Will Fed Signal a Pause?

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Market Drivers October 30, 2019
AUD CPI inline
FX awaits FOMC
Nikkei -0.57% Dax -0.20%
UST 10Y 1.83%
Oil $55/bbl
Gold $1490/oz
BTCUSD $9210

Europe and Asia:
AUD AU CPI 0.5% vs. 0.5%

North America:
USD ADP 8:15
USD GDP 8:30
CAD BOC 10:00
USD FOMC 14:00

FX markets were steady ahead of key event risk in the North American session today with most majors slightly up against the dollar as traders prepared for the FOMC decision at 16:00 GMT.

In Asia, the Australia CPI data came inline at 0.5% vs. 0.5% eyed having very little impact on Aussie as the inflation news essentially confirmed a steady as she goes monetary policy by the RBA which is seen to be on pause for now at least until December. The Aussie held firm rising to .6875 in European dealing.

Both euro and cable were higher with the later running through stops at the 1.2900 figure before coming in for some profit-taking. UK Parliament approved a snap election for December 12 so the focus in the UK will now be on politics and electioneering with Boris Johnson expected to win a majority. There is a clear sense of Brexit fatigue amongst the UK public and Mr. Corbyn offering a very weak alternative to Mr. Johnson’s chaotic style of governorship the UK public may simply choose to opt for lesser of two evils. Still, it is always precarious to handicap UK elections so the market convention may be wrong.

For today the focus will shift to North America where both the Fed and the BOC hold policy meetings, with the Fed expected to lower rates by another 25bp. Many analysts have remarked at the absurdity of the Fed easing monetary policy as a time of all-time highs for the equity market, but the critics have it wrong. Equities are at all-time highs precisely because the Fed is easing. There is certainly no fundamental reason for stocks to rally as earings continue to decline and miss expectations and the current rally is nothing more than multiple expansion.

The Fed meanwhile is caught between a rock and a hard place as it would like to end stimulus and allow the economy to regain strength organically while realizing just how difficult the task is. Even the slightest hint of monetary tightening is sure to throw the capital markets into a tizzy, create liquidity shortages in most securities and instantly depress consumer sentiment which remains shaky despite seemingly strong economic data.

The Fed is fully aware that despite higher equity prices the interbank market continues to have liquidity and credit issues and it now has increased its credit line for the repo market to more than 120 billion per month. Therefore it’s highly unlikely that Mr. Powell will assume any hawkish posture given the fragility of the system underneath but the more interesting question is whether he will offer an unabashedly dovish forecast going forward. With equities markets anticipating a full-on monetary spigot anything less could cause a sell on disappointment and could take dollar down with it.

Boris Schlossberg
Managing Director

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