There once was a fellow named Zuck
Whose business had run quite amok
That he should be chided
Thus many tech stocks came unstuck
This was THE story yesterday, the ongoing questions over the data handling by a certain social media company’s business partners. It has raised significant privacy questions and generated a slew of letters from various US Senators and Congressmen regarding just what is happening there, as well as calls for kangaroo courts testimony by company leaders. The impact on markets was broad based as so many tech sector names make their living off the personal data they have accumulated and now parse and sell for profit. The upshot was a sharp sell-off in the tech heavy NASDAQ as well as across all equity markets and a little more uncertainty as to whether the ongoing growth story in the US (and globally) has the legs to continue. And of course, this is critical to the other key issue this week, the FOMC.
With little else making the news
The market continues to muse
‘Bout just what Chair Jay
Is likely to say
Regarding the Fed’s latest views
The question of just what the Fed is going to say tomorrow in their statement that accompanies the universally expected 25bp rate increase remains topic number one in the Fixed Income and FX markets. The debate hinges on whether they will explicitly discuss a fourth rate hike this year, or be more circumspect over the prospects. The futures market continues to move in the direction of clarity with a fourth rate hike now garnering a 36% probability, up 10 points over the past week. In addition, we have the situation where Chair Powell will be giving his first press conference as Fed Chair. The market had become quite used to the soothing and obfuscatory language of Chair Yellen and her immediate predecessors. However, thus far, Powell has seemed to be a bit more forthright in his comments, which means that we could see a bit more volatility once the press conference starts tomorrow. The thing is, I don’t think he cares that much about short-term movements in either equity or bond markets. Rather, barring a collapse that has the potential to drive the economy lower, he and many of his Fed brethren will be comfortable if equity prices see a little compression. Al told, there is no question that tomorrow’s events have the opportunity to move markets. Today, on the other hand, appears less exciting.
The dollar is holding its own this morning, edging higher against most of its counterparts in both the G10 and EMG blocs. We continue to be in a data desert, with today’s major oasis being UK inflation data. Interestingly, despite the ongoing drumbeat that the BOE is going to be raising rates at its May meeting, currently priced at a more than 80% probability, CPI was softer than expected, printing at 0.4% M/M and 2.7% Y/Y. This should be no surprise as the original driver of high inflation in the UK, the sharp decline in the pound, has not only reversed at least half of the movement, but is also now far enough behind us that it is falling out of the data. This, of course, begs the question, of why the BOE feels it is necessary to raise rates into the greatest economic uncertainty the UK has ever known. In the end, while the pound had rallied early in the session on news that the EU was seen as showing a little flexibility in the Brexit talks, the CPI data has removed all that gain and then some, with the pound actually slightly lower on the session as I type. One other modest movement has been in the euro, where the single currency has fallen 0.2% after the release of the German ZEW survey showed expectations falling more sharply than expected. The decline to 5.1 from last month’s 17.8 was clearly a surprise and the euro fell right on the news. Away from those two stories however, it is hard to find anything interesting to discuss in the G10 space. The dollar has generally edged higher against virtually the entire bloc, but movement remains de minimis. My take is we are seeing a small unwinding of short USD positions ahead of the FOMC tomorrow.
The EMG bloc is pretty similar, with most currencies somewhat softer vs. the dollar, but none having moved a great deal. The background questions over South African credit issues and NAFTA for Mexico continue but without any new pieces of information, there has been no market reaction. Arguably, the market is also awaiting the upcoming tariff announcements by the Trump administration regarding China, where the talk is of tariffs on $60 billion of Chinese goods. What I do know is that if they are implemented, we are very likely to see measured inflation start to rise pretty quickly in the US and the pressure on the Fed to normalize policy to increase. As I have been writing for a while, I believe that news will help support the dollar, and given the still prevalent view that the dollar is headed lower, could cause some pain.
As to the upcoming session, there is absolutely no data to be released and the Fed is in the first day of their two-day session, so there will be no Fed commentary. We could hear more about tariffs, which depending on what is said could clearly impact markets. We are likely to continue to hear about the tech sector’s data woes and while equity futures are pointing to little change on the opening, it is hard for me to believe that this is a one-day event. Look for other names to get caught up in this whirlwind and further pressure there. (As an aside, it is issues like data privacy that help you understand the growing interest in blockchain related efforts by so many companies as they try to prevent future occurrences of similar crises.) At this point, there is no evidence that we are moving into a risk-off scenario, but the right confluence of events could well bring us there. However that seems unlikely today. Rather, I like the dollar to continue to drift slightly higher as we await tomorrow’s FOMC.