During yesterday’s testimony to the Senate Banking Committee Fed Chairman Powell stayed close to FOMC’s recent script, dodging direct questions about the timing of rate cuts, instead redirecting attention to economic benchmarks: ‘more good data’ showing that inflation is on the path to ‘2% on a sustainable basis’. One fresh insight that Powell did offer was his comment that ‘inflation is not the only risk we face’, and further that ‘reducing policy restraint too late or too little could unduly weaken economic activity and employment’.
Powell’s testimony had little impact to implied rate cut probabilities: 72% chance of a September cut pre-testimony and 72.3% post-testimony. And the probability for a December cut was 80% pre-testimony and 79.9% post-testimony. Given this it should come as no surprise that U.S. treasury yields are virtually unchanged since Monday.
The dollar’s reaction to Powell’s testimony was modest vs. the G10, evenly splitting gains and losses. The dollar’s best 1-day spot return is +1.22% vs. NOK (taking its cue from lower oil prices).
The dollar lost ground against emerging market currencies: -0.48% vs. MXN, -0.43% vs. ZAR, and -0.38% vs. BRL, suggesting a shift to ‘risk-on’ sentiment.
The S&P 500 and Nasdaq 100 indexes reached new record highs yesterday, consistent with the risk-on theme. Powell not directly pushing back on market speculation of rate cuts before year-end has fueled a surge in risk assets.
Powell addresses the House Financial Services Committee today.
Tomorrow’s economic calendar includes CPI reading for June and weekly Initial Jobless Claims.
