Fed: Powell’s Dovish Comments Might Not Be The Whole Truth
Powell’s stance increased investors’ optimism, though the narrative sounds like a broken record. Meanwhile, the tapering clock may already be ticking…
While I usually finish the analyses with the fundamental discussion and start with the technicals, it seems justified to switch the usual order today. The reason is that a large part of yesterday’s and today’s pre-market price moves could be attributed to yesterday’s FOMC (and the following press conference), while today’s moves could be attributed to the aftermath of the above, as well as to the tensions preceding today’s initial jobless claims numbers.
Look at Everything Powell Does
With Jerome Powell, Chairman of the U.S. Federal Reserve (Fed), conducting his dovish orchestra on Jul. 28, the maestro did what he often does during FOMC press conferences. To explain, I wrote prior to the announcement:
While the PMs may record a short-term bounce – which often occurs following Powell’s pressers – lower lows are still likely to materialize in the coming months.
And with the man living up to his reputation at 2:30 p.m. ET, his predictability resulted in another example of ‘PMs up, USD Index down.’
Please see below:
However, because the price action was largely expected, it’s likely another case of ‘been there, done that.’ For example, the PMs bounced and the USD Index sank following the last four FED meetings. However, after the sugar highs wore off and reality reemerged, the reversal of fortunes left the PMs on the wrong side of happiness. As a result, is this time really different?
To explain, we still expect the FED to announce its taper timeline by (or before) its Sep. 21/22 policy meeting. And while the surging reverse repurchase agreements (another $965 billion sold on Jul. 28) are the fundamental equivalent of a taper, if Powell utters the words, it will have a much greater effect on the financial markets. Thus, while the FED Chairman remained staunch in his dovish stance, signs of slippage are already emerging.
Please see below:
Source: U.S. FED
To explain, the FED released its standard statement on Jul. 28, and as expected, ~$120 billion per month of QE remains on autopilot. However, what differs from June and now is that the FED added the underlined section above. And while the FED parrots “substantial further progress” as its criteria for reducing its bond-buying program, the mere mention of “progress” is a subtly hawkish shift. For context, the identical paragraph below (released following the FOMC meeting in June) made no mention of progress whatsoever.
Source: U.S. FED
Furthermore, Powell said the following about the labor market during his press conference:
“I’d say we have some ground to cover on the labor market side. I think we’re some way away from having had substantial further progress toward the maximum employment goal.”
However, during his opening statement, he said:
“As with overall economic activity, conditions in the labor market have continued to improve. Demand for labor is very strong, and employment rose 850,000 in June, with the
leisure and hospitality sector continuing to post notable gains. Nonetheless, the labor market has ways to go. The unemployment rate in June was 5.9 percent, and this figure understates the shortfall in employment, particularly as participation in the labor market has not moved up from the low rates that have prevailed for most of the past year. Factors related to the pandemic, such as caregiving needs, ongoing fears of the virus, and unemployment insurance payments, appear to be weighing on employment growth. These factors should wane in coming months, leading to strong gains in employment.”
“In coming months?” That sounds a lot like Sep. 21/22…
In addition, another subtly hawkish shift was Powell’s nonchalant attitude toward the Delta variant. While the recent spike offered the perfect opportunity for him to use it as an excuse, the FED Chairman essentially brushed aside its potential impact.
He said:
“With successive waves of COVID over the past year and some months now, there has tended to be ... less in the way of economic implications from each wave, and we will see whether that is the case with the Delta variety.”
On top of that:
Source: CNBC
What’s more, Powell said the following about inflation during his opening statement:
“Inflation is running well above our 2% objective, and has been for a few months, and is expected to run certainly above our objective for a few months before we believe it’ll move back down toward our objective. The question of whether we’ve met that objective, formally, is really one for the committee to make.”
Could Inflation Overshoot the FED’s Forecasts?
Well, even though the FED increased its headline Personal Consumption Expenditures (PCE) Index forecast from a 2.4% year-over-year (YoY) rise to a 3.4% YoY rise on Jun. 16, another dose of reality could be forthcoming. For example, with the PCE Index data scheduled for release on Jul. 30, the YoY percentage change in the Commodity Producer Price Index (PPI) implies a print of roughly 3.75% to 4.25%.
Please see below:
To explain, the green line above tracks the YoY percentage change in the commodity PPI, while the red line above tracks the YoY percentage change in the headline PCE Index. If you analyze the right side of the chart, you can see that a material gap is clearly visible. As a result, inflation is still likely to overshoot the FED’s already drastically upgraded forecast.
As further evidence, the Richmond FED released its Fifth District Survey of Manufacturing Activity on Jul. 27. And while the composite index rose from 26 in June to 27 in July (an all-time high), “the indexes for inventories of raw materials and of finished goods declined, as both of these indexes hit record lows, and vendor lead times continued to lengthen.” For context, low inventories and rising vendor lead times are extremely inflationary. Not only do they signal that businesses are running low on raw materials (meaning that producers have the pricing power), but shipping delays add upward pressure, as businesses have to compete for what little supply is available.
Please see below:
However, even more newsworthy, the Richmond FED’s price paid index, prices received index, and its wages index all hit new all-time highs in July.
Please see below:
Source: Richmond FED
Finally, with 3M the latest company to sound the alarm on inflation, the American conglomerate is knee-deep in the chaos. For context, 3M manufactures products for all kinds of businesses, including those within the automotive, health care and consumer industries.
When asked during the company’s second-quarter earnings call on Jul. 27, “when do you expect commodity inflation to peak?” CFO Monish Patolawala said the following:
“So if you're asking specifically on commodities, I think it's a really hard one to call. For example, I would tell you, when we first gave our guide of $0.30 to $0.50, which has now been guided to $0.65 to $0.80, I would tell you, what we have seen is a broad-based increase in all commodities, whether it is polypropylene, chemical, resins we are seeing in our outsourced manufacturing goods, not just the labor cost but other commodities that go into that also getting passed. And then, logistics cost has continued to be a pretty strong headwind. Where that will peak, I think, in my view, and I may be wrong here, at some point, demand and supply need to start settling itself out.
There's a lot of demand. There's not enough supply based on all the V-shape recovery with the congestion in the ports, etc. And until that stabilizes itself out, I think we're going to continue to see inflation.”
And how is the company responding to the inflationary pressures?
Source: 3M/The Motley Fool
The Clock Is Ticking…
Piecing it all together, what was Gus Faucher’s, Chief Economist at PNC, takeaway from the FOMC release?
Source: CNBC
In conclusion, the PMs received a helping hand on Jul. 28, as Powell’s standard response increased investors’ optimism. However, with his words, the price action and the narrative sounding like a broken record, it’s important to remember that the medium-term implications remain intact. With inflation surging and the clock ticking toward the FED’s taper timeline announcement, the PMs are fighting an uphill battle. And because corrective upswings are expected within a medium-term downtrend, the PMs’ price action on Jul. 28 was likely nothing more.
It seems that the markets reacted to the Fed’s comments at their face value, but as the time goes by, the markets are likely to start reading between the lines and note what’s coming. And since the markets are forward-looking, yesterday’s price moves are likely to be reversed and it seems that we might not have to wait too long for that to happen.
In fact, if it was the case that yesterday’s price moves were triggered just by a very emotional reaction to the news, without their analysis, it could be the case that they will be reversed soon, as analysts will dig into the comments and report to investors soon, perhaps as soon as today – just like me, writing this text to you right now.
The implication of the above is that perhaps the price moves and their technical implications shouldn’t be taken at their face value just yet.
Having said that, let’s look at the technicals.
Rally or Fakeout?
Gold rallied in today’s pre-market trading, and it even moved above its rising short-term resistance line that I marked with a red, dashed line. This seems bullish until you compare it with a very similar price action that took place in mid-February when gold was after a very similar pattern (sharp decline, corrective upswing to the 50% retracement, another move lower, and then another move up before sliding).
It seems that we are in the “then another move up” stage right now. Back in February, gold moved to about 38.2% Fibonacci retracement based on the initial big decline before turning south. Guess what price level gold is trying to breach today – the 38.2% Fibonacci retracement that’s based on the initial big decline.
Therefore, is gold’s rally really bullish right now? Or is it a fakeout just like what we saw in mid-February? The context provided by what happened yesterday suggests that the fakeout scenario is more probable.
Disclaimer: All essays, research and information found on the Website represent the analyses and opinions of Mr. Radomski and Sunshine Profits' associates only. As such, it may prove wrong ...
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