Powell Expects Further Hikes
The Fed’s Powell hinted at a continuation of Yellen-era gradual rate hikes in the text of his confirmation statement. Trump lifted the USD via a tweet, expressing his optimism on a tax deal in Congress. The yen and kiwi were the top performers while the Canadian dollar lagged. More Fedspeak is due in the hours ahead.
Positive Correction Trading
Powell faces questions on Wednesday from Senators on his economic and regulator leanings as part of his confirmation process. His opening statement was released late Tuesday and said he expects interest rates to rise ‘somewhat further.’ He also hinted at lightening the regulatory burden facing banks while maintaining the core reforms. For the most part, the published comments were the usual platitudes about independence and the dual mandate.
The big question is how the Fed will proceed in the months ahead if inflation moves up only slowly. A hike in December is seen as a slam dunk but March and beyond will depend on progress in the economy and inflation. What remains a mystery is the where the Fed’s minimal inflation threshold lies and if there is eventually a point where they will hit the pause button until prices near 2% growth.
Dallas Fed President Kaplan hinted at growing confidence and hawkishness. He said he was beginning to worry about an overheating jobs market and signaled that gradual hikes are likely necessary. He isn’t a voter next year but is generally a good barometer for the core of the FOMC.
One issue the Fed may have to confront in the years ahead is housing. New home sales in October were at a 685K annual pace compared to 625K expected. It was the second month in a row of strong numbers.
In terms of market moves, the US dollar bounced to start the week but only recovered a small portion of last week’s drop. The yen remained red hot and was boosted in part on a report that North Korea is preparing another missile launch.
The Asia-Pacific calendar is light in the day ahead but Chinese stock markets are increasingly in focus. The Shanghai Composite fell 0.9% to start the week and is at the lowest since August on signs the government will tighten liquidity.
CFTC Commitments of Traders
Speculative net futures trader positions as of the close on Tuesday. Net short denoted by – long by +.
EUR +95K vs +84K prior GBP -1vs -4K prior JPY -123K vs -147K prior CHF -30K vs -28K prior CAD +45K vs +47K prior AUD +40K vs +44K prior NZD -14K vs -12K prior
The extreme yen short was trimmed but still remains in a highly vulnerable spot given the steady declines in USD/JPY and yen crosses. A washout could come any time.