Reversing The Fed Moves?

Fed messaging was rightfully interpreted as dovish – full employment is in effect its single mandate now. Yes, the central bank will tolerate higher inflation, and has prepped the markets for its advent (as if these didn‘t know already). Powell managed to walk the fine line between economic optimism, pushback on the idea of raising rates or taper, and yet implicitly acknowledged the growing liquidity concerns with one little, gentle prod.

Markets naturally liked the tone, overlooking no mention of action on rising yields, and stocks, metals and commodities turned positive on the day – quite strongly so. The dollar declined visibly as long-term Treasuries recovered intraday losses on high volume.

Highly charged finish to the day, but today‘s analysis will show that little has actually changed in its internals. Rates are rising for the good reason of improving economy and its outlook, reflation (economic growth rising faster than inflation and inflation expectations) hasn‘t given way to all out inflation, and stocks with commodities remain in a secular bull market. We‘re in the decade of real assets outperforming paper ones, but that will become apparent only much later into the 2020s.

So, the central bank confirmed my yesterday‘s assessment of its tone and Treasuries take:

(…) I am not looking for the Fed to act today by adjusting its forward guidance stance or language, or taking a U-turn on inflation. No, they‘ll maintain the transitory stance even though markets are transitioning to a higher inflation environment already. The Fed won‘t do much this time.

They might not even talk about bringing down rates at the long end through a twist program. I certainly don‘t look for clues as to increasing the $120bn monthly pace of monetary injections. Unless the market perceives the Fed as underplaying the threat of inflation and showing tolerance to its palpable overshoot, the overall mix of positions and conference statements might bring gold under renewed pressure as it meanders a little below $1,730 as we speak.

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Monica Kingsley 1 month ago Author's comment

The storm in the tea cup mentioned above, did indeed unfold, and thus far misses the tea cup only (especially when you look at oil). Yet earlier in yesterday's session (see those intraday updates popping up lately on my site), I was able to sidestep the damage to the short-term bullish case as the markets went on to doubt the Fed.

In today's analysis, I'll assess the damage, and also feature oil by popular request. Gold is resilient, and I like its continued decoupling from rising nominal yields, and see yesterday's hit to the miners as partially equity markets driven. The bull market in both the metals and stocks remains alive.