Rates: Powell breaks with October comments, but states the obvious
Fed Powell said that policy rates are close to neutral, breaking with his October view that they were a long way from such level. Markets only discount 1 hike next year, which is too dovish. Powell might have soothed investors’ conscience that the Fed won’t kill the economy by raising rates too much too quickly, but the December dot plot could be a harsh wake-up call.
Currencies: USD declines off recent highs on perceived soft Powell comments
Positive USD momentum halted yesterday. Markets interpreted comments from Fed’s Powell as pointing to a lower Fed rate path in 2019. The jury is still out whether the Fed will indeed act as soft as the market anticipates. Even so, in a ST perspective, the upside of the USD dollar is probably capped. FX markets will continue to monitor the Fed today as several governors will speak in Boston
The Sunrise Headlines
- US stock markets rallied yesterday after Fed’s Powell signalled policy rates are close to neutral. The Nasdaq outperformed (+2.95%). Asian equities are trading mixed with China underperforming its peers.
- US Trade Representative Robert Lighthizer said he was examining all available tools to raise US levies on Chinese cars to 40%. Such a move would equal China’s currently applied tariff to US vehicles
- The Mexican central bank has lowered growth forecasts for 2018 from 2%-2.6% to 2%-2.4%. Growth for 2019 has also been revised downwardly to 1.7%-2.8%. The report comes 3 days before Mexico’s new president Obrador takes office.
- Nancy Pelosi was nominated by a 203-32 vote by the Democratic caucus to become House speaker. A final vote by the full House is scheduled in January. Pelosi already served as speaker from 2007 to 2011.
- An unexpectedly large increase in US crude inventories to a 2018 high sent oil tumbling again yesterday, with Brent crude trading back below $60/b. and WTI crude hovering near the $50-handle.
- Switzerland saw its economy unexpectedly shrink in Q3. Growth fell to -0.2% QoQ vs. 0.4% expected. Q2 growth was revised upwardly to 3.5% on an annual basis but Q3 growth dropped to 2.4% YoY while markets anticipated 2.9%.
- Today’s economic calendar contains German and US inflation data, EMU economic confidence, weekly claims, FOMC Minutes and the ECB’s semi-annual financial stability review. Several ECB/Fed governors are scheduled to speak
Currencies: USD Declines Off Recent Highs On Perceived Soft Powell Comments
Perceived soft Powell hammers US dollar
USD trading was confined to tight ranges yesterday, as markets awaited a speech of Fed Powell. FX investors apparently didn’t expect a soft assessment from the Fed Chair as the dollar held close to recent highs against the euro and the yen. In a brief recap on monetary policy, he said the policy rate is ‘just below the broad range of estimates of the level that would be neutral for economy’. Markets consider this a soft turn from recent Fed communication when some Fed members suggested the policy rate could go beyond neutral (seen around 3% in the September dots). So, markets saw a rising chance of a pause in the rate hike cycle next year. US yields and the USD nosedived. EUR/USD jumped about a full big figure and closed at 1.1366. The USD/JPY decline was more modest as the hope for less tighter Fed policy also caused a forceful equity rebound. USD/JPY came off 114+ levels and closed at 113.68. Overnight, Asian equities opened in positive territory in the wake of the US rally, but gains are moderate and are evaporating as the session proceeds. Regional markets apparently stay cautious ahead of the meeting between Trump and XI Jinping. Even so, the dollar stays in the defensive. EUR/USD trades in the 1.1385 area. USD/JPY is drifting further south in the 113 big figure (113.25 area). Today, the calendar is well filled with German CPI, US income and spending data (including price deflators). However, in the wake of Powell’s speech the focus will be on the Fed with the publication of the FOMC Minutes and a chorus of Fed members speaking at conference in Boston. To what extent will they confirm the soft market interpretation of the Powell comments? Of late, the USD was in good shape. EUR/USD drifted lower in the 1.1216/1.1651 range. The Powell comments cap recent USD rebound. Some more USD softness might be on the card, but we don’t expect the USD to weaken beyond key technical levels. Interest rate markets are already positioned for a very soft 2019 Fed scenario (about one hike). We still see no reason for EUR/USD to strengthen above the 1.15/1.1621 range top.
Sterling initially rebounded on headlines yesterday of a possible second referendum, but the gain was reversed as the BOE painted highly negative consequences from a disorderly Brexit. Today, the UK money supply and lending data will be published. The focus for sterling trading will remain on Brexit. EUR/GBP will probably remain in a some kind of erratic trading pattern near current weak levels as long as uncertainty on the approval of the Brexit remains as high as it is right now
USD (trade-weighted): dollar declines of recent peak levels as markets ponder chance on a Fed pause post Powell