The market is focused on a less-hawkish message from Powell today but the big moves this week are in China, where it's increasingly clear that covid-zero is coming to an end.
Controls must be applied with “softness” and “greater precision” to ensure daily life can continue, various news reports in official publications said. Reports of easing lockdowns are widespread.
None of that speaks to any kind of coherent plan and few think anything resembling a full reopening before the springtime is realistic, but the path is clear.
What is not being discussed is how China's reopening will reverberate back into the global economy. A reopening could set off a wave of demand that boosts global inflation, particularly via commodities. We're in the midst of a global energy crisis and the only thing holding back oil prices is the lack of Chinese demand. At the same time, Russian barrels may disappear and OPEC is still close to pumping full-throttle.
There's a scenario where much of the global economy finally gets on top of inflation only for it to stall out well-above 2% targets because of China's reopening. To be sure, there are positives as well -- a full China reopening will make factories and ports run smoother.
On net though, it will put upward pressure on global inflation at a vulnerable time while also adding volatility and uncertainty. I don't expect China to lay out a long-term plan so it will be headline-to-headline until the reopening is complete.