What Will the Fed Do?

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Market Drivers September 18, 2019
UK CPI cooler
All eyes on the Fed
Nikkei -0.18% Dax 0.09%
UST 10Y 1.76%
Oil $58/bbl
Gold $1502/oz
BTCUSD $102017

Europe and Asia:
GBP UK CPI 1.7$% vs. 1.8%

North America:
CAD CPI 8:30
USD FOMC Rate Decision 14:00

Currencies were predictably quiet in pre-FOMC trade with the dollar slightly stronger across the board as trader awaited the FOMC rate decision later in the day.

On the econ front, UK CPI data came in cooler than expected with core printing at 1.7% versus 1.8% eyed. This was the weakest headline reading since 2016 with housing price growth slowing to 8-year lows. Housing is likely to be a massive drag on the UK GDP going forward as the country is highly leveraged to its housing stock which will suffer further declines should UK spin out of EU with a hard Brexit.

At very minimum, the lower price levels should keep the BoE on sidelines for a considerable amount of time irrespective of the political resolution of Brexit. To that point, tomorrow could serve as yet another source of turmoil in the Brexit saga when the UK Supreme Court decides if PM Johnson’s decision to suspend Parliament was unconstitutional. For now, cable is off the highs of 1.2500 but remains firmly bid as the market remains hopeful about an eventual deal.

The focus for the rest of the day, however, will be firmly on North America as the market awaits the Fed rate decision and the presser afterward. The consensus view is for a 25bp cut and anything outside of that level will be a major surprise to the market, especially if the Fed cuts by 50bps which would suggest that liquidity problems in the US banking system are worse than initially thought.

This week’s turbulence in the repo market which saw rates spike to highs not seen since the global financial crisis is just the type of distraction that Chairman Powell did not need. Much of the tightness has been attributed to technical factors but given the skittish behavior of the fixed income markets, any attempt by the Fed to overcompensate on the accommodative side will be seen as a worrying sign that US policymakers are concerned about the US economy despite seemingly robust data.

Given Chairman Powell’s hawkish slant it’s unlikely that he will assume a deeply accommodative posture and that should keep the dollar bid unless the equity markets commence a sharp selloff in which case risk aversion flows could reverse any knee jerk bounce. Regardless of the outcome, given the great anticipation ahead of the event today’s presser could prove to be volatile as traders navigate the many crosscurrents that are driving capital markets currently.

Boris Schlossberg
Managing Director

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