Said Powell, by patient I mean
We won’t rush to raise in ‘Nineteen
Unless prices soar
Then maybe once more
Though not ‘til past next Halloween
To nobody’s surprise, Chairman Powell explained that while the economy in the US is in good shape, given all the other things happening around the world (Brexit, trade situation, slowing Chinese and European growth) it was prudent for the Fed to watch the data carefully before acting to change policy again. Arguably, the market heard this as a confirmation of the now growing dovish bias and so the dollar came under a bit of further pressure. Interestingly, the equity market did not hear the same cooing of doves as it struggled all day ending slightly softer.
When discussing the balance sheet, he indicated that it was a hot topic at the FOMC, and that they were carefully studying the timing of the eventual end of the current policy of QT. But by far, the single most gratifying thing he said was, “It is widely agreed that federal government debt is on an unsustainable path.” He later added, “The idea that deficits don’t matter for countries that can borrow in their own currencies is just wrong.” (my emphasis). This was a none too subtle rebuttal to any thoughts that MMT has any validity. The Senators did not really ask many interesting questions, but today he heads to the House, where a certain freshman representative from the Bronx, NY, is grasping at the idea that as long as the US borrows in dollars, we can always pay them back by printing whatever we need with no consequence. You can be certain that she will spend her entire allotment of time on that particular issue, although I suspect she will not come off looking like she either understands the issues nor will have convinced the Chairman.
At any rate, while the questions are likely to be more entertaining, they will almost certainly not be any more meaningful as today Representatives will get their moments of preening on camera. Certainly nothing has happened between yesterday and today that will have changed the Chairman’s views.
In Parliament there’s a new view
Postponement’s the right thing to do
Three months or one year?
No answer is clear
As both sides, the other, eschew
Turning to the other key market story, Brexit, the only thing that is clear is that it remains extremely confusing. As of this morning, it appears that PM May has changed her tune regarding a delay and is now willing to accept a short one of three months. Her problem is that she has lost so much influence from the continuing morass it is no longer clear she will get what she wants. There now appears to be a growing movement for a longer delay, on the order of nine months, which would give the Bremainers the chance to organize a new referendum. That, of course, is the last thing the hard-liners want, another vote, as it could reverse the outcome. At the same time, all of this is contingent upon the EU agreeing to a delay. Now, they have said they will do so if there is a clear path outlined for what the UK is trying to accomplish, but as is obvious from this discussion, that is not the case.
The market, however, is in the process of reinterpreting the outcome. It appears that the new worst case is seen as acceptance of the already negotiated deal with a small possibility of no Brexit at all. It seems the idea of a hard Brexit is receding from view. We can tell because the pound continues to rally this morning, up another 0.45% today which takes the move to +2.5% since Friday when this chain of events took form. This is the highest the pound has traded since last July, when it was on its way down from the previous bout of optimism. One telling sign of the potential outcome is that the hardest of hard-liners, Jacob Rees-Mogg, has backed down on his adamant demands of the removal of the Irish backstop, instead saying an annex addressing the situation could be acceptable. To me this indicates the hard-liners have lost. While I am no insider, it looks very much to me like there will be a three-month delay and acceptance of the current deal. As to the pound in that case, it will depend if Governor Carney can keep his word regarding concerns over inflation. My view there is that slowing global growth will prevent any further policy tightening, and the pound will quickly run out of Brexit steam.
Elsewhere, data from the Eurozone shows that the economy continues to slow, albeit at a less intimidating rate. A series of Eurozone sentiment and confidence indicators all printed lower than last month, but not quite as low as had been
feared expected. But the euro has been the beneficiary of the current focus on Fed dovishness and has been trading higher for the past two weeks. Of course, the extent of that move has been just 1.2%, with the single currency unchanged this morning. So, while the headlines are accurate to say the dollar has been slumping, the reality is that the movement has been quite limited.
Away from those stories, the FX market has seen relatively few events of note. INR is softer this morning by 0.5% after Pakistan’s air force allegedly shot down two Indian fighter jets in an escalation of tensions in the Kashmir region. That may well be weighing on global risk sentiment as well, but not in too great a manner. President Trump’s meeting with Kim Jong-Un has not seemed to impact the KRW, although a positive outcome there would almost certainly help the won significantly. And past that, nada.
On the data front this morning we see Factory Orders (exp 0.5%) and then Chairman Powell sits down in front of the House. The current trend remains for the dollar to soften as the market’s focus continues to be on the Fed turning dovish. As time passes, we will see every central bank turn dovish, and at that time, the dollar is likely to find more support. But for now, a slowly ebbing dollar remains the most likely outcome.