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The Weekly Track no-lethargy

- The Weekly Track – No Lethargy? by Bob Savage
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While some would want to believe in a long summer of lethargy, last week proved the end of such thinking. Inactivity was replaced by hope, greed replaced fear in emerging markets and lack of bigger news allowed for the last big week of summer to end positively after a long painful 4-weeks of weakness driven by pessimism and doubt. The rise of oil prices, the reversal of the stronger USD, rebounds in foreign shares, ongoing gains in US equities with new record highs and the drop of US bond yields were all notable last week and beg explanation. We have returned to a Spring time renewal just at the pick of the Summer harvest. The mix of Trump impeachment risks rising and the flexible approach from FOMC Chair Powell on rate policy into the futures drove price action. Trump and US politics shifted with Manafort and Cohen driving the focus to the US midterm elections and control of Congress and that in turn added to the USD woes. On the central banking front, minutes from the FO
MC were clear. No one doubts the Fed hikes in September and likely again in December, the complications after that are significant. The USD retreated on Powell after his Jackson Hole comments, where hesees the Fed navigate between twin risks — moving too quickly and needlessly shortening the economic expansion, and conversely lifting rates too slowly and risking a “destabilizing overheating.” “I see the current path of gradually raising interest rates as the approach to taking seriously both of these risks,” Mr Powell said. “While inflation has recently moved up near 2%, we have seen no clear sign of an acceleration above 2%, and there does not seem to be an elevated risk of overheating.” Powell deliberately said he was avoiding all foreign and political questions, admitting that these were risk factors that “could demand a different policy response, but today I will step back from them.” The market odds for just one rate hike in 2019 are now just 60% whic
h contrasts sharply with the FOMC seeing 3 hikes.

Nevertheless, for many, the risk of a policy mistake from the Fed remains in play as they watch the shape of the US yield curve and await a recession.