Fed pivot to December
Last night’s Fed meeting went pretty much as the market expected with the dollar slipping a tad in the aftermath. Overall if the mission was to ensure the market will keep the expectations of a Fed rate hike above 50% going into the election cycle then the Fed has done what it needs to do. A hike was never really on the cards; those who were predicting it knew it was a flyer that would make them look like heroes if a surprise emerged.
The Fed’s assessment of the US economy corroborated the issues that we have seen in the past quarter. Growth remains less than 2% on the year but is running higher from a poor first half of 2016, inflation is building and they believe that they will eventually hit their 2% target over the medium term. The jobs market is strong but productivity remains poor, and the consumer continues to spend. All of these are good enough to bring rates away from these crisis levels of accommodation in December.
As I said yesterday a rate hike is coming, on that I have no doubt – I think calls for a one-and-done policy move from the Fed are overly pessimistic – but to raise rates this close to an election this divisive would be a very strange move from an extremely cautious set of central bankers. So we’ll wait on December.
Focus must now shift to democracy and data
It was very strange that Yellen, when asked about the election during her press conference, told us that “We (the Fed) don’t consider factors like that (the Presidential Election)”. Regardless of your stance on who should win on November 8th, I think that is shocking to hear from the Fed Chair. The Bank of England considered the political effects of Brexit in the lead in to the vote so why shouldn’t the Fed ahead of an election as divisive as this.
As for the dollar, I think that the focus shifts back to what happens in the electoral cycle and only God knows what will happen there. Initial signs are suggesting that USD strength will emerge from gains in the polls for Trump – especially against MXN, CAD and CNY – but data dependency remains and the USD will need decent payrolls and wage numbers to push EUR/USD towards 1.10 and GBP/USD to fresh post-Brexit lows.
Dots put greenback on backfoot
For now the greenback is softer; while the odds of a rate hike in December have picked up to over 60% the curve of rate hikes beyond that have flattened. In June the Fed’s dot plots showed a median estimate of the Fed funds rate to be at 2.4% by the end of 2018 – that is now 1.9%. Similarly, it is only 1.1% for the end of next year, down from 1.6%.
Like roasting a good piece of beef, the Fed is going to be keeping things low and slow.
Elsewhere we have calm
Oil price gains overnight have given commodity currencies a lift through the Asian session with CAD and AUD pulling out some strength. Likewise sterling has regained the 1.30 level versus the USD following the Federal Reserve and yesterday’s report from the ONS that “the referendum appears, so far, not to have had a major effect on the economy. It hasn’t fallen at the first fence.” Of course, there are many fences to jump still.
Notable numbers and data due today come from the CBI’s reading of order books in the UK at 11am as well as US initial jobless claims at 13.30 and Eurozone consumer confidence at 3pm.