By Michael O’Neill

What a waste of enthusiasm! Global markets were in a state of heightened euphoria for the past two weeks , anticipating a jaw dropping pronouncement by Fed Chair Jerome Powell, from the pulpit of the Jackson Hole Symposium.

Instead all they heard was regurgitated Fedspeak gobbledygook, leaving them deflated and perhaps even a bit baffled.

Through the thick of it, the Federal Reserve’s unyielding commitment to that coveted 2.0% inflation target stood firm, a sentence oft-repeated like a steadfast mantra in every FOMC statement for the past year. A beacon of consistency, undeniably. Yet, it’s not the commitment itself that stirred the pot, but rather the disheartening gap between the buildup of expectations and the rather sobering actuality that emerged.

Peering into the fine print of the July 26 FOMC statement minutes, a subtle shift in the breeze becomes apparent. An underlying willingness to tweak policy, should emerging risks start casting shadows on their goals, is exposed. It’s a stance that speaks volumes about acknowledging the fragility and uncertainties inherent in the economic tapestry. And so, when Powell took the stage, his words echoed this sentiment—preparedness to push rates higher if the scenario merits, coupled with an intention to clasp policy within a restrictive hold until the elusive sustainable decline in inflation gains confidence.

In a nutshell, the speech is hawkish.  Mr Powell is committed to achieving the 2.0% target and specifically said he would raise rates if needed.  He added that he intended to keep rates in restrictive territory for some time.

Nevertheless, there were plenty of words to ensure to mollify doves.  Mr Powell acknowledged that real-time assessment was challenging and emphasised that rate decisions would be data dependent, which suggests the bar to raising rates may be fairly high.

The initial reaction was to buy dollars and sell stocks, but the moves are already starting to be unwound as traders scratch their heads and wonder “what does it mean?”

It means more of the same.

The Fed is as data-dependent today as they said they were for the past few monetary policy meetings. And there are plenty of top-tier data releases between Monday and the next FOMC meeting on September 20. The data includes all the potential market movers such as nonfarm payrolls and the consumer price index.

FX markets will continue to take their cue from Wall Street, particularly the S&P 500 index. If stock traders are convinced that interest rates are at or within a quarter-point of the peak, they may retrace August losses as the 2023 rally resumes.

Bond traders are still mulling over Powell’s comments. The 10-year Treasury yield is 4.24%, which is where it was at the NY open.

The Canadian dollar has its own problems, aside from being a US dollar whipping boy. The Canadian economy is not just slowing, but Statistics Canada estimates that it probably contracted by 0.2% in June. The decrease is driven by the wholesale trade and manufacturing sectors, whose downward movements more than offset the increases recorded in May.”

Source: Statistics Canada

 Canada finds itself in the midst of a job market shakeup. The unemployment rate has experienced three consecutive months of escalation, settling at 5.5% and economists at CIBC suggest an intriguing twist: the Bank of Canada might have an inclination to see this rate climb even higher. They admit that it’s a notion BOC officials would never publicly acknowledge, but they point to the BoC’s penchant for referring to “excess demand within the economy” rather than pointing out the Labour market is too tight. 

This complex landscape of economic terms and interpretations, masks the intriguing possibility that the Bank of Canada could potentially reduce interest rates as we venture into 2024.  We may find out more on September 7 when BoC Governor Tiff Macklem discusses the September 6 decision before a Calgary audience.

The BoC is expected to leave rates unchanged. Even if they hiked rates by 25 bps, like they did on July 12, it may not do much for the currency. When the dust settled following that move, USDCAD rallied and has continued to do so, reaching 1.3640 in the aftermath of Powells remarks.

If history repeats, USDCAD  could take out resistance at 1.3660 (above the 61.8% Fibonacci level of its Covid range) and target 1.4000. But don’t bet on it yet.  If such a move were to happen, it would most likely occur after the September 20 FOMC meeting.

Fed Chair Powell’s speech may have been gobbledygook, but the gobbledygook says “higher rates for longer.