Happy Thursday, traders. Dropping in for an odd, slightly less organized mid-week post to talk a bit more about yesterday’s FOMC and how things look for gold markets. In trying to get a helpful recap up as soon as possible after Chairman Powell’s press conference yesterday, I bypassed any attempt to give my view on things; frankly, I needed the extra time to sort out my thoughts to begin with.
From a trader’s perspective, I’ve been saying for at least the last few weeks that any reaction in the gold market to individual data points on the US economy would be watered-down because all that really mattered was seeing how far the Fed would go following their July meeting. My view now is that the coin has flipped, and all the major macro data points on the calendar between now and the September FOMC meeting will have the potential to jolt risk markets. Let’s talk about why.
Okay, actually, first let me step over here to bang my large gong with “This Is Not Investment Advice” stenciled on it.
Cool, now let’s talk about why.
After mulling over yesterday’s goings on and reading the thoughts of people much smarter than I am, my view is that the likelihood of another interest rate cut in September is low, as of now. To say on August 1 that I’m sure the Fed will not make another movie all the way on September 18 would require me to be certain that nothing about the macroeconomic or geopolitical picture will change from how it is today; in fact, we can be fairly sure that it won’t remain in stasis.
To talk about what we do know—or at least what we can be relatively sure was true yesterday—we know that yesterday wasn’t the start of a full-on easing cycle. That was something that the Chairman made very clear through his consistent labeling of yesterday as a “mid-cycle” cut.
Doesn't get more clear than that https://t.co/2j8IrbbaZS
— Luke Kawa (@LJKawa) July 31, 2019
I was surprised to see Chairman Powell so plain and upfront at least about what the quarter-point cut was not; that point he seemed to work so hard to get across was one of two that I thought were particularly important for trying to understand the Fed’s near-term view.
The second point I’ve kept coming back to is Powell’s assertion that yesterday’s rate cut was not a single act of accommodation, but rather that over the course of the year through rhetoric and smaller adjustments through public channels the FOMC has been creating a more supportive environment for the later stages of the US economic cycle. The Chairman touched on that point in this exchange and others:
Highlight: Why 25 basis points, why not more? “I don’t think asking about a quarter point is really the right question,” says Fed Chair Jerome Powell. Instead, watch the Fed’s recent moves, he explains: pic.twitter.com/ytTBTmUz3Y
— Yahoo Finance (@YahooFinance) July 31, 2019
I’d argue that in focusing on getting those two points across, among other throughout the afternoon, Powell and the committee are trying to make it clear that the bar is set very high for another rate cut in September. In the first point, Powell is making it clear that the Fed is aware just how little justification there is, when looking at economic data in the US, for an honest easing cycle; in the second, the Chairman is providing some cover for the FOMC to avoid cutting rates in September, having established that there are other “non-mechanical” ways of supporting economic growth.
That’s all lead me to really believe that what the Fed does (or doesn’t do) come September will be squarely determined by the major economic data in the intervening weeks. If the data-driven assessments of the US economy’s heath improve or at the very least remain on pace (as metrics of the labor market are expected to do in tomorrow’s Jobs Report) then I think the likelihood of a September cut drops steadily, and that would take a marked and persistent (that is, more than a single month) deterioration in either the labor market or inflation to force the FOMC into cutting rates.
Unfortunately, the two primary risks to my outlook on this are more difficult to quantify and anticipate: the equity markets and the White House. As we saw during the Chairman’s press conference yesterday, equity markets did not react well to being denied the promise of deeper easing. This, I think, is what throwing a fit looks like:
— Yahoo Finance (@YahooFinance) July 31, 2019
Some could argue—and I would be among them—that this was a problem of the market’s own creation because there was no rational support for more than a 0.25% interest rate cut and so risk assets only have themselves (or rather, their traders) to blame for baking more into the price. Still, if this fit becomes a full-on market tantrum in the coming weeks the precedent was already set in December/January of this year for the Fed to capitulate to the market.
The risks that the White House poses to this are a little more varied, but we’re already seeing the primary lever being pulled today as, just in the 30 minutes that it’s taking me to wrap up writing this piece, the President announced suddenly a new round of 10% tariffs on Chinese goods starting next month. It’s this kind of reckless wielding of trade as a weapon that I think is the biggest driver of external economic risk that Jerome Powell and the Fed are concerned about bleeding into the US. If the pressure on the global economy ex. US ratchets up quickly, that could certainly spook the Fed into more preemptive easing. As we’re also seeing this afternoon, these two risk factors are tethered: the US equities markets had seen a decent recover this morning but are once again selling off on the China tariffs news.
Sure, it might seem like I just threw 900 words together to convince you to keep checking in with our macro coverage. But I do genuinely believe that—barring significant surprises from the risk factors I’ve lined out—we’re moving back into a regime, however temporary it may be, where the Fed’s next move will be data-driven. In that case, the best tool to manage your positions in gold or any other risk-related asset will be an awareness of the data itself.
We’ll do our best to keep you up to speed, starting with the July Jobs Report tomorrow morning. I’ll see you back here tomorrow for a wrap-up of our crazy week.