FX Daily: USD tumbled on Fed but Powell’s comments still matters
Too early to conclude a dovish Fed pivot.
Group Research - Econs, Philip Wee29 Nov 2023
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DXY depreciated a third session by 0.5% to 102.7, its lowest close since 10 August. The 10Y US Treasury yield fell for a second session by 6.6 bps to 4.32%, breaking its 100-day moving average to its lowest since 18 September. The Dow, S&P 500, and Nasdaq Composite rose 0.2%, 0.1%, and 0.3%, respectively. Expectations have increased for Fed Chair Jerome Powell to support another rate pause this Friday. Tomorrow’s US PCE deflator should mirror CPI inflation in slowing to 3% YoY (0.1% MoM) in October from 3.4% YoY (0.4% MoM) in September and PCE core deflator to 3.5% YoY (0.2% MoM) from 3.7% YoY (0.3% MoM). 

Fed Governor Christopher Waller fueled the dovish sentiment with his increased confidence that policy was well-positioned to slow the US economy and get inflation back to the 2% target. New York Fed President John Williams called the decline in inflation encouraging, but that has been something he has been saying. Chicago Fed President Austan Goolsbee highlighted this year’s fall was the most significant drop in 71 years. Waller attributed the disinflation mainly to an easing of post-pandemic supply chain disruptions. Waller reckoned that financial conditions were still tight despite the recent decline in bond yields which he said were high vs. levels in mid-2022. Waller’s tone was shaped by the slide in CPI inflation to 3.2% YoY in October from 3.7% in September. The next CPI report will be out on the first day (12 Dec) of the FOMC meeting.

However, Fed Governor Michele Bowman cautioned that the market’s tightening cannot substitute monetary policy to achieve the Fed’s mandate. Bowman did not change her longstanding position that interest rates may need to rise again if incoming data indicated that the progress on inflation has stalled. Despite the surge in the 10Y US bond yield in May-October, the increase in the FHFA House Price Index accelerated a fourth quarter to 2.1% QoQ sa in 4Q23 vs. 1.9% in 2Q23 and 0.9% in 1Q23. Consumer confidence rose again to 102 in November after falling three months to 99.1 in October, in line with this month’s stock market rebound and lower bond yields. Initial jobless claims also stopped climbing on a 4-week moving average basis. Let’s see if claims surprise on the downside tomorrow. Consensus is already anticipating a recovery in next week’s nonfarm payrolls to 175k in November after the larger-than-expected plunge to 150k in October.

In the end, Powell’s comments this Friday will be important in balancing the views of his Fed colleagues and setting the tone for the Fed’s blackout period next week. He will probably agree that the progress on inflation has been encouraging but will need more evidence before declaring victory, and least of all endorsing a dovish pivot.

Quote of the day
“"In my view, given potential structural changes in the economy, such as higher demand for investment relative to saving, it is quite possible that the level of the federal funds rate consistent with low and stable inflation will be higher than before the pandemic.”
      Fed Governor Michele Bowman, 28 November 2023

29 November in history
The Meiji Restoration went into effect in Japan in 1890.


Philip Wee

Senior FX Strategist - G3 & Asia
[email protected]


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