Yet another morning begins with coronavirus headlines, while the market continues to price in increasingly dire outcomes to global growth. Vice-Chair of the Board of Governors at the Federal Reserve, Richard Clarida, commented a few days ago that the US policy setting is already accommodative and appropriate for the current environment. However, despite this, the market is predicting the Fed will cut rates in the near future.
One week ago, the market was pricing in less than 10bps of cuts for the Fed's April meeting, while a 30bp of interest rate cuts was fully priced in for the November meeting of this year. This morning, a full 25bp cut is expected at the April meeting, and about 70bp of cuts is priced in for November. This big departure from policymaker comments, suggests that the market is expecting a massive decline in global outcomes. Or perhaps, we have collectively all become accustomed to central bankers riding to the rescue at the smallest provocation—one could make a spirited argument that central bankers have hindered as much as helped in recent years—but it's not clear the old pattern will be repeated.
Bottom line: In the absence of data and given that we are drowning in apocalyptic virus headlines, the market has been on a downward tear. Today and tomorrow we’ll have some tangible data out to help anchor our fears in facts. Today we are expecting US Durable Goods Orders and Gross Domestic Product data, while tomorrow US and EU consumer data points in addition to US sentiment figures will be released. Unfortunately, these measures reflect past performance and won’t help us contextualise the nearly daily increase in hysteria. Then again, people are necessarily rational, so a positive data point might provide some need for distraction and an opportunity to reframe our collective thinking.
Sterling has taken a steady journey downwards in the past 24 hours, sliding well below the 1.30 interbank level against the US Dollar and briefly falling below the 1.29 mark. The main contributor to Pound weakness is the expectation of a hard-line negotiating position from the UK government in the upcoming EU trade talks. We’ve seen some fresh Dollar supply around the 8am London open which has led to a slight bounce higher for the pair.
Worries over the UK’s Brexit negotiating position also took Sterling lower against the Euro in yesterday’s trading session. The Pound has now lost over 2% of its value against the common currency since the beginning of last week despite a lack of negative data releases. From our view, it looks as though the Euro is recovering from oversold conditions on the hopes of German fiscal stimulus.
The Euro has finally posted a solid recovery above the 1.09 interbank level against the Greenback. The prevailing risk-off mood in markets has taken the US 10-year Treasury yield to all-time lows, which in turn, has reduced the appetite of Dollar buyers. We’ll be watching to see how markets react to the US Core Durable Goods Orders figure, released at 1.30pm London time.