The Old Lady left rates on hold
But two members changed views when polled
No longer did they
See hikes as the way
The outcome was pounds were then sold

In fact, the most noteworthy thing
Is watching the dollar’s upswing
Against all its foes
Its value has rose
And once more the dollar is king

Finalizing the commentary on central bank activity this week, while the BOE did not adjust its rates, as was universally expected, the excitement came when the votes were tallied up.  As I had mentioned on Monday, at the last meeting, the split was 1/6/2 for a cut, holding steady and a hike respectively.  It remains amazing to me that members of the committee could have viewed the data and come to completely opposite conclusions in the past.  But the big change was that the two members who had been consistently voting for a hike adjusted their view to holding steady with the outcome a single vote for a cut and the rest of the committee voting to keep policy unchanged.  Of course, in the world in which we live today, that was tantamount to a rate cut and seen as quite dovish with the result being the pound underperformed its peers and continues to do so this morning, falling another -0.6%.  The developing narrative here is that a rate cut is coming soon to the UK, certainly by the June meeting, even though inflation remains far above the BOE’s target.  Yes, the inflation readings earlier this week were a bit softer than forecast, but they are still running at 4.5% at the core level.

Arguably, the more amazing thing is that the narrative around the US seems to have subtly shifted despite Powell’s quite dovish tone at the press conference.  I have seen several analyses that indicate expectations are growing for other central banks to ease policy before the Fed.  Perhaps it was the SNB’s bold action yesterday that got people thinking the rest of the world wouldn’t wait for Powell.  Or perhaps, the punditry who push the narrative are finally considering the fact that the US economy continues to be the best performing one around with the least need for further stimulus.  For instance, yesterday’s US data showed softer than expected Unemployment Claims, higher than expected Home Sales with a huge jump in the average price, better than expected Philly Fed and better than expected Flash PMI data.

Whatever the driver, analysts all over are discussing the relative hawkishness of Powell vs. his central bank brethren.  The good news is that we will get to hear from the man himself again this morning at 9:00am so perhaps he will clarify the situation.

FWIW, which is probably not that much, I remain incredulous that the Fed can even consider cutting rates in the near future.  The data are certainly indicating that economic activity remains strong, and we have seen an increase in pricing pressures discussed in a number of the surveys, like yesterday’s Philly Fed and PMI.  As long as unemployment remains quiescent, and we don’t have a major banking catastrophe it is unclear what the motivation behind cutting rates would be on an economic basis.  And consider for a moment that home prices yesterday rose 5.7%, another dagger in the heart of the idea that the shelter component of inflation measures is going to decline.  Let’s see what he says.

Until then, a look at the overnight session shows a mixed picture after yet another record setting day in US equity markets yesterday.  Japan is keeping pace, holding on to its recent gains and drifting higher but Chinese shares had a very tough time, with the Hang Seng (-2.2%) leading the way lower while mainland shares (CSI 300-1.0%) fell as well.  Throughout the rest of the region, the tale was an amalgam of gainers (India, Taiwan, New Zealand) and losers (South Korea, Australia).  In Europe, the UK (+0.8%) is the best of the bunch after posting stronger than expected Retail Sales data, although the Y/Y numbers there are still negative.  But the change was good.  However, on the continent, it is also an amalgam of gainers (Italy, Spain, Germany) and losers (France, Greece) as despite comments from Bundesbank president Nagel that a cut was coming in June, excitement remains lacking.  US futures at this hour (7:30) are essentially unchanged.

The bond market has been a bit more positive with yields sliding across the US (2bps) and all of Europe (between 1bp and 4bps) as investors prepare for the initial move by the ECB.  JGB yields are unchanged as any idea that the BOJ’s recent action was the starting signal for a rush higher in interest rates have been completely quashed.  Perhaps the one area where there is more anticipation is in China, which has seen a very consistent decline in yields for the past year with the 10-year there now sitting at 2.3%, a historic low.  However, despite that, there are many analysts looking for further policy ease by the PBOC and the potential for yields to decline even further.

Oil prices (+0.1%) while essentially unchanged this morning are consolidating losses from the past three sessions which were driven by an increase in chatter about a ceasefire in Gaza.  At the same time, we continue to see net drawdowns of inventories as reported by the EIA which is typically a sign of future strength in the price.  After a great run, gold (-0.6%) and copper (-1.0%) are both under pressure this morning, a situation I attribute entirely to the dollar’s broad strength.

Finally, turning to the dollar, OMG it is ripping higher today.  Versus its G10 counterparts, it is nearly universal with the euro (-0.4%), AUD (-0.8%) and the Scandies (SEK -0.9%, NOK -0.95%) all under pressure.  The only currency not declining is JPY, which is flat on the day but remains at its recent lows (dollar highs) well above 151.50.  in the EMG space, ZAR (-1.15%) is leading the way lower, but the real surprise is CNY (-0.8%) a huge move for a currency with 5% volatility, as it appears the PBOC has stepped away from its efforts to support the currency.  Given the huge rate differential with the dollar, by rights, we would expect USDCNY to be closer to 7.50 than its current level of 7.28, and I expect it will continue to move in that direction.  Watch carefully, especially if/when the PBOC reduces the Reserve Ratio Requirement again in the next several months.

At any rate, you get the idea that the dollar is top of the charts today, ultimately on this renewed narrative of a relatively hawkish Fed versus relatively dovish central banks elsewhere.

There is no hard (or soft) data from the US today, all the new information comes from the speakers, with Powell leading off, and then, Jefferson, Barr and Bostic.  I guess everything will depend on Powell.  Will he try to walk back some of the dovishness that was seen in the press conference or will he double down.  It appears the market expects a less dovish voice.  As such, if he doubles down on the idea rate cuts are coming soon, despite all the data, I would look for the dollar to reverse course.  However, if he tries to but the dove back into its cage, I expect risk assets to be under some pressure and the dollar to hold its gains.

Good luck and good weekend
Adf