ON DECK FOR FRIDAY, JULY 18
KEY POINTS:
- Dollar continues to weaken into the end of the week
- Often-wrong Governor Waller drives a mild market response
- Powell responds to Vought’s letter—and should have sent a bill with it!
- Yen softens, JGBs rally for three reasons
- German PPI masks rise of consumer prices, like US PPI did
- Politicized UofM sentiment on tap
A slight risk-on bias is marking the end of the week. Equities are broadly higher. The dollar is broadly in retreat. US Ts are mildly outperforming European yields.
OFTEN-WRONG WALLER LEADS MARKETS ASTRAY ON THE FED’S JULY DECISION
One consideration is that Fed Governor Waller said last night at about 6:30pmET that the Fed should cut by 25bps on July 30th. The dollar slightly weakened on the headlines and this is probably why the US front-end has mildly rallied.
His reason is to save the labour market. Nothing to date would create a sense of alarm over the state of the labour market in my view but Waller has been an inflation dove all along so—while contestable—his views are at least consistent. That contrasts with Trump who says his ‘big beautiful bill’ will supercharge growth and do such wonderful things, but that the Fed should cut to 1% from 4½% now which would only happen if a true crisis was around the corner.
Waller is likely to dissent on July 30th and may either be alone in dissenting or perhaps joined by Governor Bowman.
A big caution is that Waller has a habit of being wrong. He has previously driven premature pricing of Fed rate cuts like in late 2023 when he advised the Fed could cut within a few months as soon as March but the FOMC didn’t cut until September. Or take his dissenting vote against tapering Treasury QT at the March meeting earlier this year which in retrospect has looked like he was in the wrong. I feel he’s jumping the gun on easing when we don’t have evidence on which part of the dual mandate may deteriorate more than the other, when, and by how much in the face of the unique shocks presented by Trump administration policies.
Waller also stands accused of being somewhat opportunistic in the battle to succeed Chair Powell.
POWELL SENDS RESPONSE TO VOUGHT; SHOULD HAVE SENT A BILL TOO
Chair Powell responded to OMB director Vought’s accusatory letter with this letter sent last night. He should have also sent Vought a bill. Think of all the management time that has been wasted at the Fed responding to this politicized nonsense instead of thinking about monetary policy!
YEN SOFTENS, JGB YIELDS RALLY ON THREE DRIVERS
The yen softened a touch and JGBs are a touch richer across the curve after national core inflation decelerated by a little more than consensus expected. CPI ex-fresh food landed at 3.3% y/y (3.7% prior, 3.4% consensus). Markets are also focused upon the weekend election in Japan’s upper house with less fear that the outcome will drive a spending splurge financed by more debt. There is also a piece out from Reuters this morning about how the BoJ might indicate upgrade its near-term outlook at the July 31st decision.
GERMAN PPI REFLECTS CONSUMER PRICE PRESSURES LIKE US PPI
German producer prices landed on the screws in June at 0.1% m/m. Consumers goods prices were up by 0.3% led by non-durable goods which is similar to what happened to the US PPI figures the other day. US PPI was flat, core PPI was also flat, but come categories may have revealed tariff pressures such as big-ticket durable consumer goods prices that were up 0.4% m/m after a 0.5% jump the prior month.
POLITICIZED UMICH SENTIMENT TO BE REFRESHED
Light readings are on tap into the N.A. session. The US updates UMich consumer sentiment and its politicized measures of inflation expectations (charts 1, 2) where Republican respondents say there is no inflation risk whatsoever and Democrats say it’s going to the moon. What isn’t disturbingly politicized in America these days. Housing starts are expected to post a mild rebound in June’s release (8:30amET).
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