Pavlovian Powell Play

Fed Chair Powell stuck to a largely expected rhetoric during his Congressional testimony after Monday's unexpected Fed play into corporate bonds. Powell's testimony lead with indications that the US may be bottoming out, while rates will remain near zero growth until growth returns on track. He did his best to qwell speculation of negative rates, while admitting they were looking at yield curve control.

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Monday's unexpected announcement from the central bank revealed more about market sentiment than about anything new. Risk trades rebounded after a poor start to the week. Now heavy slate economic data kicks off.

The Fed has rolled out an unprecedented number of programs since the start of March and keeping tabs on all of them is no easy job. On Monday, the Federal Reserve announced it was buying corporate bonds directly. Risk assets jumped and the US dollar sank. Previously the Fed had only been buying corporate bond ETFs.

A closer inspection shows that the Fed was mostly doing what was already announced. When corporate bond buys were announced in March, the plan was always to buy ETFs first (that started May 12), then buy corporates directly once some kinks were worked out.

Effectively the Fed was simply doing what they had already promised to do.

Certainly we could take issue the rational. Initially the Fed said “Purchases will be focused on reducing the broad-based deterioration of liquidity seen in March 2020 to levels that correspond more closely to prevailing economic conditions.” Corporate spreads are already in-line with that objective, so arguably the buying is no longer needed, or could be tapered.

Of course, that wouldn't be in-line with Powell's pledge last week to "act forcefully, proactively and aggressively."

So while this wasn't anything new or surprising, the timing was odd. It could have been announced on the weekend or before the market open.

Given that this wasn't anything new or material and that the Fed didn't signal anything unexpected, the main takeaway is market behaviour. The automatic risk-on reaction to “Fed” and “bond buying” remains the order of the day. There's no deeper strategy. That underscores the emotion in the market and how the narrative can flip between the virus and easy-money.

Risk trades were initially bumped higher Monday when Florida rose 2.3%, below the 2.4% average over the past week.  However note that cases reported Monday have been consistently low (similar to the UK). So while cases at 1758 were certainly lower than the 2581 record on Saturday, they were much higher than 996  a week ago on Monday.