By Michael Brown, Senior Research Strategist at Pepperstone
DIGEST – The FOMC stood pat yesterday, though it was megacap earnings, and Tsy Sec Bessent’s remarks on the dollar which stole the show. Today, AAPL’s quarterly report is the highlight.
WHERE WE STAND – It’s a bit odd when the biggest event on ‘Fed Day’ isn’t the Fed themselves, but I suppose we do live in fairly unusual times.
I’ll get to Powell & Co in a second, but want to start with the Treasury. Secretary Bessent provided some fairly defiant pushback yesterday to the idea that the Trump Admin might be seeking to engineer a softer greenback, noting that the US ‘always’ has a ‘strong dollar’ policy, while also refuting speculation that the US might have been intervening to prop up the value of the JPY in recent sessions.
These comments, quite clearly, contrast with those made by President Trump a day prior, where Trump demonstrated not only a degree of comfort with recent dollar weakness, but also implied that he wouldn’t be too perturbed if it continued. All this resulted in an 18-hour long round trip to take most G10s back to where they traded before those Trump comments, which I guess was either incredibly fun, or incredibly frustrating, depending on how one was positioned.
Anyway, if we can indeed put to bed the idea that the Admin are seeking a softer greenback, then I guess we can return to the ‘status quo’, which in any case is a continuation of the ‘sell America’ trade, as participants continue to trim their US exposures amid ongoing policy volatility on the trade front. I’d still argue that the near-term balance of risks tilts towards a softer buck, at least until the tariff noise dies down a little.
As for the FOMC, there wasn’t much by way of surprises. The Committee maintained the target range for the fed funds rate at 3.50% – 3.75% as expected; there were, though, two dissents in favour of a 25bp cut, from Governors Miran and Waller – the former being expected, the latter possibly being an attempt to keep his long-shot hopes of succeeding Chair Powell alive. Accompanying that was a statement with a few minor changes compared to December – growth ‘solid’ vs. ‘moderate’, and unemployment showing ‘some signs of stabilisation’ – but one that also implied further cuts remain on the cards, again referring to ‘additional adjustments’ to the fed funds rate.
At the post-meeting presser, Powell predictably offered nothing on various issues ranging from recent FX moves, through to his plans after May. In fact, by and large, the presser was just a rerun of what was said in December, with Powell noting that the FFR remains within a ‘plausible range’ of neutral rate estimates, and that policy decisions will be taken on a ‘meeting-by-meeting’ basis moving forwards.
With all that in mind, the policy outlook hasn’t really changed much – further cuts are on the cards, though a move at either the March or April meeting would require a renewed deterioration in labour conditions between now and then. If those signs don’t emerge, though, the present ‘wait and see’ approach will probably persist through to the end of Powell’s term as Chair; while his replacement is likely to adopt a considerably more dovish stance, though substantial disinflationary progress is likely needed in order to bring the remainder of the Committee onboard with that view. For now, the latter scenario is a more plausible base case to my mind.
Given the lack of shifts in the outlook, it’s safe to say that ‘Mr Market’ wasn’t overly bothered by the Fed decision. In fact, you’d need a magnifying glass to see any of the moves that emanated from the event!
Suffice to say, we did get a little more vol over yesterday’s megacap earnings, which didn’t make for an overly auspicious start to ‘Mag 7’ reporting season. In short, Microsoft slumped after merely delivering inline growth in the all-important Azure revenue line; Meta traded in choppy fashion as markets digested yet another chunky increase in capex for the year ahead; while, lastly, Tesla gained ground on better than expected income & profitability metrics.
While I’d imagine that participants will probably want to see a fair bit more from Apple today, as well as Amazon and Alphabet next week, there’s nothing here to make me want to reconsider my bullish equity view. On the whole, earnings growth remains robust, the underlying economy remains solid, plus both monetary and fiscal tailwinds persist.
Elsewhere, briefly, I remain of the view that the Treasury curve will continue to steepen, especially with benchmark 10-year yields having remained north of 4.20%, and benchmark 30s above 4.80% through the FOMC, with said steepeners set to benefit largely from the Trump Admin’s ‘run it hotter’ approach. That, coupled with both reserve and haven demand, as well as the ongoing ‘sell America’ trade, also creates a potent cocktail to drive further gains in the metals complex, with gold notching another record high yesterday, and this sort of momentum not being a move that I’d want to stand in the way of.
LOOK AHEAD – After the fun of the Fed, and megacap earnings, yesterday, today’s docket is a little less busy.
On the data front, the weekly US jobless claims figures highlight proceedings, with both the initial and continuing metrics set to remain at relatively subdued levels, and with the latter coinciding with the survey week for the January employment report. We also receive the latest US factory orders report today, though referencing November so the data is rather stale, while a 7-year note auction rounds out this week’s Treasury supply.
Elsewhere, the Riksbank should hold rates steady at 1.75% this morning, while the Tokyo CPI figures out overnight could be worth watching, given the generally nervous nature of sentiment surrounding Japan right now. Finally, another busy earnings slate awaits, highlighted by Apple (AAPL) after the close, where iPhone demand over the key holiday season, as well as performance in China, will both be under the microscope.