Marshall Gittler's Market Outlook: USD up on more Powell press conferences; UK CPI, FOMC meeting

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06/13/2018

Market Recap

Relatively low volatility in the FX market, given the big news in the real world. The “two dictators” summit, as an unfortunate Fox News announcer accidentally said, didn’t have that big an impact on market sentiment – the S&P 500 for example was up only 0.17%, and even the South Korean KOSPI index was off slightly this morning. Nor did the US CPI data, which came in almost exactly as expected, have a big impact on markets.

USD was boosted by a report in the WSJ that Fed Chair Powell is considering holding a press conference after every FOMC meeting. He had said back in March that this was an idea he was “carefully considering.” The implication of this change would be that every meeting would be “live,” i.e. they could conceivably change rates at any meeting, rather than just the four a year that currently have press conferences. Actually, there’s nothing preventing them from changing rates at any meeting, just custom – and this custom only dates back to 2011. Before then there were no press conferences anyway. Nonetheless, the report does suggest ahead of tonight’s FOMC meeting that the Committee could be headed towards a steeper path of rate increases than the market is currently forecasting. That’s bullish for USD. As you can see from the graph, the market doesn’t entirely believe the Fed’s current estimates for rates, especially for 2020. But a move like what Powell is contemplating suggests that they are really serious about hiking further and indeed could do so even faster than they have suggested.

Sterling rallied after PM May won a crucial Brexit vote in Parliament. The UK lower house rejected an amendment that the House of Lords had put forward that would have required the government to accept the direction of Parliament in case of a Brexit stalemate. The PM had to offer several concessions to win this vote, concessions that make it less likely the UK will crash out of the EU without an agreement. The vote was therefore bullish for GBP. Sterling was unable to hold the gains vs USD however, indicating the underlying bearishness concerning the currency, and I expect today’s inflation data to encourage the bears further and send GBP lower (see below).

AUD was the big mover, although it’s hard to see why AUD in particular should’ve weakened so much. There was no AUD-specific news out at the time the currency plunged – rather, the move coincided with the appearance of the WSJ report speculating about the change to the FOMC’s press conference schedule. As you can see from the graph, AUD and CAD both fell vs USD simultaneously (USD/CAD, the orange line, is multiplied by -1 in order to have the two pairs moving in the same direction), indicating that this was a general USD move, not necessarily anything related to AUD. Bloomberg attributed the move to unspecified “trade concerns,” but the lack of any details makes me doubt this.

The Big Event:  the FOMC meeting

The Big Event of the day is obviously this evening’s meeting of the Federal Open Market Committee (FOMC), the US Federal Reserve System’s policy-making body. There’s no question about whether they’re going to raise rates; the market puts an 89% likelihood on that probability. The questions surrounding the meeting are a) the “dot plot” giving FOMC members’ estimates of where rates will be at the end of each year and b) the tone of the statement and Fed Chair Powell’s press conference following it.

As for the “dot plot,” a lot depends on whether they revise their economic projections, and if so, by how much. As you can see from the table, while growth so far this year has been below estimates, unemployment has already met their year-end projection. Inflation is still below their year-end forecasts, but not by much, and it’s at or above if we look at the qoq SAAR figure. I would expect them to revise their forecasts to show lower unemployment and higher inflation – i.e., faster achievement of their goals. They therefore ought to revise up their expected path of interest rates too. 

The tone of the statement should reflect this improved outlook, in my view. The overall view of the economy is likely to be somewhat more optimistic. In the first paragraph, last time they said inflation measures “have moved close to 2 percent.” This time they might change it to “remain close to 2 percent” or otherwise acknowledge that inflation is getting closer to their target. In the second paragraph, they have said they see the risks to the economic outlook as “roughly balanced” – they might tip the balance towards optimistic (although the trade issue could delay a change there).

Several Fed officials have signaled that they may change or even eliminate the “forward guidance” in the statement. The statement each time includes the pledge that “the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.” This statement was an important part of the Fed’s QE program – it was meant to reassure investors about the future and thereby strengthen the impact of the Fed’s loose policy today. However, now that the Fed has more or less achieved its targets of stable inflation and full employment, there’s little need for this help. Fed Governor Lael Brainard said in a recent speech that the phrase is “growing stale and may no longer serve its original purpose.” San Francisco (soon to be New York) Fed President Williams recently identified “a new normal for short-term rates of around 2½ percent.” Since today’s hike will bring the fed funds rates up to 2%, that would imply just two more hikes to achieve “normal” – hardly what the statement means by “for some time.” Removing that phrase would be an important step in the process of normalizing monetary policy.

Today’s indicators

Before the FOMC meeting, the European action starts in Britain.

The UK consumer price index (CPI) is forecast to look exactly like the previous month, with all the major rates of change the same, except for producer prices, which are forecast to rise at a faster pace. In other words, no sign of any acceleration in inflation at the consumer level. Coupled with yesterday’s employment data, which showed the rate of increase in wages slowing, this would mean less need to tighten rates any time soon, which should be negative for the pound.

US producer prices come out shortly before the FOMC decision. The message emerging from this data is forecast to be the same as that from yesterday’s US CPI: continued upward creep in US inflation. USD-positive.

Overnight, Australia announces its employment data. The expected rise in employment of 19k is somewhat below trend but not significantly so (the six-month average is 25k) while the unemployment rate is forecast to remain in the 5.4%-5.6% range that it’s been in for the last year. All told a largely no-change figure that should make for no change in AUD, either.

China announces its retail sales, industrial production (IP) and fixed asset investment (FIA) figures for May. You won’t be too surprised to hear that the rate of growth in all of these is forecast to remain pretty much the same. In fact, while retail sales are forecast to accelerate a bit, growth in IP and FIA is forecast to remain the same.

It interests me that before 2011, China’s industrial production seemed to be closely aligned with the credit cycle. However since about 2012, there hasn’t been any connection at all – production steadily slowed even when the credit impulse was highly positive, such as 2013, and it’s been quite stable even when credit once again picked up in 2016 and the slowed in 2017. The picture is pretty much the same with retail sales and FIA. It makes me wonder where the money is going.

In any event, no change in the data means no reason to change the outlook, so AUD and NZD ought to be little affected.

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