The division of policymakers
Today's news headlines:
- 'Merkel hopeful Brexit deadlock can be overcome'. Following a meeting between German Chancellor Angela Merkel and the UK Prime Minister Boris Johnson to discuss solutions for the Brexit deadlock, we learned that despite the probability of no-deal Brexit increasing, the potential for a resolution on the Irish border is still possible. Merkel charged Johnson with finding a solution to the border issue within 30 days, an admittedly gargantuan task. (Financial Times)
- 'Britain's labour market shows signs of cooling'. In spite of the tightest UK labour market experienced in recent memory, the prospect of a no-deal Brexit is starting to undermine the vacancy/labour imbalance which had only recently begun to show in wages. It’s also entirely possible that Brexit uncertainty, which has hampered business investment, has perversely contributed to additional hiring to breach the investment gap. That said, an orderly resolution to the Brexit conundrum is likely to result in net additional employment pressure when investment returns in earnest. (Financial Times)
Breaking down the minutes
In the July Federal Reserve press conference, Chair Jerome Powell styled the Fed's interest rate cut as a 'mid-cycle adjustment'—an instrument to stoke the coals of the record-length US expansion. Markets took the statement with a pinch of salt and continued to price in a substantial amount of policy easing for the rest of 2019. It's not difficult to see why; overall global economic conditions haven't really improved in the last three weeks. Last night, the minutes from July's meeting were released and provided some interesting insight into the division of policymaker views regarding appropriate policy tack. The wording characterised 'several' members in favour of no change at all despite low inflation and the constant pressure of Trump's trade agenda. A couple of participants were in favour of a more substantial 50bps cut, the so-called 'one-and-done'. Despite the divergence between each camp's precise policy path, all approaches seem to view the interest rate trajectory as flat, highlighting the reduced efficacy of monetary policy in the current environment.
Most will expect the Fed to perpetuate the dovishness of other major central banks, but the discussion in the Federal Open Market Committee makes it look like the markets will be disappointed. In the minutes, policymakers stressed the need 'to maintain optionality' to set future rates, but we expect Powell to push for another 25bps cut in September when speaking at Jackson Hole tomorrow. The committee also held an interesting discussion that criticised the lack of aggressive quantitative easing—asset purchases—over the last decade. This would suggest that the Fed may look to act more quickly and substantially in the next downturn.
Bottom line: The market's reaction to the minutes may have been muted, but there was enough detail to suggest that future cuts are likely, though perhaps not as many as the market expects. At this stage, even a 50bps September cut probably won't be enough to soothe the rally in Treasuries—and it certainly won't be enough to avoid another Trump Twitter tirade.
Safe-haven demand has remained strong, which has kept the Greenback on the front foot in recent sessions. Last night, Fed minutes only highlighted the lack of optimism and fuelled the risk-off stance. Sterling has rebounded from August lows and trades near the one-month high despite the increased probability of Brexit. Jackson Hole is the focus of most attention, which means the Dollar, as the primary driver of the pair, will move based on headlines.
In exactly the opposite circumstance as Sterling, the trade-weighted Euro is at the bottom of the one-month range. This afternoon the European Central Bank Policy Meeting Accounts will provide some fresh detail on deliberations of the upcoming ECB stimulus package. Of the primary developed central banks, the ECB is in a great position for a surprise because it's currently perceived as having so little remaining ammunition to tackle the current deflationary pressure. This will be a key driver over the next day or so.
Despite the better-than-expected EU Purchasing Managers’ Index survey data this morning, the focus is entirely on the meeting of central bankers in Jackson Hole. The Greenback is softer on today's open but likely to remain at the top of the trading range, barring any particularly interesting commentary released out of the Jackson Hole symposium before it’s adjourned.