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Chinese Stimulus And Fed Language Doubts Knock USD Off Perch

Published 09/17/2014, 05:41 AM
Updated 07/09/2023, 06:31 AM

A report by an influential US monetary policy journalist in the Wall Street Journal and a Chinese stimulus effort that came from nowhere combined yesterday to knock the USD off its perch ahead of the conclusion of today’s Federal Reserve meeting.

Jon Hilsenrath’s typical Fed meeting outlook for the Wall Street Journal is normally couched fairly cautiously on the possible outcomes and decisions that the Federal Open Markets Committee could make. Yesterday’s article threw the cat in with the pigeons by suggesting that the “considerable time” language that so many have been looking for to be removed will stay.

I highlighted the risk and the probability of this in Monday’s and Tuesday’s Morning Updates. Once again I reiterate that I believe the Federal Reserve has little to gain from increasing the hawkishness of the language at the moment.

Improvements in both job and inflation markets have slowed since June. Today’s revised forecasts of economic performance may exhibit a resumption, or bettering even, of the recent trend, but if next month’s payrolls announcement or the upcoming PCE inflation report show further softness, then a change in language will be rightly viewed as premature.

The Fed’s decision on policy is an obvious move of no change in rates and a continuation of the $10bn a month tapering that has been occurring since January. The decision is due at 7pm alongside a policy statement that will be expanded upon and clarified by the Fed Chair Janet Yellen at 7.30pm.

The USD slipped lower on the publication of the article, breaching 1.63 in GBPUSD terms and getting close to 1.30 for the first time in a fortnight.

The market reaction to the story came a few minutes before reports out of China that the People’s Bank of China had pulled the lever on a stimulus plan that will lodge Rmb500bn, roughly £50bn, with the country’s five largest banks. Our expectations of stimulus were that they would eventually choose to use cuts in the Reserve Requirement Ratio – the proportion of a bank’s overall assets that must be kept in cash – to help increase lending. According to China watchers this additional cash is the equivalent of a 50bps cut in that ratio.

Data from China has of course been weak in the past few months. Whether the weekend’s particularly poor industrial production numbers were the straw that broke the camel’s back, we may never know. What we do know is that the rebalancing effort in China is once again on hold in a bid to maintain the 7.5% growth target.

It is a little under 48 hours until we will have a result on Scottish independence and, as a result, potentially only a little under 48 hours for the United Kingdom that we know to be left in its current form. The most recent set of opinion polls have done nothing to really shift the belief away from the fact that the results due in the early hours of Friday morning are at the moment too close to call.

All three of the polls that reported last night had the ‘No’ campaign in the lead by 52% vs 48%. These figures do not include undecided voters and it is on their backs that the overall decision will be made. As with all things in this referendum, both camps are justifying why those who are yet to make up their minds will end up springing for either ‘Yes’ or ‘No’. It is true that the significant majority of undecideds so far have split for the ‘Yes’ campaign, but in wider general elections it is the status quo that undecideds will normally decide to maintain.

This morning we veer away from Scotland briefly for the latest jobs report and the minutes of this month’s Bank of England meeting. We are expecting that the pressure on wages will not have alleviated through July – there is little reason to suggest a change while the continuation of job creation will see the unemployment rate dip to the lowest level in over 5 years.

The minutes of this month’s Monetary Policy Committee are unlikely to cause as much of a market ruction as last month’s did. We remain on course, I believe, for another round of dissent at this month’s Bank of England meeting with McCafferty and Weale repeating their vote for a 25bps increase in the Bank’s base rate, but that the other members of the MPC will continue to hold fire. Comments on Scotland will of course, be blown out of all proportion.

Yesterday’s inflation numbers saw a fresh 5 year low. For a central bank mandated for inflation targeting and price support this means that the Monetary Policy Committee will be able to lean on the slowing price outlook in a bid to keep policy as is for a little while longer. Of course, the headline figure does not tell the full story. Core prices surprised higher 1.9% in August; they were unaffected by the slips in oil prices or the 1.1% decline in food and alcohol through the past 12 months. Producer prices are warning of lower input costs for British industry which should allow for further softening of the price outlook as much as it will allow companies to continue rebuilding margins.

In the session before the Federal Reserve meeting, US CPI will be in focus – a poor report and that “considerable time” language will only be seen to remain ever longer.

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