Setting The Tone For Powell

USD: Hard to see big jump in FX vol on Powell speech

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There has been quite a clear and consistent message from Fed officials so far at the

Jackson Hole Symposium and it certainly begs the question – is it credible for Powell

to shift from the tone of the rhetoric and primary message when he speaks. Fed Presidents Esther George (voter) and Patrick Harker (voter in 2023) both spoke on TV from Jackson Hole and we suspect provided a message that is likely to be reiterated by Governor Powell last week. Both suggested policy is not restrictive and that the FOMC needed to get to restrictive relatively quickly (by year-end) and then stay there “for a while”. Harker was a little clearer in citing 3.40% as the level above which nominal fed funds needs to get to before holding “for a while”. While George mentioned it being feasible to go to a level over 4.00% it feels like there’s certainly a consensus for at least another 125bps of tightening this year. Fed President

Bullard also spoke and cited frontloading and getting the fed funds to 3.75%-4.00%.

The comments yesterday were broadly consistent with Fed President Bostic’s in a WSJ

interview on Wednesday. What there also appears to be a consistency in communications is the lack of guidance on whether the Fed goes by 50 or 75bps at the next FOMC meeting on 21st September. That really elevates the importance of the incoming economic data in swaying the FOMC one way or the other at that meeting. In particular it elevates the importance of the August employment and CPI reports, to be released on 2nd and 13th September respectively. The drop in both the initial and continued claims data yesterday suggests a still vigorous labour market although the continued decline in retail gasoline prices do point to another slowdown in headline annual CPI.

The OIS market currently has 67bps priced for the September FOMC and 131bps by

year-end. Given the series of Fed officials’ comments this week and given the market

pricing, we can’t see Fed Chair Powell providing the grounds for a big move in rates.

He is unlikely to commit to a size of move for the September FOMC and is more likely

than not to imply implicitly that current market pricing seems reasonable.

We will be listening out for comments on the balance sheet. The pace of QT is about

to double from USD 47.5bn per month to USD 95bn. Might Powell hint that the FOMC

expects this to provide a more powerful force in tightening financial conditions that

might reinforce the prospect of a pause after December?

The US dollar was mostly weaker yesterday versus G10. The euro lagged, which

illustrates the continued influence of natural gas prices for EUR and GBP in particular.

Natural gas prices jumped another 8% yesterday. We’d expect Powell to have a

hawkish bias similar to other speakers this week which will help support the dollar

without providing a catalyst for any notable gains from current levels.

Source: Bloomberg

GBP: Liz Truss promises more as OFGEM lifts cap

The US dollar is stronger across G10 this morning ahead of the Jackson Hole speech by Fed Chair Powell. NZD is underperforming after RBNZ Governor Orr hinted that policy tightening might not have further to go. EUR and GBP will likely continue to take its cue from natural gas price moves and in that context developments in relation to government support for households are important. OFGEM has just confirmed that from 1st October the new utility bills cap will be set at an average rate of GBP 3,549 – largely consistent with estimates. OFGEM will now raise the cap every three months rather than six meaning another lift in January. That lift will capture the surge in natural gas prices seen most recently. We have highlighted here the fact that Leveraged Funds have increased substantially long GBP positions in recent weeks. One possibility for doing that may be the belief that the incoming UK government will act forcefully to protect UK households.

That looks a risky bet to be taking in our view. Liz Truss appears to be trying to speak

to all with her views on the level of support. Today, writing in the Times Lizz Truss has

promised “immediate support” but in a hustings last night acknowledged energy prices

was a major issue but added that it wasn’t right to “just bung more money into the

system” – is Liz Truss arguing that we need to allow “demand destruction” to kick in

and balance the market? That would not be good for growth and would be incredibly

divisive.

The Times also reports today that Liz Truss is planning to suspend the Northern Ireland

Protocol in the first ten days of office given the existing arrangements to ease checks

expires on 15th September. Last night Liz Truss refused to confirm whether she viewed

Emmanuel Macron as friend or foe. We are not convinced on the thinking of Leveraged

Funds and see downside risks based on Liz Truss disappointing and the potential for

an immediate escalation in tensions with the EU.

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