Markets Take Renewed Fed Criticism in Stride

  • The dollar is trying to build on its recent gains
  • President Trump’s criticism of Fed policy has resumed; Fed Chairman Powell speaks today
  • During the North American session, the highlight will be revised US Q3 GDP
  • Bank of England releases its Brexit analysis; May reportedly backed down on efforts to prevent parliament from amending the Brexit deal
  • Brazil reports November IGP-M wholesale inflation and October PPI

The dollar is mixed against the majors as it tries to build on its recent gains.  Sterling and Stockie are outperforming, while Loonie and Nokkie are underperforming.  EM currencies are mostly weaker.  BRL and KRW are outperforming, while RUB and MYR are underperforming.  MSCI Asia Pacific was up 0.7%, with the Nikkei rising 1%.  MSCI EM is up 0.8% so far today, with the Shanghai Composite rising 1.1%.  Euro Stoxx 600 is up 0.2% near midday, while US futures are pointing to a higher open.  The US 10-year yield is down 1 bp at 3.05%.  Commodity prices are mixed, with Brent oil down 0.4%, copper up 0.8%, and gold down 0.1%.

The dollar is trying to build on its recent gains.  The euro traded at its lowest level since November 14 near $1.1265 today and is on track to test the November low near $1.1215.  Sterling is seeing a modest bounce ahead of the BOE’s Brexit analysis but remains heavy overall.  We think it remains on track to test the October 30 low near $1.27 and then the August 15 low near $1.2660.  Lastly, USD/JPY continues to edge higher and is on track to test the November 12 high near 114.20.

President Trump’s criticism of Fed policy has resumed.  Apparently, Trump is “not even a little bit happy” with Powell at the helm.  Yet what did he expect?  His Fed appointments so far have been centrist, orthodox choices and so they will run centrist, orthodox policy.  To wit, Michelle Bowman just become a new Fed Governor and two more (Marvin Goodfriend and Nellie Liang) still awaiting confirmation.  All are cut from the same centrist cloth.

Fed Chairman Powell speaks today.  His comments will be the most closely watched in light of perceived dovish comments earlier this month that helped significantly reset market Fed expectations.  Of course, he will be asked about Trump’s criticism, but Mr. Powell is unlikely to take the bait.  We see zero chance that Fed policy will be impacted by such criticism.  For now, markets haven’t really reacted to this latest salvo.

Yesterday, Vice Chairman Clarida spoke.  He sounded less dovish than before, noting that the economy remains robust and the labor market is healthy.  He said gradual hikes are called for since the neutral rate is uncertain.  Clarida added that he’d adjust the policy outlook if inflation moves above target.  This is a balanced viewpoint.

The Fed has not done anything to dissuade markets about a December hike.  Rather, the adjustment in market expectations has taken place further out.  The implied yield on the January 2020 Fed Funds futures contract slumped to 2.72% last Monday and has only recovered to 2.75% currently.  We continue to believe market expectations have swung too dovish and need to be reversed in the coming weeks.

During the North American session, the data highlight will be revised US Q3 GDP.  Growth is expected to remain steady at 3.5% SAAR.  The Atlanta Fed’s GDPNow model is tracking 2.5% SAAR growth, down from 2.8% last week, while the NY Fed’s Nowcast model is tracking at 2.5% SAAR, down from 2.6% last week.  Sequentially speaking, growth has slowed from the 4.2% SAAR peak in Q2.  However, growth remains above trend.  Also out today will be weekly jobless claims, October advance goods trade balance, wholesale and retail inventories, and new home sales, and November Richmond Fed index.

The Bank of England releases its Brexit analysis today.  The time was changed to 430 PM London time from 7 AM previously.  The bank will reportedly study different Brexit scenarios and the likely impact on the UK economy, including a no-deal outcome.  Shortly after the release, Governor Carney will hold a press conference.  Carney has been accused of letting his “Bremain” bias color the BOE’s analysis of Brexit.  We disagree.  It is Carney’s job to prepare markets for the worst and that is what he will likely do today.

Prime Minister May reportedly backed down on her efforts to prevent parliament from amending the Brexit deal ahead of the planned December 11 vote.  The EU has already made it clear that there will be no further negotiations and so we are afraid that May is setting herself up for failure.  Stay tuned.

Brazil reports November IGP-M wholesale inflation and October PPI.  Both have been accelerating this year and stand at cycle highs of 10.8% y/y and 16.73% y/y, respectively.  Yet IPCA consumer inflation has actually fallen to 4.39% in mid-November from 4.53% in mid-October.  This has led markets to push back tightening expectations to the March 20 COPOM meeting, and this has been one of the headwinds for BRL.