The Powell Pivot 2.0

John Leiper – Head of Portfolio Management – 29th May 2020

In January 2019 Jerome Powell pivoted from a policy of interest rate increases and balance sheet cuts to interest rate cuts and, later that year, balance sheet expansion.

Whilst the sell-off at the end of 2018 was the catalyst for this dramatic U-turn in monetary policy, another was fear of increased tariffs on China, imposed by President Donald Trump. In effect, Trump had been using tariffs to force interest rates lower thereby conducting de-facto monetary policy.

Fast forward to this month and Trump is at it again…

For the last few years Trump has consistently called for interest rate cuts and a weaker US dollar. He sat with the top US CEOs to discuss their concerns and used the platform to accuse other countries of currency manipulation.

However, earlier this month, on Fox news, President Trump seemed to volte face, saying “it’s a great time to have a strong [US] dollar”.

It’s clear to see why Trump might want a stronger US dollar as it is consistent with a higher approval rating which is key for the presidential election in November.

On mobile: review chart in landscape mode

Source : Bloomberg, Tavistock Wealth

It also allows him to apply pressure on the Chinese, look presidential and benefit from the significant bipartisan support on this topic. 

Source : Bloomberg, Tavistock Wealth

However, the market reaction to Trump’s call for a stronger US dollar was muted. In fact, the US dollar recently weakened to pre-crisis levels. This is consistent with our long-term house view as the surge in liquidity provided by the Fed and improving risk sentiment, as economies re-open, leads to a weaker US dollar.  

On mobile: review chart in landscape mode

Source : Bloomberg, Tavistock Wealth

It is also possible that Trump is using the strong dollar rhetoric to force Powell into negative interest rates.

Trump has advocated for negative interest rates in the past calling them a ‘gift’ to the US economy. The idea is that negative rates would spur consumers to increase borrowing and spend or invest more money in the economy. Negative interest rates are ‘under active review’ in the UK and have been used extensively in Europe and Japan.

However, Jerome Powell recently said that negative interest rates are ‘not an appropriate policy response’. Indeed the latest Fed minutes show unanimous agreement amongst committee members against the use of negative interest rates. This is because they are highly contentious. Any positive effects are more than likely offset by a long list of negatives that include significant disruption to the banking sector, pension schemes and money markets whilst encouraging ever increasing bubbles in asset prices (notably in sovereign bonds). Looking to experience, Europe and Japan seem no better for having used them and some, such as Sweden, have even reversed course.

As shown in the chart below, Fed fund futures briefly priced-in negative rates, in early May, before reversing course later this month.

On mobile: review chart in landscape mode

Source : Bloomberg, Tavistock Wealth

The Powell Pivot 2.0 is a step too far and it is reassuring to see recent price action validate our current market outlook.

Our investment approach is to focus on the fundamentals, not the headlines, and as such we maintain our house view.

This investment Blog is published and provided for informational purposes only. The information in the Blog constitutes the author’s own opinions. None of the information contained in the Blog constitutes a recommendation that any particular investment strategy is suitable for any specific person. Source of data: Bloomberg, Tavistock Wealth Limited unless otherwise stated.  

Want to know more about the Equity Markets?

Please contact us here:

6 + 12 =

Recent blogs
Rise of the Underdog

Rise of the Underdog

In its latest economic outlook, the OECD increased its expectations for global GDP. For 2020, the improvement is minimal, reflecting an upward revision, in real GDP, from -4.5% to -4.2%. But beyond that, growing economic momentum should boost global growth to pre-pandemic levels, estimated at 4.2% in 2021 and 3.7% in 2022.

read more
Nothing Is More Powerful Than an Idea Whose Time Has Come

Nothing Is More Powerful Than an Idea Whose Time Has Come

On Monday afternoon, global stock markets soared on the news BioNTech and Pfizer had created a coronavirus vaccine which proved 90% effective based on initial trial results. The story behind the breakthrough, which you can read here, is fascinating, not least because the husband and wife team behind the virus don’t yet know why it works.

read more
Anatomy of an Election (So far…)

Anatomy of an Election (So far…)

The narrative, heading into the US election, was a ‘Blue Wave’ victory for the Democrats. Polls and betting odds favoured a Biden win and a Senate majority and investors positioned accordingly. Anticipation for a huge fiscal stimulus package, estimated at $3 trillion+, lent itself to the global reflation trade which would stimulate the economy and revive inflation, benefiting cyclical assets whilst hitting government bonds.

read more
Since the Market Low

Since the Market Low

The ACUMEN Portfolios continued their strong run throughout October, largely outperforming the market composite benchmark and IA sectors (used for peer group comparison purposes) which lost ground across the board.

read more
Canary in the Vol-Mine

Canary in the Vol-Mine

With the US election just 8 days away, financial markets are following the polls and pricing in a Biden win. The prospect for a Democratic clean sweep has contributed to the rising ‘Blue Wave’ narrative benefiting those companies that stand to benefit from Democratic party policy. Meanwhile a long/short basket of companies more closely aligned with Republican policy and values has steadily underperform.

read more
Further For Longer

Further For Longer

On Tuesday Fed Chairman, Jerome Powell, made a speech at the National Association for Business Economics, during which he implied the government should err on the side of caution and provide too much stimulus rather than too little.

read more
Life Imitating Art

Life Imitating Art

Saturday Night Live has a reputation for expertly parodying presidential election debates. My all-time favourite is Al Gore (Darrell Hammond) versus George Bush (Will Ferrell) and this year didn’t disappoint with expert performances from Donald Trump (Alec Baldwin) and Joe Biden (Jim Carrey).

read more
The Call-Up

The Call-Up

Last week the FTSE Russell decided to include Chinese government bonds in its flagship World Government Bond Index (WGBI). The decision follows similar moves, from JP Morgan and Bloomberg, and a failed attempt to do so just one year prior which resulted in a number of reforms, to increase accessibility and currency trading options, that ultimately paved the way for benchmark admission.

read more
Technical Perspectives

Technical Perspectives

In last week’s blog we discussed the ‘Nasdaq whale’, Softbank, and the role it played, alongside an army of retail investors, driving tech prices ever higher prior to the recent correction. These short-term ‘technical’ flows are driven by the options market as traders look to hedge their underlying exposure, amplifying moves both lower and higher.

read more
The NASDAQ Whale

The NASDAQ Whale

The ACUMEN Portfolios continue to perform well. As you can see from the table below, performance for the rolling quarter (to the end of August) remains strong relative to the market composite benchmark and the current assigned IA sector, which I understand many advisers use for comparison purposes. ACUMEN Portfolios 3-8 were all in the first quartile and ranked in the top 15 within their category.

read more
A Speech For The History Books

A Speech For The History Books

In a speech for the history books, last week Fed chairman Jerome Powell announced a significant change to the way it conducts monetary policy by formally announcing ‘average inflation targeting’. This means the Fed will now allow inflation to overshoot its official 2% target to compensate for prior years where inflation failed to reach that level.

read more
Room to Run

Room to Run

Despite the fact the coronavirus has plunged many countries into recession, global equity markets are now back at all-time highs, as measured by the Bloomberg World Exchange Market Capitalisation index.

read more
Rising Phoenix

Rising Phoenix

In The Return Of Inflation (5th June 2020) we made the case for a transition from the existing deflationary narrative to one in which markets start to price-in inflation.

read more
All That Glitters…

All That Glitters…

In last week’s blog, This Time It’s Different (24 July 2020), I suggested the US dollar was on the cusp of crashing through its decade-long uptrend.

read more
The Return of Inflation

The Return of Inflation

Quantitative easing, or QE, is where a central bank creates money to buy bonds. The goal is to keep interest rates low and to stimulate the economy during periods of economic stress.

read more
Don’t Fight The Fed

Don’t Fight The Fed

Over the last decade, the Fed has increasingly resorted to unconventional monetary policy, such as quantitative easing, or QE, to stimulate the economy.

read more
Super Contango

Super Contango

In an unprecedented day in the history of oil trading the price of the front month contract for West Texas Intermediate (WTI) oil fell below zero to -$37.63.

read more
The beginning of the end?

The beginning of the end?

The coronavirus has brought economic activity to a virtual stand-still and transformed a strong global economy, with lots of debt, to a weak economy… with lots of debt.

read more