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Waiting for FOMC - Brexit bedlam

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Waiting for FOMC

By Peter Rosenstreich

Despite the chaos unfolding in the UK, market volatility has eased ahead of the FOMC (Federal Open Market Committee) meeting. Perhaps the only assets showing real directional momentum are lean hog futures, which hit a new high. The Chinese consumer story remains in play regardless of the economic slowdown and trade tensions with USA. Here's an interesting indicator for the economic health of China: Australia today suggest that RBA (Reserve Bank of Australia) could cut rates. While the move is primarily aimed at the domestic housing market, some will interpret it as a comment on the state of trade with China. Gold prices remained bullish as USD weakened on expectations that the Fed would maintain a dovish policy stance.

During today's March FOMC meeting, the growing expectations is that the Fed will announce that balance sheet runoff will halt by year's end. More details are expected at following meetings, but the loosing of policy should have a negative impact on the greenback. As always, this meeting will be thoroughly dissected for evidence of the timing and direction of the Fed's next move. With patience the key word, we anticipate a less than exciting central bank decision. We are not anticipating adjustments to growth – inflation forecasts or change in dots plot. Should the Fed avoid the temptation for a downgrade, we could the equity relief rally. The probability of a Fed interest rate hike in 2019 has fallen to 60%, while the probability of a rate cut has increased to 25% by the December meeting. This means the risks are relatively balanced. Yet in our view, with downside risk to the US economy exposed, further midterm weakness in USD should be expected.

Brexit bedlam

By Peter Rosenstreich

There is a high probability that Prime Minster May will pass out due to g-force in the British cockpit. The UK is hurling towards Brexit with no steering or brakes, so can someone call Denzel Washington, please? He played airline pilot Whip Whitaker in the 2012 film, Flight.

The most recent update is that May is looking for a short extension to the Brexit schedule. The EU has indicated that any extension would only be granted for a good reason: a deal on the table, elections, a new referendum etc. Sterling volatility has receded in recent day as markets now expect an extension and a deal as the most likely outcome. Currently, no meaningful vote is scheduled in the House of Commons, and we suspect there is also the silent hope that the longer the game is dragged on, the likelihood of Brexit decreases. However, this just feels like a guess with downside extreme. Elsewhere, UK inflation data shows headline CPI inflation steady at 1.8% and core at 1.9% — but data has become extremely irrelevant at this point.

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