US bid: Stocks on Wall Street rose to all-time highs, the dollar rose strongly and US front-end yields ticked up as the White House confirmed it will stick with Jay Powell as chairman of the Federal Reserve. Lael Brainard will become vice-chair. I think Powell is rightly getting a heck of lot of credit for steadying the ship at the height of the pandemic when credit markets were exploding. What he’s doing with inflation now is another matter but Brainard wouldn’t have moved swifter on rates, that is for sure.

Market reaction has been pretty hawkish, which is kind of odd since a) he ain’t no hawk and b) the odds on Brainard were long. Still there seems to have been something of a Brainard trade which is being unwound, or perhaps it’s just the kind of market overreaction to an unpriceable bit of news which is good to fade…

Markets are pricing in a rate hike by June vs July before the announcement, with 2s up 5bps to 0.566%, hitting the highest since March 2020 and 10s rising back to 1.6%. Gold extended its drop as yields rose. The dollar index spiked to a new high at 96.50, whilst EURUSD plumbed a new 16-month low at 1.1236. Cable also lower, back to 1.340 support from 1.3450 before the news. S&P 500 and Nasdaq Composite have hit fresh all-time highs, while the Dow is up 170pts. Banks +2% – yields but also Powell is seen as not such a tough sheriff as Brainard was going to be perhaps? 

Markets like the continuity – we know what we are getting with Powell, the market is confident in his leadership, and Brainard will be an effective deputy and mouthpiece in a similar fashion to the outgoing Clarida.  

Markets also probably like the fact that the decision to keep a Trump appointee helps to depoliticize the role of Fed chair. This is a good thing – central bank chiefs should not be political appointments, selected by whatever administration in power to suit their partisan ends. Investors will be happy that the left wing of the Democrat party didn’t get their pick – again apolitical appointment is important. But also the fact the ‘progressives’ haven’t got their way this time is good for USD. Biden’s got an eye on opinion polls going south so side-lining the progressives in his party here is probably seen as a good thing, too.

Meanwhile, the pressure on EURUSD remains on both sides of the cross as Germany seems to be heading into lockdown – Merkel said situation with Covid is the worst it’s ever been, new restrictions needed. Reaction to the Powell announcement at 2pm is clear to see.