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Via Bloomberg macro strategist Richard Breslow,

There was something masterful in the Congressional testimony by Fed Chairman Jerome Powell. And it wasn’t that his dovish tilt should have come as any momentous surprise. There already was a lot of accommodation assumed in market pricing. Although the fact that there has been renewed hope for the 50 basis point club wasn’t at all insignificant.

That was a clear hint not to conclude one-and-done is their base-case scenario — rather a double shot of juice is still likely. But it does mean that data-dependency isn’t totally dead.

The back-up in rates and the pause in the run-up of equity prices after the strong non-farm payrolls report had more to do with weak hand positioning than a belief that the number was a game changer. If there was any doubt about it, he made it quite clear that it wasn’t. As in, “We have a plan and we’re sticking with it.”

And despite all the hoopla surrounding the reported trade truce reached at the G-20 meeting, corporations making supply chain and capital commitment decisions have remained very much in the seeing-is-believing camp. Investors are, as always, happier to take things at face value. But no one should get overly excited until you hear that the issues surrounding Huawei Technologies have been sorted.

What was so impressive about his presentation was his ability to allow, even encourage, market participants to hear exactly whatever emphasis would resonate with them in particular. And make the virtually promised rate cut both palatable and understandable.

Some heard that the Fed was going to finally bring the issue of inflation to the fore. The word, “transitory” has been banished to the dustbin of email inboxes. The takeaway was there is no choice. It has conveniently come to be suddenly understood as the source of so many negative externalities. And that it won’t fix itself.

Others heard global growth concerns. And it was taken for granted that only the Fed can do something about it. Naturally. Still more were taken by the fact that the Fed is being influenced by recent weaker domestic manufacturing, along with the argument that there is still labor market slack. The list goes on. If you needed any additional convincing there is always the allusion to government dysfunction and the challenges this fall will bring.

I’ve yet to hear anyone, apologies to those that have, arguing about the efficacy of rate cuts. Every analyst seems to have had their ticket punched. July seems not only to be fully taken for granted but accepted as appropriate. Very impressive job.

The subtext to this whole thing is that a large number of the world’s central banks need to cut their own rates — for even more pressing reasons. The ECB and PBOC come to mind. They desperately need the cover of the Fed to do so without risking being accused of nefarious motives.

And if this move by the Fed allows them to do so, it will have much more knock-on positive effects for the rest of the world than whatever the FOMC is planning if taken in isolation. In this sense, the Fed is indeed acting as the global central bank. Just not the way that is commonly assumed.

At this point, one of the more intriguing game-theory issues to consider is whether the ECB does something the week before the Fed meeting or six weeks after. Don’t trade the euro without thinking about this. Just remember, at the end of the day, Europe can’t tolerate a meaningfully stronger currency. And it is wrong to demand it. How this plays out will present trading opportunities.

In the meantime, it’s probably safe to assume traders are being encouraged to extend their risk exposures even further. Official denials of asset price bubbles should be both comforting and worrying. In that order.

If there is any reason for concern about how seamlessly this all evolves, it’s that curiously carry and yield grabs haven’t been more dramatic. Which suggests that the central banks are indeed coming to the market not the other way around. And everyone and their deskmates already have the positions.



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