We did suggest this week that Jerome Powell, Chairman of the Federal Reserve, could be one of the market swing factors this week, and he was. Jerome Powell, speaking at the Economic Club of New York, watered down the recent hawkish line he had been taking. He adjusted his comments from a few weeks ago when he expressed the view that interest rates were far from neutral, to suggesting they were close to neutral. Not hindering or stimulating growth. The market interpreted this as moderating interest rate rise expectations. The interest rate sensitive 2-year US Treasury yield fell below 2.8%, and the US dollar fell. These comments boosted equities as the Dow rose over 600 points and the NASDAQ index over 2%. This was a reverse market reaction to the more hawkish view previously expressed, which led to a correction of more than 10 pct in US equities. Jerome Powell may just have reissued the Fed underwriting equity markets, at least into the year-end.
The next possible event that could further boost or may take some of the steam out, is a possible announcement this week between China and America on trade as a result of the G20 meeting. One wonders if the other nations attending will try an exert pressure on the two economies to come to an agreement.
Mark Carney, described on Monday by Jacob Rees Mogg as a failed second-tier politician, (he is well placed to judge), waded back into the Brexit debate. Making a big splash as he did so. Politicians and economists often fear and misjudge outcomes. If we go back to the ’80s, in 1981 Geoffrey Howe’s budget under Maggie was described by a group of 364 economists who wrote a letter to the Times newspaper which was strongly critical of the budget and expressed the view that there was "no basis in economic theory or supporting evidence" for its measures, and that it threatened the UK's "social and political stability”. What it did was lay the foundations of economic stability for years to come, one of our longest periods of economic growth. Dropping out of the ERM was apparently going to be disastrous for the UK economy. It was painful for a short time, but we benefitted in the longer term by retaining our sovereignty.
The arrival of the year 2000 was another event that many thought was a disaster waiting to happen. To be fair, the worlds technicians did work hard to avoid any problems. In the end, the event passed smoothly. Conversely, the worlds economists and rating agencies slept walk in 2007. This is not to suggest we are heading into another 2007, it just goes to highlight how poor economists are at forecasting both busts and booms.