Pre-FOMC market gets a boost from China The market yesterday was dominated by positioning ahead of today’s FOMC meeting. The Wall Street Journal’s influential Fed reporter, Jon Hilsenrath, said he thought the Committee would keep the phrase in its statement that rates will remain low for a “considerable time” after the Fed’s bond-buying program ends next month (which I agree with) but qualify it somehow, either in the statement or during the press conference. The market focused on the likelihood that they would keep the “considerable time” phrase and Fed funds rate expectations dropped around 3 bps in the long end and USD headed lower. Then mid-morning US time, a Chinese web site reported that the government would supply additional liquidity to their five biggest banks to support the economy. Commodities soared (especially copper and oil) and equity markets recovered as the global growth picture suddenly looked a little better.
What to look for with the FOMC: Clearly, if they drop the “considerable time” phrase, USD is likely to rise sharply. A substantial rise in the Committee’s average estimate for Fed funds at end-2015 (now 1.2%) or 2016 (now 2.53%) would also be bullish for the dollar, in my view. In the press conference, Fed Chair Yellen could qualify the “considerable time” phrase by repeating something like her recent statement in Jackson Hole that “if progress in the labor market continues to be more rapid than anticipated by the Committee or if inflation moves up more rapidly than anticipated, resulting in faster convergence toward our dual objectives, then increases in the federal funds rate target could come sooner than the Committee currently expects and could be more rapid thereafter.” That too might be seen as hawkish and most probably send the dollar higher. On the other hand, if she does not include such a statement and instead emphasizes the recent weak labor figures, that could be negative for the US currency.
Our studies show that people wanting to take a view on the FOMC should do it in USD/JPY, not EUR/USD. USD/JPY has been more volatile than usual on FOMC days this year, whereas EUR/USD and GBP/USD have seen only average ranges. ECB days are more exciting than FOMC days for the euro, for obvious reasons.
Today’s market: During the European day, we get Eurozone’s final CPI for August and as usual the forecast is the same with the preliminary data.
In the UK, the Bank of England releases the minutes of its latest policy meeting. It will be interesting to see if there were any more dissenting voters or if the two dissenters in July changed their stance given the increased uncertainty surrounding the Scottish referendum. The country’s unemployment rate for July is also coming out and the forecast is for the rate to decline further. Average weekly earnings are also coming out and the market expects a rebound in July’s reading. In addition, during the day several polls are expected to be published the day before the Scottish referendum, which will give us a final view of the tight race. While this particular economic data would usually be key for GBP, I expect the Scotland news to dominate trading today.
Sweden’s Riksbank also releases the minutes of its September policy meeting, when it held the repo rate unchanged despite the recent return of deflation to Sweden. The minutes could provide signs of additional actions from the Bank mainly to fight deflationary risk. In the country’s recent general election, the center-left party won but did not achieve a majority, which leads to a complicated process of forming a government. The uncertainty from the elections, the weak economic data and the need for further policy easing could further weaken SEK.
Aside from the Fed, the US CPI for August and the National Association of Home Builders (NAHB) market index for September are due out today.