FED: Dot-Weary Powell Doesn't Make Much Of A Case To Cut (2/2)
Jun-18 20:51
For his part, Powell didn't make much of an effort to convince that the Fed could and should soon ease from what he called currently "modestly restrictive" policy, which left us wondering whether he was one of the more hawkish or less dovish half of the SEP table (9 of 19 participants saw 1 or zero cuts in 2025, while the remaining 10 pencilled in 2 or 3 cuts). His half-hearted commentary on the matter included: "I think we will get to a place more likely than not, where cuts will be appropriate. It could be a joint probability of a number of outcomes."
- Either way, he spent a lot of time talking down the message from the Dot Plot, particularly the outer years ("I would focus most on the on the nearer term, as you get out to the to the later years, it's it's hard for anybody to know where the economy's going."). He reminded several times about the uncertainty inherent in the SEP: "No one holds these rate paths with a great deal of conviction. And everyone would agree that they're all going to be data-dependent. And you can make a case for any of the rate paths that you see in the SEP." He basically dismissed the SEP as a "forecast in a very foggy time".
- Powell didn't explicitly say July was off the table for a cut, but his timeline for clarity made it pretty clear that September would probably be the next "live" meeting. He said "it takes some time" for tariffs to be seen in prices. "We're beginning to see some effects, and we do expect to see more of them over coming months."
- Noting again that it would take some months before the Fed would have sufficient confidence to cut rates, "It's very, very hard to say when that will happen. We know the time will come. It could come quickly. It could not come quickly. As long as the economy is solid, as long as we're seeing the kind of labor market that we have and reasonably decent growth, and inflation moving down, we feel like the right thing to do is to be where we are, where our policy stance is, and learn more. And in particular we feel like we're going to learn a great deal more over the summer on tariffs."
- He elaborated, "I think we can take the time to do [make a judgment] because unemployment is 4.2%. Wages are moving up. Real wages are moving up at a healthy clip now. And inflation is 2.3% headline [] over a 12-month basis. So it's a good economy and a solid economy with decent growth."
- He said in response to MNI's question about why there are no forecasts for rates to rise or stay steady through 2026, "people are writing down their most likely path. They're not saying there's 0 possibility of other things...people write down their rate paths and they do not have a really high conviction that this is exactly what's going to happen over the next two years. No one feels that way. They feel like, what am I going to write down? What would you write down? It's not easy to do that with confidence...We don't rule things in or out. Certainly a hike is not the base case at all."
- One modest surprise in Powell's press conference was that the FOMC is basically dismissive of the economic impact of the fiscal package making its way through Congress, saying they "didn't really talk" about it, the "effects will be at the margin", and that while they may be able to estimate its impact by the July FOMC, "it's not a major thing.". That's despite this being one of his four areas of uncertainty to watch ("trade, immigration, fiscal, and regulatory policies") and one of the reasons some see upside risks to inflation and activity later this year and into next.
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FED: Dallas's Logan Advocates For Standing Repo Enhancement As Reserves Shrink
May-19 20:11
Dallas Fed Pres Logan, formerly the head of the Fed's SOMA portfolio at the NY Fed, continued to advocate for banks to use Fed facilities including the standing repo facility and discount window in times of stress.
- Logan: "Depository institutions have greatly improved their operational readiness to borrow from the discount window. We should continue to reinforce the value of operational readiness so firms maintain these gains. And readiness is a partnership. At the Federal Reserve Banks, we are working to enhance our capacity to serve customers efficiently when they come to borrow...We should also continue to emphasize that borrowing from the window is an appropriate way for healthy banks to meet short-term funding needs—not something investors, ratings agencies or supervisors should criticize or question."
- "We can also enhance the SRF. As Roberto [Perli, current SOMA manager] described in his recent speech, experiments and market outreach by the New York Fed’s Open Market Trading Desk have found that conducting and settling the SRF operation in the morning, in addition to the current afternoon timing, makes the facility more effective by addressing intraday funding needs. I’m pleased that...the Desk plans to soon introduce regular early-settlement SRF operations. Central clearing of SRF operations would also make the facility more attractive and enhance rate control. That’s because central clearing would allow bank-affiliated dealers to net down their balance sheets when they borrow from the SRF and lend onward to other firms."
- Commentary at the panel discussion chaired by Logan was also noteworthy in pointing out that the Fed should look at a wide array of rates to signal reserve scarcity. Wrightson ICAP's Crandall noted that the Fed funds effective rate could be late in providing a signal: “The last way you want to measure the availability of liquidity in the overnight market is the fed funds market...the rate will eventually respond to changes in market conditions but it may very well be the last rate to do that.”
- Logan said (quoted by Bloomberg): “In my view, rate control is not just about keeping the fed funds rate in the target range...the fed funds market is small. And the FOMC’s desired stance of monetary policy must transmit smoothly into larger and broader markets — especially the repo market.”
- Of course, using the SRF and discount window are ways of ensuring market functioning while reserves shrink, allowing the Fed balance sheet to wind down further.
USDCAD TECHS: Corrective Cycle
May-19 20:00
- RES 4: 1.4296 High Apr 7
- RES 3: 1.4111 High Apr 4
- RES 2: 1.4024 50-day EMA
- RES 1: 1.4016 High May 12 / 13
- PRICE: 1.3925 @ 16:44 BST May 19
- SUP 1: 1.3814/3751 Low May 8 / 6 and the bear trigger
- SUP 2: 1.3744 76.4% retracement of Sep 25 ‘24 - Feb 3 bull run
- SUP 3: 1.3696 Low Oct 10 ‘24
- SUP 4: 1.3643 Low Oct 9 ‘24
Despite the latest move higher, the trend condition remains bearish in USD/CAD and Monday’s weakness confirms recent strength as corrective. A fresh cycle low on May 6 reinforces the bearish theme. A resumption of weakness would open 1.3744, a Fibonacci retracement. Note that moving average studies are in a bear mode position, highlighting a dominant downtrend. Key resistance is seen at 1.4024, the 50-day EMA.
US TSYS: 30Y Holds 5% Level Amid Broad Post-Downgrade Rally
May-19 19:39
Treasuries recovered from early weakness to close flat/stronger Monday, with bull steepening in the curve.
- Following on from Friday's post-close surprise downgrade of the US's AAA credit rating by Moody's, yields rose sharply in the early going.
- While over the weekend White House officials shrugged off Moody's decision, there was significant attention on the apparently deteriorating fiscal trajectory overnight as House Republicans cleared a procedural hurdle to get the "Big, Beautiful" tax bill closer to completion.
- 30Y yields notably touched their highest since Nov 1 2023 (5.0353%) - up 13.5bp from Friday's ratings downgrade announcement - before an impressive reversal lower on the day (just 1+bp up from pre-downgrade).
- Despite little in the way of headline catalysts - China expressed displeasure with the US's guidance against the use of some Huawei chips, bringing a brief risk-off reaction - Treasuries rallied alongside equities for the rest of the session (the TY upturn started with the equity cash open).
- We heard from multiple Fed speakers, including Bostic, Jefferson, Williams, and Kashkari, all of whom reiterated the FOMC's patient approach on cuts amid economic uncertainty, and Williams and Bostic in particular suggesting that the next cut wouldn't seriously be contemplated until after the summer. Reaction was limited however given the market's already-low implied probability of a cut before September.
- Data was relatively thin - Conference Board leading economic index had its sharpest drop since 2023 but avoided an outright recession signal.
- Latest levels: the 2-Yr yield is down 3.1bps at 3.9681%, 5-Yr is down 3.2bps at 4.0611%, 10-Yr is down 2.2bps at 4.4553%, and 30-Yr is down 2.6bps at 4.9183%.
- Jun 10-Yr futures (TY) down 2.5/32 at 110-08 (L: 109-20 / H: 110-09)
- Tuesday's schedule includes the Philly Fed nonmanufacturing survey along with another slew of Fed speakers, including Collins, Barkin, Musalem, Kugler, Hammack and Daly.
