Loose lips make Fed expectations slip

June 5, 2019

USD

Dovish Federal Reserve rumbles sent the entire US yield curve down yesterday, which, led by moves at the front-end of the curve, eventually dragged the dollar down in the mud. After the dovish tones sung by St. Louis Fed President James Bullard on Monday, it was Chicago Fed’s President Charles Evans’ turn to further fuel the fire of short-term rate cut expectations by saying that markets “seem to be seeing something that we’re not seeing as quickly (…) We need to pay attention to that.”. Jerome Powell in an afternoon speech then managed to apply all the lessons of what to do when taken hostage, as he shared some views that appeared relevant on the surface, but when you dig deeper, actually tell you little concrete about which direction monetary policy will take in the future. “At the start of the press conference, he mentioned the Fed “as always, will act as appropriate to sustain the expansion”, which markets took as a signal the door to further short-run rate cuts may be slightly more open. However, he also said that to serve public interests it is the Fed’s duty “to take those measures now that will put us in the best position to deal with our next encounter with the lower bound”, which implies the Fed wants to keep some powder dry to respond to the next financial crisis. On balance, Powell didn’t give us much to determine whether he favours short-term rate cuts or not, which means we’ll have to wait until the Federal Open Market Committee meeting of the 19th of June to discover more about his views on this topic. His second-in-command, Vice Fed Chair Richard Clarida, will take the stage today at 14:45 BST, which can still put rate expectations on the move as he is seen by many as the real thought leader of the FOMC.

GBP

Sterling’s price action amidst a broadly weakening dollar evidences the amount of political risk the currency still holds. The pound rallied only 0.71% despite sitting at a low base and the US dollar softening 1.1% against the G10 as measured by the DXY index. Political risk is still the key player for the pound, and last night saw the release of a timeline for the leadership contest. The UK will have a new Prime Minister by the week of July 22nd, and membership hustings kicked off last night in Westminster. Politico reports that up to 100 MPs were crammed into a room in Westminster to watch four candidates pitch to the Tory moderates, one of which being bookies favourite Boris Johnson. Another set of hustings will happen tonight at 17:00BST including figureheads such as Jeremy Hunt and Dominic Raab. Johnson focused on the potential “extinction” of the Conservative party if Brexit isn’t delivered in a timely manner, doubling down on threats of a no-deal exit in the case of not being able to renegotiate a deal. Voting itself will begin on June 13th, with further votes on June 18, 19 and 20 to whittle the big list of candidates down to the final two. Meanwhile, Donald Trump travels down to Portsmouth on the final day of his state visit. Trump is also expected to hold meetings with Foreign Secretary Jeremy Hunt and Environmental Secretary Michael Gove before his departure, following a call with Boris Johnson yesterday, highlighting that the race to number 10 may be more clear cut than originally thought; if Trump’s meetings are anything to go by.

EUR

The euro briefly touched a seven-week highpoint against USD yesterday, more driven by broad dollar weakness than by outstanding euro strength. The Eurozone May Consumer Price Index Flash Estimate didn’t meet the expected level as it fell to 1.2% compared to 1.7% in April, while Core CPI decreased from 1.3% in April to 0.8% last month. Markets were mostly unmoved by these data as a bounce-back was expected after the Easter driven surge in inflation in April, while last week’s Flash CPI figures from Germany, France, Italy and Spain already signalled a decline in price level growth. This will nevertheless be unwelcome news for the European Central Bank that holds its monetary policy-setting meeting on Thursday as it needs to grapple with the fact their policies continue to fail to drive up inflation. This morning’s Final Services PMI’s outperformed forecasts with a score of 52.9, counterbalancing the weak manufacturing PMI’s somewhat. Whether this will be enough for the ECB on Thursday to remain at least some level of optimism appears doubtful at the moment, as both sectors taken together still only point to a very marginal growth rate.

CAD

The loonie extended its gains from Monday yesterday, maintaining momentum overnight as crude oil prices stabilised and the US dollar was heavily sold in general. The possible imposition of US Tariffs on Mexican imports remains a threat to the loonie, due to possible complications in the ratification of the USMA trade deal. Today at 13:30 BST, Labour Productivity data for the first quarter will be released.

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