Seventeen Voices

A gentleman Fed Chair named Jay
Is leading a meeting today
Where policy choices
‘Mongst seventeen voices
Is likely, on markets, to weigh

It seems most investors agree
The statement today will be free
Of hawkish content
And that’s why they’ve spent
Their cash on a stock-buying spree

The dollar, this morning, has taken a breather from what has turned into quite a nice run higher over the past two weeks. If you recall, a week ago I suggested that the euro would break below 1.20 by the end of April. Well, I was wrong by one day, as yesterday we breeched that level for the first time since January 11, and as I type, we remain slightly below. What is quite interesting to me is that the bulk of what I have been reading over the past several days has been a confirmation of everything I have written over the past several months.

To wit, the synchronous global growth story is falling apart as data from the Eurozone, the UK, Japan and China all slows down. Meanwhile, US data continues to perform well thus taking us back to the US economic leadership story. A key part of this message is that the inflationary impulse in the Eurozone, the UK, Japan and China is still lagging, if not missing completely, despite the rise in oil prices while in the US, every price indicator points to rising inflation. This combination of events has led to very different commentary from the respective central banks. The ECB has been at pains to highlight patience is a virtue and that they didn’t even discuss monetary policy at their meeting last week because they were too busy focusing on what was happening in the economy. Expectations for the BOE next week have turned around 180 degrees as the previous idea of a 25bp rate hike has been completely eliminated due to the weakening data and ongoing Brexit concerns. The BOJ has given up its timeline for reaching its inflation target, having missed it for the past five years, and is seen now as likely to continue QQE indefinitely. And finally, the PBOC has actually eased policy, cutting the Reserve requirement by 100bps two weeks ago, so any idea of tighter monetary policy there has been thrown out the window.

Which leads us to the Fed today. There is no question that the consensus view is that there will be no policy changes and that the Fed statement today will offer little new information. The market has become quite accustomed to the Yellen approach of only adjusting policy at meetings with press conferences, and so the strong belief is that they won’t do anything. But it is important to remember that until 2012, under Bernanke, there were no Fed press conferences at all and they acted when they thought it was appropriate. In fact, for many years, they didn’t even announce rate moves, they simply acted in the money markets to adjust the supply/demand situation to drive rates. Now given the impact of QE and the resultant excess reserves that exist, they can no longer manipulate rates in that manner. But they certainly have the ability to change policy without a press conference. And after all, they could call for one after the statement and I assure you that every news agency would be there at the appointed time. All I’m saying is it is a mistake to believe that the lack of a scheduled press conference precludes the Fed from adjusting policy.

Now with that in mind, I don’t think they are going to raise rates, but what I think is quite possible is that based on the data we have seen since the last meeting, particularly the ongoing rise in inflationary data, I expect the language in the statement to recognize the evolving economic landscape and sound more hawkish. I mean it is hard to consider the inflation situation balanced. Rather inflation is clearly trending higher. And why they should continue to believe that it will stabilize at 2.0% after having risen rapidly in the past few months is beyond me. I think the bigger question is will they mention something about allowing inflation to run hot for a while before getting concerned.

With the correlation between 10-year Treasury yields and the dollar having returned to its historically positive condition, and the 10-year back at 3.00% as I type this morning, I think a hawkish tone from the FOMC is quite possible and will help to generate the next leg higher in the dollar. And this is true against all currencies, both G10 and EMG as this story is completely US-centric.

There’s really little else to discuss this morning. The overnight data simply confirmed the slowing growth trajectory elsewhere in the world. The only data point in the US today is ADP Employment (exp 190K), which may alter some views about Friday’s NFP report if it is sufficiently different from expectations. However, it’s really all about the Fed today. So I would look for limited movement until the release at 2:00pm. If I am correct about a more hawkish lean, look for the dollar to extend its rally. And quite frankly, if they come across as dovish, then the dollar could easily retrace 1% or more. However, I think the evidence points to the hawks continuing to rule the roost there.

Good luck