rss

A quick glance at the key risk events in markets this week

It is going to be an eventful week in markets despite the slower start today

Let us take a look at what else is on the agenda:

Tuesday, 10 December
– RBA governor Philip Lowe speaks at the AusPayNet Summit in Sydney
– China November CPI data
– Germany December ZEW survey current conditions, expectations
Wednesday, 11 December
– US November CPI data
– FOMC December monetary policy meeting & Fed chair Powell press conference
Thursday, 12 December
– UK general election
– SNB December monetary policy meeting
– ECB December monetary policy meeting & ECB president Lagarde press conference
– BOC governor Stephen Poloz speaks about the Canadian economic outlook for 2020
Friday, 13 December
– US November retail sales data
Sunday, 15 December
– Deadline before US tariffs on $156 billion of Chinese goods go into effect
These will be the key ones to pay attention to but there will also be other smaller data releases during the week that will also have some say to the ebb and flow of things.
As such, fret not about the lack of meaningful moves in markets so far today. Things will surely heat up over the next few days.

What’s driving the USD right now?

What’s driving the USD right now?

What's driving the USD right now?

The FOMC decided to pause their recent easing cycle, but they also said that rate hikes were not going to be considered for some time, signalling a broadly more dovish bias to US monetary policy.The expectations for the rest of 2019 is that the Fed will remain on hold and that the holding position for the medium term will be for rates to remain as they are.

USD being driven by it’s safe haven status

The main driver then, at the moment, is coming from the USD’s status as a safe haven currency. The flip flopping of the US-China trade dispute, which is subject to regular and rapid change, has been moving the USD around on safe haven moves:

  • Positive developments in the US/China trade tariffs weighs on the USD
  • Negative developments in the US/China trade tariffs supports the USD

The FOMC statement for the October 2019 meeting

FOMC statement for the October 2019 meeting…

October 30, 2019

Federal Reserve issues FOMC statement

For release at 2:00 p.m. EDT

Information received since the Federal Open Market Committee met in September indicates that the labor market remains strong and that economic activity has been rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although household spending has been rising at a strong pace, business fixed investment and exports remain weak. On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the Committee decided to lower the target range for the federal funds rate to 1-1/2 to 1-3/4 percent. This action supports the Committee’s view that sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective are the most likely outcomes, but uncertainties about this outlook remain. The Committee will continue to monitor the implications of incoming information for the economic outlook as it assesses the appropriate path of the target range for the federal funds rate.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; James Bullard; Richard H. Clarida; Charles L. Evans; and Randal K. Quarles. Voting against this action were: Esther L. George and Eric S. Rosengren, who preferred at this meeting to maintain the target range at 1-3/4 percent to 2 percent.

Implementation Note issued October 30, 2019

The FOMC September 2019 full statement

FOMC statement from the September 2019 rate decision

Information received since the Federal Open Market Committee met in July indicates that the labor market remains strong and that economic activity has been rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although household spending has been rising at a strong pace, business fixed investment and exports have weakened. On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the Committee decided to lower the target range for the federal funds rate to 1-3/4 to 2 percent. This action supports the Committee’s view that sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective are the most likely outcomes, but uncertainties about this outlook remain. As the Committee contemplates the future path of the target range for the federal funds rate, it will continue to monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

Voting for the monetary policy action were Jerome H. Powell, Chair, John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Charles L. Evans; and Randal K. Quarles. Voting against the action were James Bullard, who preferred at this meeting to lower the target range for the federal funds rate to 1-1/2 to 1-3/4 percent; and Esther L. George and Eric S. Rosengren, who preferred to maintain the target range at 2 percent to 2-1/4 percent.

Fed lowers interest rates by 25 basis points, as expected

Highlights of the FOMC statement on September 18, 2019:

  • Fed funds target rate lowered to 1.75%-2.00%
  • Prior Fed funds rate was 2.00%-2.25%
  • IOER lowered to 1.80% vs 1.85% expected
  • IOER spread widened to 20 bps
  • Statement repeats that economic activity is rising at a moderate rate
  • Repeats the labor market remains strong
  • Repeats will act as appropriate to sustain expansion
  • Repeats inflation running below 2%
  • Bullard voted to lower rates more aggressively, George and Rosengren voted for no cuts
  • George and Rosengren dissented previously for no cuts
  • Says household spending been rising at a strong pace vs ‘has picked up from earlier in the year’ prior
  • Adds that exports have weakened
  • Business fixed investment ‘has weakened’ vs ‘has been soft’

There isn’t much of any kind of change in the statement. The market is focusing on the dot plot, which doesn’t show another cut this year and only an 9-8  preference for no cut at all next year.

Time to dust off the ‘hawkish cut’ outlook – September FOMC to lift the USD

Morgan Stanley expect the sept September meeting of the Federal Open Market Committee to cut

  • by 25bp
  • But the dot plot published alongside is unlikely to show more rate cuts for the balance of 2019 and into next
  • expects confusing dots reflecting diversity of views on the committee
More:
  • ” …. FOMC materials are likely to be insufficiently dovish to meet the market’s lofty expectations”
  • “USD is likely to outperform on the day, particularly against risk-sensitive currencies like high-yielding EM FX and the dollar bloc” 

Full text of the July 31, 2019 FOMC statement

The full text of the July 31 statement from the FOMC

Federal Reserve issues FOMC statement
Information received since the Federal Open Market Committee met in
June indicates that the labor market remains strong and that economic
activity has been rising at a moderate rate. Job gains have been solid,
on average, in recent months, and the unemployment rate has remained
low. Although growth of household spending has picked up from earlier in
the year, growth of business fixed investment has been soft. On a
12-month basis, overall inflation and inflation for items other than
food and energy are running below 2 percent. Market-based measures of
inflation compensation remain low; survey-based measures of longer-term
inflation expectations are little changed.

Consistent with its statutory mandate, the Committee seeks to foster
maximum employment and price stability. In light of the implications of
global developments for the economic outlook as well as muted inflation
pressures, the Committee decided to lower the target range for the
federal funds rate to 2 to 2-1/4 percent. This action supports the
Committee’s view that sustained expansion of economic activity, strong
labor market conditions, and inflation near the Committee’s symmetric 2
percent objective are the most likely outcomes, but uncertainties about
this outlook remain. As the Committee contemplates the future path of
the target range for the federal funds rate, it will continue to monitor
the implications of incoming information for the economic outlook and
will act as appropriate to sustain the expansion, with a strong labor
market and inflation near its symmetric 2 percent objective.

In determining the timing and size of future adjustments to the
target range for the federal funds rate, the Committee will assess
realized and expected economic conditions relative to its maximum
employment objective and its symmetric 2 percent inflation objective.
This assessment will take into account a wide range of information,
including measures of labor market conditions, indicators of inflation
pressures and inflation expectations, and readings on financial and
international developments.

The Committee will conclude the reduction of its aggregate securities
holdings in the System Open Market Account in August, two months
earlier than previously indicated.

Voting for the monetary policy action were Jerome H. Powell, Chair;
John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; James
Bullard; Richard H. Clarida; Charles L. Evans; and Randal K. Quarles.
Voting against the action were Esther L. George and Eric S. Rosengren,
who preferred at this meeting to maintain the target range for the
federal funds rate at 2-1/4 to 2-1/2 percent.

Dovish testimony from Powell, 3 rate cuts on the way, starting with 25bps in July

That’s the expectation from Bank of America / Merrill Lynch for the FOMC after Fed Chair Powell’s testimony on Wednesday

Powell “delivered a dovish testimony
  • hinting strongly at an upcoming cut
BoA ML:
  • expect a 25bp cut in July (31st)
  • and cuts thereafter at each of the following two meetings (September17-18 and October 29-30)
  • cumulative 75bp of easing
More from the note:
  • The Fed seems to be willing to dismiss the better data from the US and instead is focusing on the weaker global data.
  •  Indeed, when Powell was asked if the strong jobs report changed his views on cuts, he stated “no”. 

Fed’s Bullard and Kashkari make case for rate cut

Slowing growth momentum and the lack of inflationary pressure are fuelling the case among Federal Reserve policymakers that a rate cut may be necessary this year in order to stimulate the economy.

A duo of Fed officials — St Louis Fed president James Bullard and Minneapolis Fed president Neel Kashkari — on Friday cited rising global uncertainty as a reason the US central bank should take immediate action to lower rates.

At its latest policy meeting this week, the Federal Open Market Committee voted 9-1 to hold rates steady but signalled a strong possibility of cutting them this year.

Mr Bullard, one of the most dovish members of the Fed board, was the lone dissenter. He said on Friday he pushed for a quarter-percentage point cut at the meeting in order to safeguard against weaker growth, tepid inflation and an increasingly volatile environment.

“I believe that lowering the target range for the federal funds rate at this time would provide insurance against further declines in expected inflation and a slowing economy subject to elevated downside risks. Even if a sharper-than-expected slowdown does not materialise, a rate cut would help promote a more rapid return of inflation and inflation expectations to target,” he said in a brief statement posted on his bank’s website.

Mr Kashkari, a non-voting member of the FOMC, went even further. In an essay published on Friday, he said he argued at this week’s meeting for a 50 bps cut in order to “re-anchor” inflation expectations. (more…)

Federal Reserve Raises Discount Rate

breaknnews

The Federal Reserve Board on Thursday announced that in light of continued improvement in financial market conditions it had unanimously approved several modifications to the terms of its discount window lending programs.

Like the closure of a number of extraordinary credit programs earlier this month, these changes are intended as a further normalization of the Federal Reserve’s lending facilities. The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy, which remains about as it was at the January meeting of the Federal Open Market Committee (FOMC). At that meeting, the Committee left its target range for the federal funds rate at 0 to 1/4 percent and said it anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. (more…)