J-Pow Staying Put Is The Best Thing He Can Do

WHERE WE STAND – I start, this morning, with a bit of a rant.

There seems to be a view doing the rounds over the last day or so, pushed principally by ex-PIMCO Chief Mohamed El-Erian, that the best thing for Fed Chair Powell to do right now, would be to resign. El-Erian’s view is that such a decision would “safeguard the Fed’s operational autonomy”, and would also be “better than what’s playing out now”.

This is a family-friendly note, so I’ll simply say that such a view is complete and utter unadulterated nonsense. The best thing that Powell can do right now, is to stay in his job, and to see out his term as Chair, which ends next May. In fact, an even better thing to do would be for Powell to remain as a Governor, until that term ends in January 2028. A move that, while not seen since the days of Marriner Eccles, is both perfectly legal and possible.

Resigning, which to be clear is a highly unlikely outcome, would simply be Powell surrendering to the shameless, bully-boy tactics that have become the Oval Office’s trademark of late, while also resulting in the entire idea of monetary policy independence going up in smoke. Doing so, furthermore, would also set a worrying precedent, in that with enough pressure, a President can force out a Fed Chair, and replace them with someone who places loyalty to the Administration of the day above all else. Good luck with the dollar being a reserve currency, and with your US debt servicing costs, in that environment!

Powell has shepherded the economy in exemplary fashion over the last seven years, with the US economy, the Fed as an institution, and of course financial markets, likely to be best served by Powell continuing to simply do his job for the next ten months. Thankfully, J-Pow seems immune to external interference impacting the FOMC; I suspect, and hope, that he will similarly ignore this latest shameless intervention.

Speaking of interventions, I wonder when we’ll get one here in the UK. It certainly feels like we’re in need of one, given that the Treasury remain stuck between a rock and a hard place, both of their own making. Yesterday brought the latest public borrowing stats, which pointed to a record (ex-covid) £20.07bln budget deficit last month. With every passing day, the prospect of sizeable tax hikes in the autumn Budget becomes increasingly certain. Tax hikes which will, of course, further choke off growth, and see the labour market weaken at an even more alarming rate. Short GBP, in the crosses to remove any USD risk, and short the long-end of the Gilt curve, remain my preferred plays when it comes to this particular theme.

More broadly, yesterday brought little by way of major catalysts, for the second day on the trot.

Treasury Sec. Bessent took to the airwaves, as he seems to do every day, to note that “a rash” of trade deals could be announced soon, though this rhetoric is very in keeping with recent remarks, and nothing out of the ordinary whatsoever. Besides that hopium, which leaves another ‘TACO’ moment on the table at the back end of the month, there was little else to drive markets across the board. Still, we’ve seen a US-Japan trade deal announced overnight, so the overall direction of travel on that front remains a more conciliatory one.

Consequently, markets took the ‘path of least resistance’ across the board. Said path continues to lead higher for equities, lower for the dollar, and lower for Treasury yields too, with dip buyers in command for the time being, and probably remaining so until next Friday’s US labour market report.

LOOK AHEAD – Another barren docket ahead today.

Consumer confidence figures are due from the eurozone, and existing home sales stats are due from the US, though neither are likely to be market-moving. The same can be said of this evening’s 20-year US Treasury auction, which should be taken down well.

After hours earnings from Tesla (implied move +/-6%), and Alphabet (implied move +/-5.3%) are set to be of considerably more interest, and stand as key tests for the equity bull case, which continues to be built on the idea of earnings growth remaining solid. Though any misses here will likely be punished, I remain a dip buyer.