To Limit Excess

December Rate Hike Probabilities:

USD   92.3% + (No surprises yesterday, high confidence now)

EUR     1.9% (Think December 2019)

GBP   91.6% + (Done deal this morning)

CAD   21.7% = (Ain’t gonna happen now, maybe July 2018)

Fed Rhetoric               25bps


This morning as I go to press

The Old Lady’s likely to stress

Inflation is rising

And so She’s revising

The base rate to limit excess


While yesterday Janet and friends

Implied that she fully intends

To hike in December

Though not every member

Is likely, this move, to defend


The FOMC meeting went off without a hitch yesterday, with the statement actually upgrading the view on economic growth to “…a solid rate despite hurricane related disruptions.” There is certainly nothing dovish about that comment. The committee’s view on inflation remains less upbeat, and it is clearly still a mystery to them why measured inflation remains below their 2.0% target given consistent GDP growth and the ongoing strength of the labor market. However, there was nothing about the statement that could be construed as dovish in any sense, and while Neel Kashkari may well dissent in the December meeting, it remains abundantly clear that the Fed is going to raise rates by 25bps at the next meeting. If you recall, yesterday’s probabilities showed a substantial decline as some traders bet on a dovish outcome. However, with the market now pricing north of a 90% probability for a December move, it will require a significant downturn in economic data to halt that momentum. In addition, we learned that Jerome Powell is now set to be the new Fed Chair. He is a current governor (who has never dissented on policy votes) and is seen as a moderate. Happily, he is not a PhD in Economics, although unhappily he is a lawyer. However, it appears that the trajectory of monetary policy is not likely to change much, at least initially, and his focus may well be on regulatory issues. I would be quite surprised if the market reacted in any significant way to the formal announcement due later today.

Which brings us to this morning’s key activity, the Bank of England’s monthly meeting. Though there are many pundits who believe it is a mistake, it does seem likely that the BOE will raise rates by 25bps this morning. They have essentially talked themselves into the move as their key concern remains, despite substandard growth (averaging just 1.5ish% since Brexit), inflation caused by the pound’s sharp, post-Brexit decline. I continue to believe that this will be ‘one and done’ with almost no probability that Carney will raise rates again until after the UK leaves the EU. Uncertainties over the potential framework by which this occurs will continue to weigh on business decisions and by extension economic growth. Although the data this morning (Construction PMI at 50.8) was modestly better than expected, there is no indication that growth is picking up significantly. At the same time, nominal wage growth remains desultory and with the elevated inflation readings real wage growth is actually negative. It is just hard for me to see how the BOE will be able to raise rates more aggressively with that economic background. Of course it is not only interest rates that drive currencies, and yesterday saw the pound reverse all of its early morning gains, and then some, after the news that UK Defense Secretary, Michael Fallon, resigned. While I am confident that few FX traders know who he was or what his policy agenda was, it was yet another sign that PM May’s grip on power remains tenuous. Right now, the pound appears to be caught between concerns over a more hawkish than warranted BOE and concerns over further weakness in the government. The one thing of which I am confident is that if PM May were to lose control, and the market believed that Jeremy Corbyn was likely to become PM, the pound would fall further. Socialism is not seen as a benefit for either markets or currencies these days! But for today, it will be all eyes on the BOE, with the statement due at 8:00 this morning.

Beyond the Fed and BOE, there has been much less of interest overnight. Eurozone PMI Manufacturing data was released largely as expected and saw little reaction in the markets. Growth in the Eurozone remains solid, if unspectacular. Meanwhile, the euro continues to trade at the lower end of its three-month trading range, although today it is higher by 0.2%. And beyond that, it is exceptionally hard to find interesting news.

EMG currencies have also been pretty dull although ZAR has rebounded about 0.7% from its recent depths. It doesn’t appear there have been any changes to the political situation on the ground, simply that traders are reducing short ZAR positions.

As to the US this morning, we get more data to add to the mix: Initial Claims (exp 235K); Nonfarm Productivity (2.6%); and Unit Labor Costs (0.4%). Now there are many pundits, myself included, who believe that one of the key problems we have in the US economy is the lack of productivity growth. I think this stems from the fact that since the beginning of the ZIRP era corporate policies have been far more focused on financial engineering (issuing debt to repurchase shares) rather than investment in production facilities. As such, if today’s report meets expectations, it would be good news. But in the end, tomorrow’s payroll report is of far more consequence than today’s data so I wouldn’t expect any FX movement regardless of the release.

One more thing, I will not be writing tomorrow, as I will be out of town. But I strongly believe that the FX market will respond somewhat symmetrically to the jobs release. If pressed, my sense is the post-hurricane rebound will be even larger than currently expected, maybe 350K-375K, and it will simply cement the idea that the Fed is going to be raising rates come December. Look for the dollar to benefit on that type of news.


Good luck and good weekend