US: Justified optimism? - Rabobank

The new Fed Chair did not take the time to ease into his new job, and instead spoke a very clear message in his testimony before the Financial Services Committee, according to analysts at Rabobank.

Key Quotes

“Mr. Powell noted that his “personal outlook for the economy has strengthened since December,” with data that “will in my case add some confidence to my view that inflation is moving up to target.” Amongst the reasons Mr. Powell gave for his optimism were the continuing strength in the labour market, a fiscal impulse, and the global economic expansion. This was a clear shot across the bow from the new Chair, suggesting that –if it is up to him– the FOMC may want to revise its current projections of three hikes for this year up to include a fourth.”

“Markets certainly took note of Mr. Powell’s remarks. The Fed funds futures are now priced for about 50% chance of a hike in December, and the implied odds of hikes in the other three quarters increased across the board – with a March move all but a given. As a result of the more hawkish assessment of the Fed’s plans, the US dollar strengthening substantially: the DXY dollar index gained 0.6% on the day, as EUR/USD slid a full cent to the 1.2220 range.”

“Despite Mr. Powell’s confidence in the economy, not all data are fully giving the green light. US durable orders declined -3.7% in January. Part of this was due to a sharp decline in aircraft orders, but even after accounting for these specific drivers, the data came in weaker than expected. This contradicts earlier data, including business surveys, that suggested improving prospects for business investments. The coming months will have to prove whether actual orders catch up with the more optimistic surveys. For now, however, the Atlanta Fed’s GDP ‘nowcast’ for Q1 has been revised down to ‘only’ 2.6% - it stood at 4% only two weeks ago!”