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Cable jumps to test $1.29 as Nigel hands Boris an early Christmas present
Markets have quickly priced in higher odds of a Conservative Party victory in the coming General Election after the Brexit Party today launched its own campaign.
Party leader Nigel Farage has backed away from his initial aim of fielding 600 candidates and will instead focus on Remainer strongholds; those held by Labour and the Liberal Democrats.
Farage has gone as far as to say that his party will not contest the 317 seats won by Conservative MPs during the 2017 election. He seems to have been persuaded by Boris Johnson’s commitment not to extend the transition period beyond December 2020.
Having knocked on $1.29, cable pared gains to trade around $1.2880. EURGBP dipped below 0.8560 before retracing to around 0.8570. The pound is stronger since a clear, decisive election win for the Conservatives will provide clarity on Brexit – anything else becomes messy.
This is a huge boon for Boris Johnson. Conservatives had reason to fear the Brexit Party before, as it offered a place for Leave voters who felt betrayed by Johnson’s broken promise to get Brexit done by October 31st. The PM claimed he would rather be dead in a ditch than request an extension, but thanks to some legislative arm-twisting, he was forced to do so.
Everyone knew it would have been crazy politics for the Brexit Party to take Leave votes away from the Tories and enable a pro-Remain grouping to take seats.
Now Leavers in many constituencies have a much clearer choice; back the Tories or abandon Brexit.
Brexit Day delayed as UK gears up for another General Election
Today was supposed to be Brexit Day. Instead the whole thing is on pause for another three months while the UK holds another General Election.
We’ll soon be entering the government’s quiet period, known as purdah, during which Downing Street won’t be announcing any major new policies that could influence the campaign.
Sterling is also facing a quiet period as well. The diminished threat of a no deal Brexit – for the time being – is providing solid support, but the upside is limited due to the political uncertainty.
Over the past few days cable has bounced between 1.28 and1.30, but there was a Fed meeting driving the dollar and the pound’s contribution to the volatility looked limited.
The deal on the table makes all the difference
We’ve been expecting an election for weeks now, and the upcoming poll is very different from a market perspective than it would have been if it had been held a couple of months earlier.
Boris Johnson managed to renegotiate Theresa May’s withdrawal agreement, replacing the backstop with something he claims is more palatable. The DUP don’t like it, however, and they’re not alone.
What’s important here is that if Boris gets to return to No.10 with a solid majority it’ll be his withdrawal agreement bill that he attempts to implement. This is a much better outcome for cable than the no deal Brexit he seemed intent on pursuing when he won the leadership contest.
Labour seems less market friendly no now deal off the table
For a while it looked like markets might have been relieved by the prospect of a Labour government due to its aversion to a no deal Brexit.
Back when Boris was talking about no deal, Labour was pretty tight-lipped about what exactly it wanted. Jeremy Corbyn has since come out in favour of a confirmatory referendum on a Brexit deal.
The political landscape has shifted away from a no deal Brexit. A Conservative majority may not be the downside risk it was once perceived to be. Labour still has the more market-friendly Brexit policy, but the Conservative alternate is not nearly as unpalatable as it once was. All parties in this election (other than the Brexit Party) are now offering to avoid a no deal exit.
This may free up traders to look a bit longer term and take into account Jeremy Corbyn’s radical plans for shaking up the system.
What are the risks of a hung Parliament?
The latest YouGov poll shows the Conservatives hold a 15-point lead over Labour at 36%, while Labour, at 21%, are just three points ahead of the Liberal Democrats. But it’s vital to remember that the Conservatives were polling at 44% the day before Theresa May called her disastrous 2017 election. Boris is by no means going to walk this one.
While another huge surge for Labour can’t be written off, perhaps the bigger threat comes from Nigel Farage’s Brexit Party. It could hoover up the votes of both Tory and Labour Leavers, weakening both parties. The other parties have given them the perfect campaign materials; Boris broke his own promise to ‘get Brexit done’ by October 31st, and Labour and the Lib Dems both want a second referendum.
Rather than looking at one established party dominating the others, this could be an election that sees the Brexit Party squeeze its way into Parliament, leaving no one with a majority. Not only would this promise many more months, if not years, of further chaos, but it would also put a no deal exit firmly back on the table, especially if hardcore Brexiters in the Tory party make alliances with Nigel Farage.
There really is a lot to play for, and the outcome will have huge implications for the UK’s future. But until we get more polling data and the candidates start doing things that are seen to dramatically alter their chances, the pound will be paralyzed by uncertainty.
Week Ahead: Nonfarm payrolls, China PMIs and Eurozone inflation on tap
Welcome to your guide to the week ahead in the markets. China trade talks are ushered in by PMI data, Eurozone inflation results and US nonfarm payroll reports.
US nonfarm payrolls
The set-piece US labour market report on Friday is the main eco event for market watchers. Signs of a slowdown in employment growth are showing, supporting the doves’ case for further rate cuts. Will we see stronger wage growth though? The NFP report missed expectations on the headline number with employers adding just 130k last month versus the 160k expected.
China data ahead of trade talks
The week gets a kickstart with more economic data from China likely to give more clues about the impact of the trade war. The official manufacturing and services PMIs will be followed by the closely-watched private Caixin manufacturing survey in the early hours of Monday.
The European Central Bank has cut rates, so what now? Inflation has proved stubbornly weak in the Eurozone, with headline inflation in August of just 1%, while core inflation was a meagre 0.9%. Market expectations for inflation remain subdued. There seems little hope that inflation will start to tick higher and give the ECB some breathing space. Euro area CPI preliminary readings will be delivered on Tuesday morning.
MPs are back to business, but we don’t know where this leaves the only thing that matters for sterling right now – will there be a deal or not? GBP pairs will remain exposed to headline risk as the market tries to figure out which way the wind is blowing.
The Reserve Bank of Australia is expected to cut interest rates again when it convenes on Tuesday. Speaking last week, governor Philip Lowe gave a very strong signal that rates would be cut again from the current record low 1%.
There are several corporate data releases this week, here are the main ones to put in your diary.
|Oct 1st||Ferguson||FY 19 Full Year Results|
|Oct 1st||Greggs||Q3 Trading Update|
|Oct 2nd||Tesco||Interim Results|
|Oct 3rd||Pepsico||Q3 Earnings|
|Oct 3rd||Ted Baker||Interim Results|
|Oct 3rd||H&M Group||Q3 Results|
Coming Up on XRay
Don’t miss our upcoming video streams on XRay. You can watch them live directly through the platform or catch-up afterwards when it suits you.
|07.15 GMT||Sept 30th||European Morning Call|
|15.00 GMT||Sept 30th||Charmer Trading talks Forex|
|15.45 GMT||Oct 1st||Asset of the Day: Oil Outlook|
|19.00 GMT||Oct 1st||Live Trader Training|
|18.00 GMT||Oct 3rd||The Stop Hunter’s Guide to Technical Analysis (part 5)|
|12.30 GMT||Oct 4th||LIVE Nonfarm Payrolls Coverage|
Key Economic Events
There’s a lot of data coming out in the next few days, particularly at the start of the week.
|01.00 GMT||Sept 30th||China Manufacturing and Services PMIs|
|01.00 GMT||Sept 30th||ANZ Business Confidence|
|01.45 GMT||Sept 30th||China Caixin PMI|
|08.30 GMT||Sept 30th||UK Final QoQ GDP|
|12.00 GMT||Sept 30th||Germany CPI Inflation YoY|
|03.30 GMT||Oct 1st||RBA Interest Rate Decision and Statement|
|08.30 GMT||Oct 1st||UK Manufacturing PMI|
|09.00 GMT||Oct 1st||Eurozone Preliminary CPI|
|14.00 GMT||Oct 1st||US ISM Manufacturing PMI|
|12.15 GMT||Oct 2nd||US ADP Nonfarm Employment|
|14.30 GMT||Oct 2nd||US Crude Oil Inventories|
|08.30 GMT||Oct 3rd||UK Services PMI|
|12.30 GMT||Oct 4th||US Nonfarm Payrolls|
Week Ahead: Brexit courtroom drama, US inflation and euro area PMIs
Welcome to your guide to the week ahead in the markets. This week, Brexit is inescapable and Euro data comes in.
UK Supreme Court ruling
One thing is certain – the Brexit comedy/tragedy will continue this week following the drama of the Supreme Court. Boris Johnson will find out this week whether his decision to suspend Parliament was legal. Meanwhile rumours of the chances of a ‘deal’ between the UK and EU will no doubt do the rounds.
Sterling will remain exposed to headline risk and be more volatile than peers, although until there is real clarity, GBP pairs may lack direction over the coming days.
US PCE inflation
The Fed is relaxed about the uplift in the core CPI readings, which jumped to 2.4% last time out. On Friday markets will be focused on the Fed’s preferred inflation gauge – core PCE.
While announcing a quarter point cut to rates last week, FOMC members left their inflation expectations for this year and next unchanged. If the PCE gauge follows the CPI indicator, there may be some concern that inflation is rising faster than policymakers are forecasting.
Following the ECB interest rate cut, markets are shifting to eco data to show whether there’s any sign of uplift in the Eurozone economy. Flash manufacturing and services PMIs are due Monday, while the German Ifo business climate report is released on Tuesday.
Reserve Bank of New Zealand governor Orr has said the central bank is in wait and see mode as it assesses the impact of cuts this year. Markets don’t expect any change to the main cash rate on Wednesday, but recent GDP slowing does suggest the RBNZ will maintain its easing bias and accommodative stance.
Keep these dates in your diary, as results come out for Manchester United, Nike and more.
|Sept 23rd||Cintas||Q1 2020|
|Sept 23rd||Manchester United||Q4|
|Sept 24th||Nike||Q1 2020|
Coming Up on XRay
It’s a busy week on XRay, make sure you don’t miss out on these live video sessions. Tune in live, or watch on catch-up when it suits you.
|07.15 GMT||Sept 23rd||European Morning Call|
|17.00 GMT||Sept 23rd||Blonde Markets|
|15.45 GMT||Sept 24th||Asset of the Day: Oil Outlook|
|19.00 GMT||Sept 25th||Asset of the Day: Indices Insights|
|18.00 GMT||Sept 26th||The Stop Hunter’s Guide to Technical Analyis (Part 4)|
Key Economic Events
Lots of US and Euro data out this week, so expect to see some reaction in the currency markets.
|07.15-08.00 GMT||Sept 23rd||Eurozone Flash PMIs|
|13.45 GMT||Sept 23rd||US Flash Manufacturing PMI|
|08.00 GMT||Sept 24th||German IFO Business Climate|
|14.00 GMT||Sept 24th||US CB Consumer Confidence|
|02.00 GMT||Sept 25th||RBNZ Official Cash Rate and Statement|
|14.30 GMT||Sept 25th||US Crude Oil Inventories|
|12.30 GMT||Sept 26th||US Final GDP|
|12.30 GMT||Sept 27th||US PCE Inflation, Core Durable Goods|
Cable softens as UK nears general election – and that’s when the real pain begins
Markets usually know what to do in a general election – hope a right-leaning party takes the day. But what happens when the socialists are the ones who could have the best approach to the economy?
In other circumstances, Boris Johnson would be the perfect election candidate. Sterling would surge on expectations that he would stroll comfortably to a majority. He’s charismatic, respected by many, and is facing up against Jeremy Corbyn – the perennial fence-sitter who struggles to keep his own party united.
But, as far as the markets are concerned, the current Prime Minister has a major flaw. He seems determined to take the UK out of the European Union without a deal on October 31st. He may make claims to the contrary, but his extended proroguing of Parliament and his refusal to budge on the Irish border backstop make negotiating and ratifying a new deal virtually impossible.
GBP/USD rallies hard after Boris Johnson Parliamentary defeat
It was for this reason that Sterling rallied hard this week as the opposition, with the support of 21 Conservative rebels, forced through a bill that would allow them to take control of the Parliamentary agenda and table new legislation obligating Johnson to get an extension.
Cable shot up 1.3% in overnight trading, and pushed 0.6% higher the following session to rebound from “flash crash” lows to its highest levels ($1.2350) in nearly six weeks. EUR/GBP was forced lower, falling from €0.9080 to €0.8940.
Johnson responded by calling for a snap general election, but his efforts were thwarted. Labour abstained from the vote, meaning the motion failed to receive the two-thirds majority required.
Parties fight over election date, but a vote is coming
So, we currently have Boris Johnson, who has repeatedly stated he doesn’t want a general election, desperately pushing to dissolve Parliament. He’ll try again on Monday with another vote. Meanwhile, Jeremy Corbyn, who has been calling for an election for months now, has refused the offer.
Welcome to Brexit politics.
There will be a vote though, the question remains when. Labour and the Liberal Democrats want to ensure the new legislation that prevents a no deal exit has been passed before they agree to a vote. Otherwise Johnson, who would have the power to set the actual date of the election, could simply opt for November 1st – after the UK has left the EU. It’s for the same reason that Johnson is so keen to get the opposition to agree to it now.
Even that isn’t the end of it. There’s a risk for the opposition in waiting for an election. If Boris Johnson does set the voting date after the UK’s departure, he will have been the Prime Minister who successfully delivered ‘the will of the people’. Boris couldn’t ask for a better string to his electoral bow.
Markets forced to choose between anti-economy and anti-business
But those are problems for the parties to concern themselves with. The issue for markets is do they back anti-EU Johnson, or anti-business Corbyn? In this poll, both candidates threaten the UK economy.
The business world has been largely outspoken against a no deal exit – if it does deal huge economic damage, a pro-business Conservative might not be enough to repair the damage.
But is it better to soften Brexit and then leave the nation in the hands of Jeremy Corbyn, a man who intends to completely transform the economy anyway? His plans include nationalising rail, water, electricity and mail companies. He wants to increase taxes for the rich, vastly increase public spending, and redistribute powers from corporations to workers.
Again, in a straightforward election, this would be a simple call for the markets: go for the man who doesn’t want to come after their investments. But, although Corbyn has them firmly in his crosshairs, he is at least committed to keeping as much of the status quo in terms of trade intact for business as possible.
Are markets comfortable to have the same percentage of a smaller pie, or a smaller percentage of the same pie?
Boris Johnson will suspend Parliament ahead of Brexit deadline
Opponents of Brexit are furious after Prime Minister Boris Johnson secured the Queen’s permission to suspend Parliament for over four weeks in the run-up to the October 31st Brexit deadline.
Those fearing a hard Brexit have been dealt another blow this week. The Prime Minister will suspend Parliament between mid-September and October, drastically limiting the amount of time opposition MPs have to block his attempts to walk away from the EU with no deal in place.
Although Parliament does traditionally close before the annual Queen’s Speech, this year scheduled for October 14th, the proximity to the Brexit deadline has caused outrage amongst the opposition.
Sterling plunged yesterday on the news, dropping as low as 1.2155 before paring losses, although not enough to prevent it from wiping out all of Tuesday gains by the close of trading. The weakness in the pound has been a small factor today in pushing the FTSE 100 up 1.1% to a five-day high just under resistance at 7,200.
Is this the final nail in the coffin for softer Brexit hopes?
The gloves are really coming off now. Such was the outrage caused by Johnson’s move to suspend Parliament that rebel MPs from his own party joined forces with the opposition to call for a legal injunction to stop it from happening.
With just a couple of weeks to make a move, opponents of a no deal Brexit may have to strike hard and fast. Markets may bet that the opposition will finally be compelled to act decisively – Labour leader Jeremy Corbyn has suggested he will call a vote of no confidence in the government when the time is right. He may not have much time left to choose from.
Even if a vote is called though, Johnson could refuse to hold an election until after Brexit has taken place. Remain-supporting MPs are running out of time and options. The markets are firmly pricing in a no deal Brexit, and this seems to be an almost-certainty unless the EU caves at the last second.
However, the latest developments suggest that tensions could continue after the UK has officially departed. A general election could be on the way. The battle for Brexit looks almost won, but the battle for No. 10 may be just about to start.
Week Ahead: Inflation headlines heavy data week
Welcome to your guide to the week ahead in the markets.
US & Eurozone inflation
As markets weigh the prospect of more stimulus from global central banks, hard economic data this week will be eyed for any signs that the premise on which market expectations are based is wrong.
Friday sees the release of the flash CPI estimate for the Eurozone. Indications so far do not suggest inflation in the bloc is moving higher. The same day the Fed’s preferred inflation gauge, the core PCE measure, is released. Core CPI has been moving up lately but the PCE indicator has remained subdued.
After the G7 summit over the weekend, markets are looking to the EU and Britain for where the next move is on Brexit. MPs return on September 5th but there will be plenty of politicking going on behind closed doors before then.
With Aussie traders looking to the next RBA meeting at the start of September, this week’s download of data will be closely assessed for clues about future rate cuts. Construction work done, building approvals and capital expenditure figures are all set for release in the coming days.
After the end of the trading week on Saturday we get the latest manufacturing and services figures out of China. The key question for risk assets is whether the trade war is still biting down on Chinese expansion.
A batch of US figures are out including core durable goods (Monday), the second reading of the Q2 GDP print (Tuesday), while on Friday we get the Chicago PMI and University of Michigan consumer sentiment reports.
Earnings season is wrapping up, with just a couple of releases this week.
|Aug 26th||Dollar General|
|Aug 28th||Tiffany & Co|
|Aug 28th||Hewlett Packard|
|Aug 29th||Pernod Ricard|
|Aug 29th||Best Buy|
There are plenty of things to look forward to on XRay this week. You can watch live, or subscribe to view on catch up.
|07.15 GMT||Aug 27th||European Morning Call|
|15.30 GMT||Aug 27th||Asset of the Day: Bullion Billions|
|15.45 GMT||Aug 27th||Asset of the Day: Oil Outlook|
|13.00 GMT||Aug 28th||Asset of the Day: Indices Insight|
|07.00 GMT||Aug 29th||Live Trading Room|
There are a lot of dates for the diary this week, including US Core Durable Goods and Eurozone Flash CPI.
|08.00 GMT||Aug 26th||German IFO Business Climate|
|12.30 GMT||Aug 26th||US Core Durable Goods|
|14.00 GMT||Aug 27th||US CB Consumer Confidence|
|01.30 GMT||Aug 28th||Australian Construction Work Done|
|14.30 GMT||Aug 28th||EIA Weekly Crude Oil Inventories|
|01.00 GMT||Aug 29th||ANZ Business Confidence|
|01.30 GMT||Aug 29th||Australia Private Capital Expenditure|
|12.30 GMT||Aug 29th||US Q2 GDP (2nd Reading)|
|09.00 GMT||Aug 30th||Eurozone Flash CPI|
|12.30 GMT||Aug 30th||US PCE Inflation|
Cable higher on plans to thwart no deal Brexit
Members of Parliament yesterday voted in favour of legislation that will make it harder for the next prime minister to push through a no deal exit from the European Union.
The move comes as we move closer to finding out whether Boris Johnson or Jeremy Hunt has won the Tory leadership contest and will therefore replace Theresa May as Prime Minister.
MPs fear hard Brexit under Boris
As one of the key figures in the Brexit campaign, Boris Johnson has been unsurprisingly vocal on his commitment to taking the UK out of the European Union. He has said that he would prefer to leave with a deal, but is prepared to make a clean break from the EU if no new deal is forthcoming. Officials on both sides have until October 31st to negotiate new changes to Theresa May’s Withdrawal Agreement.
MPs are concerned that Boris Johnson may even attempt to suspend Parliament in order to force through a no deal Brexit in October. Lawmakers have been tenacious so far in their efforts to avoid the UK leaving the European Union without a deal, although a series of indicative votes left it clear that there is no majority in Parliament for any of the Brexit options (including a second referendum).
As the odds on a victory for Johnson have increased, cable has come under greater pressure as markets price in larger odds of a hard Brexit scenario. On Tuesday cable slipped below the levels seen during the October 2017 flash crash, although news of the victory for new legislation yesterday pushed GBP/USD up 0.5% to trend above 1.2485.
Legislation recalls Parliament, even if suspended
The bill states that even if Parliament is suspended it must sit for a few days in September and October to consider issues in Northern Ireland. On top of this, new legislation requires ministers to make reports every fortnight on the progress made towards re-establishing the collapsed executive in Northern Ireland, and states the lawmakers must have the ability to debate and approve those reports.
It effectively calls for Parliament to be present to debate unrelated issues so that MPs coincidentally happened to be sitting just as the UK is due to leave the European Union.
It does not prevent Parliament from being suspended, but it is another spanner in the works for Boris Johnson, should he become Prime Minister and attempt to force through a no deal Brexit.
The pound tumbles; Carney trade wars warnings; Lagarde to lead ECB and better than expected NFP
With Brexit unknowns continuing to rumble away, it’s been a tough few months for sterling. The weakening pound hit a six-month low against the dollar today, which was buoyed by better than predicted US jobs report.
The figures come hot on the heels of Mark Carney’s speech on Tuesday in which he warned that trade tensions and Brexit uncertainty had the potential to “shipwreck” the global economy.
“Business confidence has fallen across the G7 to its lowest level in five years, with sentiment among manufacturers particularly weak. Households have also become gloomier about the general economic outlook, though they remain relatively upbeat about their own financial situation, likely reflecting robust labour markets. This is a similar pattern to that which emerged in the UK following the referendum,” he said.
He warned that policymakers were underestimating the impact of the ongoing US trade wars with China, Mexico and Europe. In his speech, he said trade tensions had significant downside risks for the UK economy, given it is already struggling under the Brexit quagmire. But he added that the global uncertainty has caused a “sharp slowdown” in global trade, manufacturing, production and capital good orders.
His comments caused gilts to rally and led to speculation of a BoE rate cute later this year, despite his claims that global markets are already pricing in more stimulus than is necessary.
Carney’s warning, alongside the weakening pound and sluggish growth in the first and second quarters, suggest that the BoE forecast for the UK economy next month could be grim reading.
Sterling lost more than 1% over the week against the dollar, and is heading for its ninth consecutive week of losses against the Euro. With little good news on the horizon, the outlook for the currency is bleak.
Lagarde new ECB president
Carney’s name just keeps popping up in the news this week, as he’s one of the contenders tipped to replace Christine Lagarde as the head of the IMF.
Mario Draghi steps down in October and Lagarde has been nominated to replace him. The nomination has surprised many, as Lagarde would be the first ECB president without any experience of setting central bank policy. She would also be the first female president of the ECB.
It’s a tough time to take over the ECB presidency, with pressure to improve growth across the Eurozone and – crucially – keep the area intact. It’s tough not to keep coming back to Brexit, but the UK’s disorganised and divisive split from the EU has done nothing to reduce calls for similar EU-exits from member states.
However, Lagarde is clearly no stranger to a challenging role, taking over as head of the IMF in 2011 when many countries were still struggling to overcome the effects of the financial crisis.
Investors must feel that she is a safe pair of hands, as the impact of the announcement on the markets was instant. The FTSE 100 closed up 0.7% at 7,609 points on the day the news broke, while the New York S&P 500 hit a record high as it moved closer to the 3,000 mark. There was almost palpable relief that a monetary hawk, such as Jens Weidmann from Germany, has not been handed the reins.
Non-Farm Payroll better than expected
Finally, the US got a boost in what is already a celebration week with better than expected Non Farm Payroll figures.
It showed that 224,000 jobs were created in June, many more than the 160,000 that economists had forecast. The figures are a rebound from the disappointing figures in May, and will be a relief to many worried about the economic outlook.
The Greenback strengthened on the (already weakening) pound following the figures, and EUR/USD is falling toward 1.1200 – the lowest in two weeks.
However, despite the impact on the dollar, investors would be wise to be cautious. Wage growth was disappointing compared to expectations and trade wars continue to cause tensions in global markets. Nevertheless, concerns of a recession may be over-egging it.
As Rewan Tremethick explains here, these figures have come just at the right time and show that the gap between market expectations, and what the economy actually needs, could be shrinking – just.
Fed holds, pound breaks $1.27 ahead of BoE
Stocks firmed and the dollar fell, whilst gold rallied to a 5-year high as the Fed opened the door to cutting rates.
It’s like 2010 all over: the race to the bottom is on. Only this time the global economy is coming off a period of remarkable synchronised expansion, not a terrible recession and the worst financial crisis in a generation or more. So what gives!? Must Powell acquiesce to the whims of his president? Must Draghi end his tenure not normalising, but actually cutting rates even deeper?
Draghi to be fair has little option. In the absence of structural and fiscal reform – blame Germany – he can but tinker around the edges of the zero lower bound, hoping to weaken the currency to get some competitiveness back. Powell is in a different position, although really it looks like central banks are spitting in the wind in trying to shift inflation expectations. They should try to focus on boosting oil prices instead.
So yesterday the FOMC nudged towards a cut. Nearly half the 17 members of the FOMC think cuts will be warranted this year. The median dot plot suggests 50bps in cuts through 2020. The dots evinced a shift from a tightening bias to an easing bias. The patient mantra was dropped, whilst the economy is now only expanding at a ‘moderate’, not ‘solid’, rate. The market took this as a sign the Fed’s listening to their demands – a cut in July is now fully priced in.
But there’s yet optionality for Powell and co. The Fed refrained from explicit references to cuts. The median dot plot shows no cuts this year still. The market is ahead of itself again. If we believe the dots, rate cuts will come slower than the market wants them to.
In some ways the Fed thread the needle here – keeping the market and the president happy without actually committing to cuts. The dots suggest the Fed is saying: “Of course we will cut, just not yet-good enough?”. For now it is. But the tail seems to be wagging the dog, forcing the Fed to follow sooner or later.
Certainly revising inflation expectations lower points to concerns that tame price growth cannot simply be attributed to transient factors. Yet at the same time the Fed thinks unemployment will be lower and growth stronger than it thought in March.
The problem we have is that Fed looks like it is flip-flopping; changes its mind based not on economic data but on the caprice of financial markets; appears in thrall to the White House; and is therefore at a very serious risk of losing its credibility.
Yields hit the deck. US 10yr bond yields slipped beneath 2% again for the first time since 2016. Bunds heading deeper into negative territory.
Gold rallied on the outcome as yields sank, breaking north of $1385. It’s now cleared a tonne of important multi-year resistance, paving the way for a return to $1400 and beyond. This is a big move, but if the Fed doesn’t deliver the cuts the bulls could be caught out.
Stocks liked it – the S&P 500 notched gains of about 0.3%, Limited upside as the Fed was not as dovish as the market wanted and because a lot of this was already priced in. Asian markets rallied across the board.
Futures show European stocks are on the front foot, catching a tailwind from Wall Street and the Fed. The FTSE 100 may underperform though as the pound is finding bid.
Oil has climbed as US inventories feel three times more than expected. Brent was up at $63.50, threatening to break free from its recent range – look for $63.80. WTI at $55.50 also close to breaking out of its trough.
The dollar kicked lower after the Fed decision – but with the ECB looking super easy the gains versus the euro are limited. Likewise the yen with the Bank of Japan also ready to step up stimulus. Likewise the Australian dollar, with RBA governor Lowe talking up a further, imminent, cut. The race to the bottom is on. Is it too soon to talk about currency wars?
The exception here is the Bank of England, which is heading towards raising rates. We get to learn more about the BoE’s position later today. The difference here is the inflation expectations, which are moving up, not down like they are elsewhere. Britain’s also enjoying strong wage growth and a super-tight labour market. All of this is dependent on a smooth Brexit – this is not a given by any means.
Indeed, Brexit is keeping the lid on sterling’s gains – the prospect of Boris Johnson taking Britain out of the EU come October 31st is a risk. There’s now talk of a possible general election if he gets in – risky, we know what happened to May. The prospect of a general election would not do anything to remove uncertainty around UK assets. Zero clarity still.
EURUSD moved through 1.12 and was last at 1.1280, but failing to gain enough momentum to rally above 1.13 and scrub out the Draghi-inspired losses.
GBPUSD has reclaimed 1.27. Quite a chunky move here, blasting through a couple of big figures in under a day. Maybe the prospect of a more hawkish BoE is helping the pound, albeit the market is actually pricing in cuts, not hikes. At least Mark Carney doesn’t have to deal with a political leader on his case…
USDJPY lost the 108 handle to trade at 107.50, now breaking free into new 2019 lows (ex the Jan flash crash).”