Dollar Soft Ahead of FOMC Decision

  • The FOMC decision today will be followed by a press conference
  • The implied yield on the January 2020 Fed Funds futures contract is trading near 2.17%
  • President Trump’s jawboning the Fed is having less and less impact on markets
  • Besides the FOMC decision, there are some key US data releases today
  • UK reported soft April manufacturing PMI
  • New Zealand reported weak Q1 employment data; Korea reported April trade

The dollar is narrowly mixed against the majors ahead of the FOMC decision. Swissie and sterling are outperforming, while Stockie and Kiwi are underperforming. EM currencies are mixed. INR and PHP are outperforming, while KRW and IDR are underperforming. MSCI Asia Pacific ex-Japan was up 0.3%, with Japan closed until May 7 for Super Golden Week. MSCI EM is up 0.2% so far today, though China and many other markets are closed for May Day. Euro Stoxx 600 is flat near midday, while US futures are pointing to a higher open. 10-year UST yields are flat at 2.50%, while the 3-month to 10-year spread is steady at 9 bp. Commodity prices are mixed, with Brent oil down 0.1%, copper flat, and gold down 0.1%.

The FOMC decision today will be followed by a press conference. There will not be any updates to the Fed forecasts or Dot Plots. We would be very surprised if anything dovish emerged from this meeting. The Fed should acknowledge the economy’s strong turnaround from the early soft patch. Of course, they will balance that with the need to see how Q2 develops and so its stance of “patience” and “flexibility” will continue.

Ahead of the FOMC decision, the implied yield on the January 2020 Fed Funds futures contract is trading near 2.17%. This is the lowest since March 29 and almost fully prices in a 25 bp cut this year. The January 2021 contract prices in another 25 bp cut next year. Fed officials have pushed back against rate cut expectations several times this year. As such, there is a risk that we see some more push back today, which would help the dollar regain some traction.

President Trump’s jawboning the Fed is having less and less impact on markets. Traders barely reacted yesterday after he called for a percentage point cut in rates and a resumption of QE. Elsewhere, it appears that the nomination of Stephen Moore to the Fed’s Board of Governors is in trouble, as several Republican Senators have expressed either opposition or concern. We can only hope for more orthodox choices to replace Moore and Cain.  

Besides the FOMC decision, there are some key US data releases today. These include April ADP private sector job estimate (180k expected), ISM manufacturing PMI (55.0 expected), April auto sales (annualized 17.0 mln expected), and March construction spending (flat m/m expected). After the weak Chicago PMI reported yesterday, markets will be looking to ADP and ISM for more guidance on this Friday’s jobs report.

UK reported soft April manufacturing PMI. It fell as expected to 53.1 vs. 55.1 in March. Construction PMI (50.3 expected) will be reported Thursday, and services (50.3 expected) and composite (50.6 expected) PMIs will be reported Friday. Some of the recent improvement in the PMI readings were due to stockpiling ahead of the original March Article 50 deadline. There should be some further payback in Q2 after that deadline was extended.

New Zealand reported weak Q1 employment data. Employment fell -0.2% q/q vs. an expected gain of 0.5%. This dragged the y/y rate down to 1.5% vs. 2.2% expected. Unemployment fell a tick to 4.2% but this was due to a sharp drop in the participation rate from 70.9% to 70.4%. This is just the latest in a long string of weak Kiwi data that has fed into rate cut expectations. WIRP shows odds of a cut at the May 8 meeting at 59.3%.

Korea reported April trade data. Exports contracted -2.0% y/y vs. -5.9% expected, while imports rose 2.4% y/y vs. -1.0% expected. While it’s too early to sound the all clear, this is a better than expected reading for regional trade. Note that the key JPY/KRW cross is nearing 10.5, well above the 10 area that Korean exporters prefer. Absent the January yen flash crash, JPY/KRW hasn’t been this high since September 2017 and that’s good news at the margin for Korean exporters.