary policy. The bond market helped them take rates to restrictive territory that should break the economy and allow for inflation to fall to the Fed's target.

Fed Chair Powell's Q/A:

At the margin, yield rise could mean less need to hike
Fed has to let rise in yields play out, watch it

The long-end of the curve surged higher but pared gains, the 30-year Treasury yield settled around 5.05%, roughly 5.5 bps higher on the day. Powell noted that losses in commercial real estate are inevitable, but that they don't see it causing broader problems. With the risk of an immediate rate hike off the table the dollar settled softer against all of its major trading partners.

Source: ActionForex

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Thomas

Economic

Malaysia's ongoing truck driver strike, which started and remains largely limited to the east coast states, is threatening to once again disrupt the country's supply chain that is still going through a nascent recovery post-pandemic.

Transportation from raw materials like iron ore, steel bar and concrete products, to basic needs like food and beverages appear to be throttling in the past few days amid widely circulated WhatsApp messages calling for a truck drivers' strike until Sunday (Oct 22).

Several construction companies contacted by The Edge said that the current strike among the lorry drivers have reduced the productivity of their construction sites as many of the raw materials delivery did not come in.

A construction company executive said that if the strike prolongs for another few days, his construction site may have to stop work.

"Some of the work at the construction site has been disrupted as the deliveries of raw materials have been disrupted.

"If the situation continues, I think it will have an impact on some of our sites and we may have to stop work," he told The Edge when contacted.

Another construction executive pointed out some of the construction sites have reduced their activities to around 30% as the strike had actually started since the beginning of this month.

"It has caused delays to our project. We hope that the government will step in to solve this issue. The government should look into the matters and take appropriate action," he said.

Selangor and Kuala Lumpur Trucking Association (Seklta) secretary general Jeff Teh said some of the association's members have avoided serving the east coast region temporarily for fear of risking their drivers' safety.

The widely circulated calls for truck drivers to go on strike may lead to personal issues among the drivers who are seen as not being united with the striking drivers.

More stringent enforcement after several fatal accident

Teh explained that the current strike came about after a series of trucks being seized by enforcement agencies, which appear to be more stringent in enforcing the road transport laws, after several fatal accidents involving overloaded trucks.

"Overloading is not rare in Malaysia. So, there are two laws to deal with overloading, if a truck is overloaded up to 34.9%, it falls under the Road Transport Act 1987, which would result in two compounds of RM300, one each to the driver and to the vehicle owner.

"For overloading above 35%, it comes under the Land Public Transport Act 2010, which comes with a fine that could range between RM1,000 to RM500,000, with maximum imprisonment of two years, and the enforcement agency can seize the vehicle," he explained.

On Tuesday, local media reported that over 1,000 truck drivers demonstrated at the Kuantan Road Transport Department (JPJ).

This came after more than 1,000 lorry drivers staged a protest in Terengganu at the state's JPJ office on Oct 15. The drivers handed over a memorandum to the local police listing eight demands, including raising the allowance for loading by 50% and proposed a fine on load consignors in case of overloading.

These lorry drivers also demanded that drivers should not be fined and lamented that the weighing facilities at JPJ are not accurate.

While there is a proposal for the Ministry of Transport (MOT) to ease loading regulations, concerns that overloaded trucks could cause damage to the country's road need to be balanced.

The Malaysia Trucking Federation (MTF) had on Tuesday issued a statement that distanced itself from the strike and urged its members to "ignore any announcement, audio messages or any written statements by any parties" to plan a nationwide protest.

The federation called on its members to proceed with their normal daily operations, saying that they are obliged to obey the law and orders in Malaysia.

"Please be reminded that it is MTF's direction to promote the collaboration with other stakeholders that relate to our industry, so as to find solutions in the event of any conflicts or challenges," it said.

Calls for government intervention

Seklta's Teh said the association and MTF shared similar views, whereby they hope to resolve the overloading issues through constructive engagement with the government.

"We also organised a press conference before, our call is for JPJ to consider abandoning mobile weighing facilities for trucks, because they seem less accurate and those permanent facilities that are built along the highways are more accurate, and we don't mind heading there," he said.

Teh said Seklta also hopes the government could enact laws that in the event of overloading, enforcement agencies could engage with consignors in resolving this issue instead of penalising drivers and vehicle owners.

"To be fair, JPJ is heading in the right direction in addressing overloading, because those accidents can involve overloads of between 70% and 140%, which is dangerous," he said.

The government, particularly the MOT, appears to be in a catch-22 situation with the public calling for more stringent enforcement on lorry and trucks to ensure road safety while the transportation players are complaining that their rice bowls are being squeezed under current rules and regulations.

Source: The Edge Malaysia

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Justin

Central Bank

Economic

The Bank of England is navigating a narrow path between thrusting the UK economy into full-scale recession through further monetary tightening and easing off from its task of bringing down the inflation rate to 2%. Huw Pill, the Bank’s chief economist and executive director for monetary analysis and research, told an OMFIF audience on 16 October that the Bank might still have work to do to reduce inflation further. He left open how the Bank may still be thrown off course by the disturbed international environment.

Headline inflation falling, but some components proving persistent

The latest figures from the Office of National Statistics show that headline inflation in the UK is falling, with the consumer price index at 6.7% in September, holding steady from August. The most significant decrease in the monthly change was due to declining prices in the food and beverages category, while petrol and diesel contributed the most to the upward pressure on the inflation rate.

For now, markets are pricing in a high likelihood that the BoE will hold rates steady at 5.2% at the next meeting in November. But Pill insisted that ‘the [Bank of England’s] mandate is not to have declining inflation. It is to achieve the 2% target on a lasting and sustainable basis,’ adding that ‘We probably have work some to do in order to get back to 2%.’

The UK’s inflation remains highest among G7 economies. Over the long term, there are signs of more ‘persistent components of inflation’, which include ‘that part of inflation which will still be there at the 18-month to two-year horizon’.

Labour market looks tight, but data more difficult to interpret

According to Pill, the persistent components of inflation are associated with domestic pricing decisions, domestic cost dynamics and domestic wage-setting behaviour in the UK. The labour market still appears tight. ‘Official average weekly earnings data… looks very high, and has tended, if anything, to surprise to the upside.’

The underlying reason for wage growth will determine whether a monetary response would be needed. ‘Stronger wage growth driven by the right reasons – like stronger productivity growth – would certainly be something I’d welcome,’ Pill explained. But a wage-price spiral in response to the cost of living crisis ‘would be a cause for greater concern’.

More generally, labour market data are proving more difficult to interpret than in previous cycles. ‘Whether the tightness in the labour market is better represented by the unemployment gap, the level of vacancies or the ratio of vacancies to unemployment or the number of quits in the economy’ is unclear. ‘These are all indications which historically actually move quite nicely together,’ reflected Pill. ‘They have not moved as closely together over recent times, and that reflects some of the magnitude of big supply shocks.’ For the BoE, he admitted that these converging metrics has been a ‘big challenge for us to try and understand’.

Transmission of monetary policy less clear than in previous cycles

The length and depth of the current tightening cycle will also be influenced by the timing and effectiveness of monetary policy transmission. Pill was asked several times about the stated view of Swati Dhingra – the most consistently dovish of the Bank’s nine-person monetary policy committee – that only 20 to 25% of the monetary tightening since the Bank started raising rates at end-2021 had so far worked through. In answer, Pill indicated that the amount of effective tightening was appreciably higher than that range, although he did not give a more precise estimate.

Mortgage rates are still the primary metric of the impact of rate hikes on the wider economy, but this mechanism has become more complex than in other tightening cycles. Pill commented that, ‘on the one hand, the structure of the mortgage market has changed considerably. Mortgage rates are refinanced every two or five years. That is different from the world of 30 years ago where mortgage rates were very closely tied to the bank rate itself’. This complicates policy transmission, potentially causing lags.

At the same time, he pointed out that the BoE ‘are able to monitor [monetary policy transmission] much more closely, because we now have data on every mortgage’. More robust supervisory capabilities allow for a more granular understanding of the housing market and, therefore, a more finely calibrated policy response.

Uncertainty and economic shocks may spur revaluation of risk models

Monetary policy implementation has become more difficult in face of multiple exogenous shocks. Pill noted that as the supply side has become more uncertain, the ability to work out where excess demand is in the economy has become more complex.

To add, risk factors are compounding. On the frequency of macroeconomic shocks, Pill reflected, ‘The key question for us is, are these shocks at the tail end of a distribution, which will go back… to a normal bell shape? Or should we be thinking about a very different distribution of shocks?’ This question will be especially pertinent if violence in the Middle East escalates.

Spearheading this effort is Ben Bernanke, who is conducting a review of the BoE’s forecasting during times of major uncertainty. The review started this summer and is due to conclude next year, with the results set to be released in spring 2024. ‘I would hope that we would be able to see something and act on it relatively promptly, in the spring,’ stated Pill.

A reassessment of risk scenarios would also need to be effectively communicated to the public. At present, the Bank’s communications still revolve around a single fan chart. They may need to reconsider this, as we are clearly in a world of bigger shocks.

Source: Taylor Pearce

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Thomas

Palestinian-Israeli conflict

As we write this today there is no water or electricity in Gaza. Soon there will be no food or medicine either. An unprecedented humanitarian catastrophe is unfolding before our eyes. Every hour we receive more desperate calls for help from people across the Gaza Strip.

Over 2 million Palestinians live in Gaza. More than half are children. All are now subjected to the siege, further tightening a 16-year-old blockade. Israel’s order to all Palestinians living in northern Gaza and Gaza City to move to the southern part of the strip triggered an exodus towards an already massively overcrowded area. And there is nowhere else to go.

Gaza is one of the most densely populated places in the world. The 365 sq km area is bordered on one side by the sea, the other side is controlled and fenced by Israeli security forces. The remaining border with Egypt is closed for people fleeing the war and in between the area is bombarded - there is no safe place.

The death toll is rising and hospitals are flooded with wounded and injured people in need of immediate and at times complicated surgery. Thirteen United Nations Relief and Works Agency (UNRWA) staff have been killed; UN premises have been damaged, including medical facilities; and currently more than 500,000 people are sheltering in UNRWA schools.

The Answer to Killing Civilians Cannot Be to Kill More Civilians

What is taking place in Gaza may amount to collective punishment for the atrocities carried out by Hamas on Oct 7.

Last week’s attack on Israelis was horrendous - devastating images and testimonies continue to come out. Killing and maiming civilians and taking them hostage is a flagrant violation of international humanitarian law and may constitute war crimes. Hamas must be held legally accountable for its actions.

But the answer to killing civilians cannot be to kill more civilians. Imposing a total siege and bombarding civilian infrastructure in a densely populated area is not the solution. It will not bring peace and security to Israelis and to the region. This war comes from deep underlying grievances on both sides and only intense and genuine negotiations can make the changes that are required.

The laws of international armed conflict set minimum standards for the conduct of all parties with one consistent and permanent goal: To reduce the human suffering caused by conflict. The Fourth Geneva Convention relates specifically to the protection of civilians during times of war. This is in recognition that civilians and those taking no active part in the conflict - men, women and children - bear no responsibility for the conduct of parties to the conflict and must not be targeted in retaliation.

The Geneva Conventions prohibit the targeting of civilians and civilian infrastructure and attacks that do not discriminate between legitimate military targets and civilians. Attacks must not result in disproportionate loss of civilian life and damage to civilian objects even where there is a military objective, and collective punishment is prohibited. Violation of these fundamental obligations can constitute international crimes including war crimes and crimes against humanity.

Respect For Human Life

People in Gaza feel desperate - and abandoned by the international community. They are asking "Where is the UN and where is UNRWA?" The UN is in Gaza. UNRWA alone has more than 13,000 staff working round the clock with very limited resources that may run out at any time.

Even if the siege is lifted we do not have the resources to meet the immense need for water, food, medicines and psychological help. The UN cannot supply the civilian population even with basic life-saving materials unless it receives significant support. We call on all member states of the UN to express solidarity for UNRWA during this time.

But above all, we must act - we all have a duty, both moral and in law, to protect civilian populations. International law and respect for human life is never more important than in moments of despair, anger and polarisation.

A humanitarian suspension of hostilities must take place without delay to spare the loss of more lives. Israel must stop the siege, stop indiscriminate bombardment of civilians and facilitate a humanitarian corridor. Hamas must release all hostages unharmed immediately.

Humanity must prevail. Otherwise, there will be tragic consequences for the years to come, in Gaza, the region and beyond.

Source: Financial Times

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Forex

Stocks

Central Bank

Energy

Markets unsettled by geopolitics as oil rallies

Stocks markets fell deeper into the red on Thursday after widespread losses yesterday on the back of the tense mood in the Middle East that has fanned the rally in crude oil, which in turn is pushing up soaring bond yields even higher.

President Biden's unscheduled visit to Israel on Wednesday was marred by the bombing of a hospital in Gaza that prompted Arab leaders to cancel a planned summit with the US President. But although a ceasefire looks even further off than it did prior to this week's developments, there was some relief that Biden is stepping up efforts to get aid into the Gaza strip as well as urging Israel to proceed cautiously amid preparations for a possible ground offensive.

The ongoing risk of an escalation of the conflict that could draw in other regional powers such as oil-rich Iran driving oil futures up more than 3% at one point. A much bigger-than-expected drop in weekly US crude inventories added to the upside pressure.

Both WTI and Brent crude futures later erased some of those gains to close around 1.8% higher but gold maintained a sturdier uptrend. The precious metal has jumped more than 6% since the outbreak of violence in Israel on October 7 and it is trading higher today to test the $1,950/oz level.

Powell speech awaited as 10-year yield approaches 5.0%

Demand for safe havens failed to put a cap on bond yields although yesterday's auction for 20-year Treasuries did attract plenty of buyers. Nevertheless, concerns not just about the rise in oil prices but also about the recent run of solid economic indicators out of the United States has added fuel to the rally in Treasury yields.

The yield on 10-year Treasury notes reached a fresh 16-year high of 4.97% today, while the 30-year yield breached the 5.0% threshold for the second time in two weeks.

Fed officials have been questioning the need for additional rate hikes lately, arguing that the tighter financial conditions stemming from higher yields has done some of the work for them. But after the hattrick of data beats from the nonfarm payrolls, CPI and retail sales reports, investors have begun to price in a higher probability of one final 25-bps rate hike.

Speaking in London yesterday, Fed Governor Christopher Waller signalled a pause in November, saying he wants to “wait, watch and see”, but he did not rule out “more action” at a later point if needed. All eyes today, though, will be on the Fed Chair as Powell will be speaking at the Economic Club of New York (16:00 GMT) before the blackout period begins at the weekend.

Equities face growing headwinds

Stock markets took fright from the relentless upward march in bond yields, with all three of Wall Street's leading indices closing lower on Wednesday. Even if the Fed decides against raising rates further, the ‘higher for longer' reality is slowly sinking in for investors, with rate cut expectations pared back sharply this week.

After starting the week on a positive note following a strong set of bank earnings on Friday, stocks took a dive yesterday as rising borrowing costs took the steam out of the latest bounce, while the Israel-Gaza conflict further muddied the outlook.

Morgan Stanley was a major drag as the stock plunged 6.8% after the bank reported a 9% fall in its Q3 earnings. Tesla's results also disappointed and its stock looks set to extend yesterday's 4.8% drop, which came even before the earnings were announced.

However, Netflix could spread some joy today as its stock surged by more than 10% in after-hours trading when it reported impressive revenue and subscriber numbers.

Dollar's uninspiring performance

The US dollar was mostly steady on Thursday, failing to significantly capitalize on the spike in Treasury yields as well as the flight to safety. The dollar index remains below its October 3 peak, suggesting that FX markets are adhering to the shift in Fed rhetoric differently to bond markets.

The pound is trading at a two-week low as yesterday's hotter-than-expected UK CPI data did little to alter much rate hike bets for the Bank of England. The Australian dollar, meanwhile, is one of the worst performers today, weighed by a smaller-than-forecast increase in Australian employment in September, which slightly dented expectations of the RBA raising rates again. Stocks Pummelled as Yields and Oil Extend Gains, Dollar Firms Ahead of Powell_2