FOMC Minutes a Potential Catalyst?
October 16, 2010
The USD pulled a bit stronger ahead of today’s FOMC minutes, which will reveal the degree of dissent within the Fed and perhaps the likelihood of a November 3 move to QE2 at the conveniently post-election next FOMC meeting. Could the FOMC serve as an important catalyst here?
FOMC Meeting Minutes
Plenty of focus on today’s release of the FOMC meeting minutes, which will round out our impression of the debate within the Fed that let to last month’s statement, in which the path was cleared to QE2 – though the reasoning in the statement pointed to inflation as a chief culprit in the need to move toward further easing – so this places extra focus on the inflation data this week – the PPI set for release on Thursday and the CPI on Friday. But whether we’ll get specifics on the absolute amounts the Fed is considering intervening is somewhat doubtful – the more important question here might be whether there is a large enough minority to threaten the dovish FOMC contingent, though as we have been harping on a bit latetly, the FOMC composition should turn more hawkish at the beginning of the year with the addition of Kocherlakota, Fisher and Plosser, though hawkish stalwart Hoenig will lose his voting status. The Fed seems more divided than the market is currently pricing in at the moment. Interestingly, one of the FOMC’s supposed doves, Janet Yellen, who was recently appointed as Vice Chairman of the Fed, was out suggesting that the Fed’s accommodative policy risked creating excessive risk-taking, though her remarks were more theoretical than aimed at criticizing current Fed policy.
Looking at our coincident indicators, interest rate spreads have moved very slightly in the USD’s favor and perhaps served as a driver for the USD rally over the last couple of days, as did the overnight reversal in risk appetite, as US equity markets weakened after the close and European equity market action has been capped for the better part of a month. In fixed income markets, the German Bund rallied, with the yield close to threatening the lowest levels in a month (around 2.20% vs. the August spike low at 2.05). US 10-year notes are within a bp or two of their lowest level for the cycle – though we’re still some 30 bps or so from the panic low in late 2008 during the crisis. Lower yields mean pressure on the JPY to strengthen, yesterday’s modest reversal attempt in USDJPY notwithstanding.
UK Data
UK inflation levels were relatively in-line with expectations and only microscopically lower than last month’s levels on average – a persistent sign that inflation in the UK is uncomfortably high considering the BoE’s policy rate. Will rapidly deflating house prices (ignore today’s DCLG data as the overnight RICS House Price Balance suggests that UK house prices are in steep decline again) and the government’s new austerity measures ever see the inflation rate slow? The BoE certainly better hope so – and all signs are that MPC members continue to hope so, as the BoE’s Miles was out today exhorting officialdom to not withdraw the easy money policies. Considering this and yet another gaping trade deficit number and one wonders why on earth GBPUSD is trading here at 1.5850 rather than at 1.50? We can supposedly chalk it up to interest rate differentials, which more or less support the current levels versus historical comparisons….the question is why 50 bps here or there of interest rate spreads should matter, if the pound’s buying power is deflating more rapidly?
Looking ahead
Contrarians should be licking their chops in this market, as it appears that almost every bank is getting on board the weak USD train at the moment. We would reserve judgment for now on how long this can continue: the current environment of ever upward spiraling equity markets and risk appetite and lower bond yields (the liquidity game) is completely unsustainable in our view. It is very straightforward to understand the logic of the market – but we still see tremendous risk of disappointment in improvement of real economic fundamentals, in the US and elsewhere – something that is not priced into the market, which is in a speculative frenzy. Any shock to that frenzy will force the market to reverse its positions – positions that are already extremely short the US dollar. It’s like the market thinks it has some hot dice at the craps table and continues to push its luck, not noticing that the craps table is in a casino on the Titanic – which has already hit the iceberg.
But will today’s FOMC serve as any kind of catalyst or are we going to have to grind this thing out all the way to the November 3 FOMC meeting? Corporate earnings are another potential source of disappointment for this current market’s paradigm, as significantly slower sales or a dour outlook or two from the corporate sector could jolt a market that has gotten lost in La-La Land.
Be careful out there – the type of action we have seen lately suggests that global markets could be building significant energy for a severely volatile episode.
Economic Data Highlights
- UK Sep. RICS House Price Balance out at -36% as expected and vs. -32% in Aug.
- Australia Sep. NAB Business Confidence out at 10 vs. 11 in Aug.
- Australia Sep. NAB Business Conditions out at 7 vs. 5 in Aug.
- Japan Sep. Consumer Confidence out at 41.4 vs. 42.5 in Aug.
- Sweden Sep. CPI out at +0.8% MoM and +1.4% YoY vs. +0.8%/+1.3% expected, respectively and vs. +0.9% YoY in Aug.
- Sweden Core CPI out at +0.8% MoM and +1.8% YoY vs. +0.7%/+1.7 expected, respectively and vs. +1.4% YoY in Aug.
- UK Aug. DCLG House Prices out at +8.3% YoY vs. +8.1% expected and +8.4% in Jul.
- UK Sep. CPI out at 0.0% MoM and +3.1% YoY, both as expected and vs. +3.1% YoY in Aug.
- UK Sep. Core CPI out at +2.7% YoY vs. 2.6% expected and 2.8% in Aug.
- UK Sep. Retail Price Index out at +0.4% MoM and +4.6% YoY vs. +0.1%/+4.4% expected, respectively and vs. 4.7% YoY in Aug.
- UK Aug. Visible Trade Balance out at -£8227M vs. -£8050M expected and £8675M in Jul.
- US Sep. NFIB Small Business Optimism out at 89 vs. 89.6 expected and 88.8 in Aug.
Upcoming Economic Calendar Highlights
- US Oct. IBD/TIPP Economic Optimism (1400)
- US Fed’s Hoenig to peak (1545)
- EuroZone ECB’s Weber to speak in New York (1600)
- EuroZone ECB’s Trichet to speak in New York (1620)
- US FOMC Meeting Minutes (1800)
- EuroZone ECB’s Weber to Speak in New York (2030)
- US Weekly ABC Consumer Confidence (2100)
- UK Sep. Nationwide Consumer Confidence (2301)
- Australia Oct. Westpac Consumer Confidence (2330)
- Japan Aug. Machine Orders (2350)
- New Zealand Sep. Non-resident Bond Holdings (0200)
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