By Michael Brown, Senior Research Strategist at Pepperstone
DIGEST – Fallout from Wednesday’s FOMC decision dominated yesterday’s session as the dollar gained, and stocks slipped, despite a cooler tone on US-China trade relations. Today, eurozone CPI highlights the docket.
WHERE WE STAND – Given that today is Halloween, I’m sure you’re expecting me to open today’s missive with a spooky, but ropey, pun.
Sorry to disappoint, but it’s been a hell of a long week, and I’m all out of ideas on that front.
In any case, fallout from the FOMC continued yesterday, and largely overshadowed anything else that was going on, as the market continued to hawkishly reprice policy expectations, largely on the back of Chair Powell’s remark that a cut in December is ‘far from’ being a foregone conclusion.
I do think that the market might’ve got the wrong end of the stick a bit here. My view is that this was Powell trying to simply build in some optionality to the future policy path – with seven weeks to go until the next FOMC confab, and potentially 3x jobs reports to come in that period, plus the Committee now being split in three directions, it’s easy to see why there may be a level of discomfort with allowing money markets to discount, with certainty, another 25bp cut at this stage.
If one sets aside the intraday noise, and zooms out a little, the backdrop remains an incredibly constructive one for risk assets. Not only is the fed funds rate on its way back to a more neutral level, regardless of whether or not a cut comes in December, but the balance sheet is also set to bottom out around a neutral level too. When one combines that with a resilient underlying economy, robust corporate earnings, the soon-to-reopen corporate buyback window, as well as the increasing influence of FOMO/FOMU flows as we move into year-end, then you still have a very, very powerful cocktail to tilt the path of least resistance to the upside for risk assets from here on in.
Anyway, stocks did stumble yesterday, with the tech sector leading the downside, though it shan’t surprise anyone to learn that this is a dip that I’d be seeking to use as a buying opportunity. In addition to the above bull case, participants can also now price out the risk of a significant re-escalation in Sino-US tensions, after the agreement of what essentially amounts to a year-long trade truce after Presidents Trump & Xi met in South Korea. If nothing else, that takes yet another block out of the ‘wall of worry’ markets need to climb.
As for other catalysts yesterday, we had what was probably the most boring ECB decision I can remember, even by their pitifully low standards. Unsurprisingly, the deposit rate was maintained at 2.00%, in a unanimous decision, with the policy statement reiterating a ‘data-dependent’ approach moving forwards, and President Lagarde repeating that policy remains in a ‘good place’. The easing cycle is, almost certainly, done and dusted at this stage, with this terminal rate set to be maintained through at least the end of next year. Frankly, it would do everyone a favour if policymakers would admit to this, and spare us from another tedious press conference in December – hope springs eternal, I guess!
Suffice to say, though, that the ECB decision had next-to-no impact on anything in the G10 FX space yesterday, with it simply being a day of broad-based dollar strength, which took cable back under 1.32, USDJPY north of 154, and the EUR back under 1.16. While that has more to do with the aforementioned hawkish repricing than anything else, as a dollar bull I’m pleased that not only has FX vol made a return, but that the buck is back too! Logically, the next upside target for the greenback is the 100 figure in the DXY, which equates roughly to 1.30 in cable, 1.15 in the EUR, and 155 in the JPY. I remain of the view that the Fed’s ‘run it hot’ approach continues to tilt risks to the US outlook to the upside, and also makes a return to the ‘US exceptionalism’ vibe a high probability.
LOOK AHEAD – Mercifully, today’s docket is a light-ish one, at the end of what’s been a very hectic week for us all.
The latest eurozone inflation data highlights proceedings, with headline CPI set to have held steady at 2.1% YoY per the ‘flash’ October reading, though this figure is likely to have little-to-no bearing on the policy outlook, with Lagarde & Co sending a resoundingly ‘done & dusted’ message yesterday.
Besides that, we will probably get a whole host of ECB speakers through the session, as is typical following a Governing Council meeting, while the end of the FOMC’s ‘blackout’ period heralds the return of Fedspeak too, with Logan, Hammack and Bostic all scheduled. There will also be the latest Canadian GDP and MNI Chicago PMI figures to digest, as well as earnings from ‘big oil’ names such as Chevron and Exxon Mobil.
After all that is over with, I think it’s safe to say that we will have all earned a beverage or three to see in the weekend.