It turns out the market misread
How strong are the hawks at the Fed
Though rates they did raise
They saw some delays
Ere rates rise much higher ahead

Meanwhile from the Old World we learned
The path of growth, lower has turned
So Draghi and friends
May need to extend
QE when June’s meeting’s adjourned

The upshot of yesterday’s FOMC meeting and press conference was that the Fed raised rates by 25bps, as expected, but the changes in the dot plot were further out in time than many had forecast, coming in 2019 rather than a fourth hike this year. What this did accomplish was to raise the terminal rate in this cycle to 3.40%, up from the previous rate of 3.10%, although the long-term view remains much lower than historical levels and is still anchored below 3.0%. And so this was declared to be a dovish tightening by pundits everywhere. We also learned that Chairman Powell is not as beholden to his own models, as arguably he hasn’t built any himself, and therefore seems far more willing to listen to others and observe the economy instead of assuming his own model is reality. That is certainly a healthy change! He continues to speak more forthrightly and in another blessing, cut things short at the press conference in less than forty-five minutes as compared to former Chair Yellen’s penchant to ramble on for well more than an hour. So perhaps reality and brevity will come to define Powell’s Fed, and if so, we are all better off.

The market response was less optimistic as equity markets, which had traded higher all day prior to the meeting, fell in its wake and closed lower. The dollar, which had edged lower ahead of the meeting added steam to that movement and fell quite sharply. Meanwhile, Treasury yields, which had been treading water, rose about 3bps. In other words, no market’s expectations were fulfilled. Again, I think that is a positive outcome. I believe the financial markets are far healthier when there are clearly different opinions around instead of the situation we have seen for most of the post financial crisis period, which is everybody has to be in the same trade. A little more daily volatility is likely to result in significantly less drama when there is a major change.

Before I look at today I need to correct something from yesterday’s note, the reasoning behind the strength in MXN and CAD that we saw yesterday. It turns out that the movement was directly related to unconfirmed news that the US was climbing down on a NAFTA demand about US content in automobiles. That had been a major sticking point, especially given the way supply chains for the Big Three had developed over the past twenty years, but now seems to bring the process one step closer to a successful renegotiation. It is not surprise that both currencies rallied on the news.

As to this morning, the noteworthy outcome has been the Eurozone Flash PMI data, which came in softer than expected for the second month running. While the numbers are still strong, the trajectory is less positive than it had been all last year and is starting to call into question just how much faster and for how much longer the Eurozone economy is going to be able to grow above trend. In fact, the euro has traded lower on the news, (-0.2%) although that is only a small portion of yesterday’s gains. Certainly, if the growth trend slows further, Signor Draghi will have a hard time claiming that QE must end abruptly in September and we are likely to see it extended even further. At the same time, the pound has added to yesterday’s gains after UK Retail Sales data showed a surprising improvement, with the headline number rising 0.8% in February compared to expectations of just a 0.4% increase. So for two days running we have seen UK data show resilience despite the ongoing uncertainty over Brexit. One other noteworthy mover in the G10 space has been AUD, which is down 0.35% this morning after Australian labor market data disappointed. The Unemployment Rate rose unexpectedly to 5.6% and the number of employed grew less than expected. This will certainly not encourage the RBA to raise rates sooner, and if it continues, could well see talk of yet another cut eventually. It should be no surprise Aussie is soft this morning.

Meanwhile, in the emerging markets, there has been far less drama and currency movement. Obviously, the big question remains over the tariff announcement the Trump administration is due to make today regarding China. The word is they are seeking to impose tariffs on $50 billion of Chinese imports while the Chinese are readying retaliation. No good can come from this process, but I expect that we will start to go down the road before either side blinks. Interestingly, the renminbi has fallen 0.2% ahead of the news, which for that currency is a pretty good-sized move. But away from that, the EMG bloc is a mixed bag of gainers and losers with nothing showing an outsized reaction to anything.

This morning brings the usual Initial Claims data (exp 225K) and then Leading Indicators at 10:00 (exp 0.3%), although neither seems likely to have a major impact on markets. There are no Fed speakers today, although we hear from three tomorrow morning, so the FX market will be looking for other cues. Equity futures are pointing lower at this point, but the bond market has rallied slightly, generally giving opposite signals to the dollar. My sense is that with the Fed out of the way, the broad based dollar weakening narrative is likely to return, and so further softness is on the cards today. But over the medium term, I continue to look for the dollar to rebound.

Good luck