A Fed pivot - A data dependent Fed is a good Fed

As we mentioned in our FOMC preview, the market went into the meeting long of USDs and there was enough in the statement and Powell presser to cause a decent reaction - whether it's sustained is the subject of big debate today.

For me, the market had a vision and a journey priced for the economy and Fed policy – we were to see a 75bp hike at this meeting, a 50bp hike in September, and then the Fed moving to be data dependent, slowing the pace to 25bp hikes back-to-back in November and December – taking the fed funds rate to 3.5% and 100bp into restrictive territory. This would then allow them to cut rates to the neutral setting of 2.5% in 2023 when inflation fell towards 4%. Essentially, the market heard the Fed shared the same journey – they're still on an inflation-fighting mission, but they are now data dependent – they believe the fed funds rate will be around 3.4% by year-end, which implies a 50bp hike in September and they may slow the pace of hikes down if needed.

Is this a pivot?

Well, yes and no. It offers them optionality – it means bad US data will be bad for the USD, especially vs the JPY and CHF. It means the USD is a true cyclical currency – as opposed to a safe-haven play and it means economic data is now far more important as the Fed is no longer on autopilot with regards to rate hikes. If you weren’t already glued to the economic calendar to monitor daily risk events, well you should be now as markets will become even more sensitive to the data flow.

The fact is they can still hike 75bp in September if the data warrants it – but that seems a reduced probability as the data comes in softer. While some will say the ship has already sailed, the chance of a policy error has been reduced at the margin – but the Fed know where they must get to and will take it meeting-by-meeting.

For now, this subtle but significant change from the Fed is causing the USD to weaken, the JPY to outperform and gold and crypto to find buyers. Equity looks good, and the breakout in the US500 and US30 is one that may have legs.

So what data points are on the radar that could really move the dial as we head to the Jackson Hole Symposium?

• 29 July (22:30 AEST) – Q2 Employee cost index
• 30 July – Uni of Michigan 5-10 inflation survey
• 2 Aug – ISM Manufacturing
• 4 Aug – ISM services
• 5- Aug – US payrolls
• 9 Aug- Unit Labor Costs
• 10 August – July CPI
• 17 Aug- Retail sales