Drawing a line

​​​​​​Today's news headlines:

  • ‘OPEC may call early meeting as virus puts oil demand at risk’ – OPEC members may call an emergency meeting next month as oil prices sink on concerns that the Coronavirus will restrict global demand. Nearly 8,000 people have been infected by the virus since December 30th, while WTI oil prices have fallen 20% this month. The next scheduled OPEC meeting is from March 5th-6th to discuss future oil production after coordinated cuts expire at the end of March. (Bloomberg)
  • ‘Powell paves way for possible dovish shift in inflation strategy’ – Federal Reserve Chairman, Powell has signalled future policy easing to combat global disinflationary pressures. Last night, the Fed kept interest rates on hold but stressed the Fed are ‘determined to avoid’ the downward spiral in inflation and inflation expectations that have affected other economies around the world. (Bloomberg)

The steady course

Last night, the Fed hosted their first press conference of 2020 and on the surface the message seems pretty ordinary. The conclusion of their economic analysis was little changed from last year. The Federal Open Market Committee – 10 voting members who are regional Fed presidents or Fed executives – unanimously agreed to keep interest rates on hold, because a setting of 75-100 bps is already quite accommodative. Given the core Consumer Price Index reading of 2.3%, Personal Consumption Expenditure of 1.6% (the Fed’s preferred measure of inflation) and Nominal GDP at 3.8%, this puts real GDP in a range of 1.45% and 2.15%. This means inflation is near the Fed’s 2% target and GDP growth is a respectable level after a year of global economic deterioration.

The only tweak to prior economic observations was a moderated consumer demand. Since the labour outlook remains intact, it suggests this is not driven by deteriorating economic conditions for the average person. Much like other main central banks, Fed members have become more vocal about the asset price-distorting effects of long term ultra-low monetary policy. That’s quite a mouthful, but essentially the full-court press from central banks over the past several years has driven risky asset prices continually higher, causing concern this might be building towards asset bubbles. Since asset price distortions are a key catalyst of recessions, so called price stability risk is an important balancing factor to the ever-present desire to stimulate the economy. On that basis, I wouldn’t expect any rash movements out of the Fed for some time. That policy inertia alone speaks volumes about the Dollars position going forward.

Bottom Line: Given President Trump’s zero-sum view of economics, it is no surprise the administration has pressured the Fed towards negative rate policies adopted by other leading central banks (ahem, European Central Bank). This is an incredibly one-sided view of the economy because it entirely ignores the cost of that policy. This highlights an interesting application of Warren Buffets well-worn maxim ‘Price is what you pay. Value is what you get.’ 

GBP/USD

Cable trades at the lower end of January’s trading range and below the 1.30 figure as we head into the Bank of England’s (BoE) key interest rate decision at midday. Sterling’s reaction is likely to be more volatile than usual BoE meetings, as the outcome is the most uncertain in years. Meanwhile, the US Dollar continues its advance amid growing concern that the Coronavirus will dampen economic growth.

GBP/EUR

The market reaction to this morning’s European data will be overshadowed by the Bank of England’s monetary policy decision at midday. An interest rate cut could see the currency-cross fall to January lows of 1.1633, alternatively a decision to keep rates on hold could push the pair towards the 1.19 level. This morning’s German inflation readings support the prediction that the CPI reading out at 1pm could be greater than expected. Such an outcome risks curbing upside movements in the currency-cross after the BoE’s decision.

EUR/USD

This morning, the pair opened London above the 1.10 level having briefly dipped below the level yesterday. US GDP data out this afternoon could cause the first close below the 1.10 level in three-months. However, on a trade-weighted basis, the Euro appears to have found a floor from its two-week decline so a rebound above the 1.10 level could be in play in the short-run.