Prime Minister Johnson’s achieved
The goal that had had him aggrieved
A Christmas election
To change the complexion
Of Parliament, so they can leave
Meanwhile today all eyes have turned
To Washington where, when adjourned,
The Fed will declare
A rate cut that they’re
Not sure’s been entirely earned
Yesterday morning the UK Labour party finally caved and agreed to an election to be held in six short weeks. Boris has got exactly what he wants, an effective second referendum on Brexit, this time with a deal in hand. At this point, the polls have him leading handily, with 38% of the vote compared to just 23% for Labour and its leader Jeremy Corbyn. But we all know that the polls have been notoriously wrong lately, not least ahead of the original Brexit referendum which was tipped for Remain by a 52-48 margin and, of course, resulted in a Leave victory by that same margin. Then Theresa May, the newly appointed PM in the wake of that surprise thought she had the support to garner a strong mandate and called an election. And she lost her outright majority leading to two plus years of pusillanimous negotiations with the EU before finally reaching a deal that was so widely despised, she lost her job to Boris. And let us not forget where the polls pointed ahead of the US elections in 2016, when there was great certainty on both sides of the aisle that President Trump didn’t stand a chance.
So, looking ahead for the next six weeks, we can expect the pound to reflect the various polls as they are released. The stronger Boris looks, meaning the more likely that his deal is ratified, the better the pound will perform. For example, yesterday, upon the news that the election was finally agreed, the pound immediately rallied 0.5%, and subsequently topped out at a 0.75% jump from intraday lows. While it ceded the last of those gains before the close yesterday, this morning it has recouped them and is currently higher by 0.25%. A Johnson victory should lead to further strength in the pound, with most estimates calling for a short-term move to the 1.32-1.35 area. However, in the event Boris is seen as failing at the polls, the initial move should be much lower, as concern over a no-deal Brexit returns, but that outcome could well be seen as a harbinger of a cancelation of Article 50, the EU doctrine that started this entire process. And that would lead to a much stronger pound, probably well north of 1.40 in short order.
With that situation in stasis for now, the market has turned its attention to the FOMC meeting that concludes this afternoon. Expectations remain strong for a 25bp rate cut, but the real excitement will be at the press conference, where Chairman Powell will attempt to explain the Fed’s future activities. At this point, many pundits are calling for a ‘hawkish’ cut, meaning that although rates will decline, there will be no indication that the Fed is prepared to cut further. The risk for Powell there is that the equity market, whose rally has largely been built on the prospect of lower and lower interest rates, may not want to hear that news. A tantrum-like reaction, something at which equity traders are quite adept, is very likely to force Powell and the Fed to reconsider their message.
Remember, too, that this Fed has had a great deal of difficulty in getting their message across clearly. Despite (or perhaps because of) Powell’s plain-spoken approach, he has made a number of gaffes that resulted in sharp market movement for no reason. And today’s task is particularly difficult. Simply consider the recent flap over the Fed restarting QE. Now I know that they continue to claim this is nothing more than a technical adjustment to the balance sheet and not QE, but it certainly looks and smells just like QE. And frankly, the market seems to perceive it that way as well. All I’m trying to point out is that you need to be prepared for some volatility this afternoon in the event Powell puts his foot back into his mouth.
As to the markets this morning, aside from the pound’s modest rally, most currencies are trading in a narrow range ahead of the FOMC meeting this afternoon, generally +/- 0.15%. We did see a bunch of data early this morning reinforcing the ongoing malaise in Europe. While French GDP data was largely as expected, Eurozone Confidence indicators all pointed lower than forecast. However, the euro has thus far ignored these signals and is actually a modest 0.1% higher as I type. And in truth, as that was the only meaningful data, other market movement has been even less impressive.
This morning we also hear from the Bank of Canada, who is expected to leave rates unchanged at 1.75%, which after the Fed cuts, will leave them with the highest policy rates in the G10. Now the economy up north has been performing quite well despite some weakness in the oil patch. Employment has risen sharply so far this year, with more than 350K jobs created. Inflation is running right around their 2.0% target and GDP, while slowing a bit from earlier in the year, is likely to hold just below potential and come in at 2.0% for the year. Over the course of the past two weeks, the Loonie has been a solid performer, rising 2.0%. If the BOC stays true, it is entirely reasonable to expect a bit more strength there.
This morning begins this week’s real data outturn with ADP Employment (exp 110K) kicking things off at 8:15, then the first look at Q3 GDP (1.6%) comes fifteen minutes later. Obviously, those are both important in their own right, but with the Fed on tap at 2:00, it would take a huge surprise in either one to move the market much. As such, I doubt we will see much of consequence until 2:00, and more likely not until Powell speaks at 2:30. Until then, things should remain sleepy. After? Who knows!