The dollar is down sharply after Federal Reserve chair Jerome Powell sounded a less hawkish tone in his last public speaking engagement before the central bank’s December 13-14 meeting.
At times, Mr. Powell sounded positively Grinch-like, warning that a “sustained period of below-trend growth” would be necessary to bring inflation down. He noted signs of moderating price pressures in the October consumer price report, but said it would take “substantially more evidence to give comfort that inflation is actually declining”. “I will simply say that we have more ground to cover,” he said. “History cautions strongly against prematurely loosening policy. We will stay the course until the job is done.”
But – not unlike the Grinch – he also seemed to have a change of heart, doing nothing to combat the loosening in financial conditions that has occurred over the last two months – and avoiding a widely-feared repeat of his extraordinarily-hawkish speech at Jackson Hole in August. He said “The time for moderating the pace of rate increases may come as soon as the December meeting,” and acknowledged growing downside risks, saying “My colleagues and I do not want to overtighten.”
Markets ripped higher, with equities, commodities, and high-beta currencies posting solid gains to end the month of November. Whether this was the intended effect is an open question – and we imagine Powell’s thought process going a little like this as he stepped away from the podium: “They’re just waking up! I know just what they’ll do!
Their mouths will hang open a minute or two
Then the Whos down in Whoville will all cry boo-hoo!
That’s a noise,” grinned Jerome, “that I simply must hear!”
He paused, and Powell put a hand to his ear.
And he did hear a sound rising over the snow.
It started in low, then it started to grow.
But this sound wasn’t sad!
Why, this sound sounded glad!
Every Who down in Whoville, the tall and the small,
Was singing without any presents at all!”
In other news, the Fed’s preferred measure of inflation, out at 8:30, is expected to show continued moderation in underlying price pressures. Consensus estimates suggest the core personal consumption expenditures index will rise 0.3 percent month-over-month in October, down from 0.5 percent a month earlier. Year-on-year changes are seen settling down to 5 percent from 5.1 in September.
Initial claims for jobless benefits are expected to fall modestly, hitting 235,000 in the week ended November 26, down from 240,000 a week earlier. Market reaction to any deviation from expectations will likely be subsumed by broader inflation-related moves.
Markets think the United States generated 200,000 jobs last month, with tomorrow’s non-farm payrolls report bringing evidence of a modest slowdown in hiring activity. We suspect the dollar’s reaction function could prove asymmetric: after a series of upside surprises in labour market data, a hotter-than-expected number should generate modest lift for the dollar, while a lower print might weaken it more sharply as traders bet on the Fed shifting focus toward the second part of its dual mandate in 2023. This “skew” looks likely to persist in months to come, gradually eroding the dollar’s outperformance against its major counterparts.
Karl Schamotta, Chief Market Strategist